Because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not ‘beggar-thy-neighbor' but rather are positive-sum, ‘enrich-thy-neighbor' actions.
~ Fed Chairman Ben Bernanke, Reuters, March 25, 2013
Mar 25, 2013
Felix Zulauf on the Japanese government's massive debt problem
Zulauf: The Japanese government is in a difficult position, with the country's debt running at 230% of GDP. Japan is in a recession. The budget deficit exceeds 8% of GDP, and could top 10% this year and next. The deficit was easy to finance as long as Japan was running a structural current-account surplus
and the domestic pool of savings was large enough to do so. In recent
times the country's external accounts have deteriorated, and that could
continue.
Japanese institutions have always been the largest and steadiest buyers of Japanese government bonds, or JGBs. They recently announced they lack the funding sources to keep buying on the same scale. Japan Post Bank is an example. It formerly was a government institution in which individuals held savings of more than $2 trillion. It was a big buyer of government debt, as were pension funds and life insurers. All said recently they can't keep buying. The moment has arrived where the Bank of Japan needs to bridge the gap and buy more JGBs with newly printed yen. In other words, the supply of yen will increase dramatically. Japanese inflation will be pushed from slightly below zero to 2%, and the yen will be weakened. This is a major change for Japan, because the yen has been one of the world's strongest currencies for a long time, right behind the Swiss franc.
Q: There is definitely a trend here.
Zulauf: Japan's big life insurers are pension-fund-style entities for the Japanese public. They are big investors overseas, and because of the yen's strength, have hedged part of their exposure to the currency. What would happen if they unwound 10% of their hedges? The four largest life insurers would have to buy $25 billion worth of dollars and sell yen. Many pension funds and industrial companies are in a similar position. The potential purchase of dollars and sale of yen is gigantic. Of course, Japanese bond yields would rise under this scenario, which is another problem, as Japanese banks have 900% of their Tier 1 equity capital in JGBs. To prevent the bond yield from rising, the Bank of Japan will have to buy even more bonds, and print more yen. They will keep things under control for a while, but eventually this plan will fail.
~ Felix Zulauf, Barron's Roundtable, January 21, 2013
Japanese institutions have always been the largest and steadiest buyers of Japanese government bonds, or JGBs. They recently announced they lack the funding sources to keep buying on the same scale. Japan Post Bank is an example. It formerly was a government institution in which individuals held savings of more than $2 trillion. It was a big buyer of government debt, as were pension funds and life insurers. All said recently they can't keep buying. The moment has arrived where the Bank of Japan needs to bridge the gap and buy more JGBs with newly printed yen. In other words, the supply of yen will increase dramatically. Japanese inflation will be pushed from slightly below zero to 2%, and the yen will be weakened. This is a major change for Japan, because the yen has been one of the world's strongest currencies for a long time, right behind the Swiss franc.
Q: There is definitely a trend here.
Zulauf: Japan's big life insurers are pension-fund-style entities for the Japanese public. They are big investors overseas, and because of the yen's strength, have hedged part of their exposure to the currency. What would happen if they unwound 10% of their hedges? The four largest life insurers would have to buy $25 billion worth of dollars and sell yen. Many pension funds and industrial companies are in a similar position. The potential purchase of dollars and sale of yen is gigantic. Of course, Japanese bond yields would rise under this scenario, which is another problem, as Japanese banks have 900% of their Tier 1 equity capital in JGBs. To prevent the bond yield from rising, the Bank of Japan will have to buy even more bonds, and print more yen. They will keep things under control for a while, but eventually this plan will fail.
~ Felix Zulauf, Barron's Roundtable, January 21, 2013
Mar 24, 2013
Rocky White on the housing recovery
Evidence of a housing recovery continues to pile up, but lingering signs of
skepticism suggest there's still plenty of sideline cash to fuel further gains.
Just last week, the Commerce Department said housing starts rose 0.8% in
February, while building permits rose to a four-year high, topping economists'
expectations. Furthermore, existing-home sales jumped 0.8% to the highest level
since November 2009, the National Association of Realtors (NAR) reported.
Technically, the iShares Dow Jones U.S. Home Construction Index Fund (ITB -
24.20) recently bounced from key support at its 80-day moving average. The fund
touched a multi-year peak of $24.88 on Wednesday, and is now consolidating atop
the formerly resistant $24 level. Among individual equities, KB Home (KBH) and
Lennar (LEN) both defied the skeptics, touching their own multi-year highs after
reporting solid earnings and announcing plans to ramp up development. Despite
bullish magazine covers on the radar -- including "The Great American Housing
Rebound" from Bloomberg Businessweek and Money's "Housing is Back"
-- pessimism remains prevalent, as evidenced by The Wall Street Journal's
recent warning that the sector is "exhibiting froth." Of the 32 names we track
under the "builders" umbrella, all are trading north of their psychologically
significant 200-day moving averages, yet just 43% of analysts offer up "buy"
endorsements -- even less than a year ago.
~ Rocky White, Schaeffer's Investment Research, Monday Morning Outlook, March 25, 2013
~ Rocky White, Schaeffer's Investment Research, Monday Morning Outlook, March 25, 2013
Mar 20, 2013
Alexis De Tocqueville on empires
Nothing opposes the prosperity and freedom of men as much as great empires.
~ Alexis De Tocqueville, Democracy in America
~ Alexis De Tocqueville, Democracy in America
Mar 12, 2013
Mohamed El-Erian compares the Fed to the Wizard of Oz
When you think of it, in today's economy, the role of the wizard is being played by the Federal Reserve Bank. Facing a difficult economic situation, made worse by the inaction of a bickering Congress and essentially paralyzed government agencies, the Fed has found itself forced to take on the role of savior. And since its massive emergency interventions in 2008, it has felt a moral obligation to stay engaged, a role which, over time, it seems to have pursued more willingly.
In trying to do good, the Fed has confronted more than the considerable dark forces of disorderly economic and financial deleveraging. It has also had to overcome the (not-so-occasional) headwinds from a disruptive Congress and a Europe unable to decisively overcome a regional debt crisis.
~ Mohamed A. El-Erian, "The Fed as ‘Oz, the Great and Powerful’," Yahoo!Finance, March 12, 2013
In trying to do good, the Fed has confronted more than the considerable dark forces of disorderly economic and financial deleveraging. It has also had to overcome the (not-so-occasional) headwinds from a disruptive Congress and a Europe unable to decisively overcome a regional debt crisis.
~ Mohamed A. El-Erian, "The Fed as ‘Oz, the Great and Powerful’," Yahoo!Finance, March 12, 2013
Mar 11, 2013
Friedrich Hayek on civilization and central planning
The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society—a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.
~ Friedrich Hayek
~ Friedrich Hayek
Mar 8, 2013
Jack Welch on hedge fund manager David Einhorn
Apple (AAPL) deserves better than the treatment it's getting from David Einhorn.
Look, these guys are after a quick hit. I'd blow him off. I'd give Einhorn the back of my hand.
~ Former GE CEO Jack Welch, CNBC, March 8, 2013
Look, these guys are after a quick hit. I'd blow him off. I'd give Einhorn the back of my hand.
~ Former GE CEO Jack Welch, CNBC, March 8, 2013
Mar 7, 2013
Mark Hulbert on the value of VIX as a contrary indicator
Unfortunately, my research suggests that the CBOE’s Volatility Index (VIX, 13.53 close) leaves a lot to
be desired as a market-timing indicator. In contrast to what many contrarians
believe, low VIX levels are not bearish. And high levels are not necessarily
bullish either.
~ Mark Hulbert, "Letting the VIX tell us when to get out," MarketWatch, March 6, 2013
~ Mark Hulbert, "Letting the VIX tell us when to get out," MarketWatch, March 6, 2013
Mar 5, 2013
Alan Greenspan gives speech defending his bubble record
Fasciano asked whether laissez-faire capitalism inherently gives rise to tail risk, and if so, if this is an acceptable risk.
Greenspan replied that if you want to guarantee that that there will be no bubbles, you should have an economy like the Soviet Union’s. A regimented society does not have bubbles; it also doesn't have Standard Oil. We also wouldn't have bubbles if we didn't have human nature, he said. Bubbles come from euphoria, which is a deep-seated inbred characteristic that vies with fear. When we switch from fear to euphoria, bubbles can be the result. Behavioral economists refer to “herd behavior.” We’ve all observed this, when people run in in one direction in droves, like lemmings running over a cliff. And we do that. Yes, Greenspan said, it happens all the time and always will unless human nature changes, which it won’t. Don't question it.
If we wanted the monetary authorities to impose terrible inflation, we would not have stock market bubbles, “I guarantee it.” So the question is, do we live with these problems – and they are problems, but there’s no way around them – or do we live in a highly regimented society? We could impose enough regulations on the financial system, Greenspan said, that bubbles would not occur. But we can’t have it both ways. [...]
Greenspan was accorded the moniker “The Maestro,” but he has also been accused of fomenting the housing bubble by keeping interest rates low in the early 2000s, following the collapse of the dot-com bubble. He's also faced criticism for failing to recognize the existence of that bubble during his tenure as Fed chairman, arguing that "national price distortion" in housing prices was unlikely. He responded to those claims.
In looking back on the crisis in residential housing, Greenspan said that it was clear at the time that housing was in a bubble. He pointed out, however, that we had just come out of the dot-com bubble, which had virtually no economic effect, and the “so-called” recession 2001 was barely visible. This suggested, he said, that we could probably get through the housing bubble. But he and others made the mistake of recognizing only too late that the dot-com bubble didn't amount to a big problem largely because the toxic assets of the time, which were equities, collapsed in institutions that were not leveraged. Therefore, although there was a very large capital loss, there weren’t the bankruptcies and sequential losses that occur when a leveraged institution holds toxic assets.
The mortgage-debt problem of the 2008 financial crisis was different, according to Greenspan. Mortgages were held in very large leveraged institutions. If we had somehow had the dot-com boom second, it would have been interesting to see how different history might have been, he said.
~ Adam Jared Apt, synopsis of Alan Greenspan speech given to Boston Security Analysts Society, February 12, 2013
Greenspan replied that if you want to guarantee that that there will be no bubbles, you should have an economy like the Soviet Union’s. A regimented society does not have bubbles; it also doesn't have Standard Oil. We also wouldn't have bubbles if we didn't have human nature, he said. Bubbles come from euphoria, which is a deep-seated inbred characteristic that vies with fear. When we switch from fear to euphoria, bubbles can be the result. Behavioral economists refer to “herd behavior.” We’ve all observed this, when people run in in one direction in droves, like lemmings running over a cliff. And we do that. Yes, Greenspan said, it happens all the time and always will unless human nature changes, which it won’t. Don't question it.
If we wanted the monetary authorities to impose terrible inflation, we would not have stock market bubbles, “I guarantee it.” So the question is, do we live with these problems – and they are problems, but there’s no way around them – or do we live in a highly regimented society? We could impose enough regulations on the financial system, Greenspan said, that bubbles would not occur. But we can’t have it both ways. [...]
Greenspan was accorded the moniker “The Maestro,” but he has also been accused of fomenting the housing bubble by keeping interest rates low in the early 2000s, following the collapse of the dot-com bubble. He's also faced criticism for failing to recognize the existence of that bubble during his tenure as Fed chairman, arguing that "national price distortion" in housing prices was unlikely. He responded to those claims.
In looking back on the crisis in residential housing, Greenspan said that it was clear at the time that housing was in a bubble. He pointed out, however, that we had just come out of the dot-com bubble, which had virtually no economic effect, and the “so-called” recession 2001 was barely visible. This suggested, he said, that we could probably get through the housing bubble. But he and others made the mistake of recognizing only too late that the dot-com bubble didn't amount to a big problem largely because the toxic assets of the time, which were equities, collapsed in institutions that were not leveraged. Therefore, although there was a very large capital loss, there weren’t the bankruptcies and sequential losses that occur when a leveraged institution holds toxic assets.
The mortgage-debt problem of the 2008 financial crisis was different, according to Greenspan. Mortgages were held in very large leveraged institutions. If we had somehow had the dot-com boom second, it would have been interesting to see how different history might have been, he said.
~ Adam Jared Apt, synopsis of Alan Greenspan speech given to Boston Security Analysts Society, February 12, 2013
Alan Greenspan gives speech on virtues of Fed-induced asset inflation
Another plus Greenspan cited was the state of the equity markets. In his words, equity premiums are now at almost the highest level in American history, which means that the market is pleased with the economic outlook and the downside risk is at a minimum. It was extraordinary, he said, to see how far the markets had gone down by March of 2009, when price-to-earnings ratios were at a level where “human beings don’t allow them to go any further.” Although we’re considerably up from there, there is still the possibility of a further rise, he said. [...]
People don’t realize the significance of equity prices, and asset prices in general, for day-to-day economic activity, according to Greenspan. His research shows that equity markets are not only a leading economic indicator, but, much more important, they are fundamental creators of economic activity. Approximately 6% of the growth in GDP is funded by a rise in equity values, on average, though this varies considerably. As a result, increasing equity values can be even more important for economic growth than fiscal stimulus.
The problem with fiscal stimulus is that we measure it gross, by how much it puts into the economy, but we don’t put debits against it. The evidence is unambiguous, according to Greenspan, that rapid increases in deficits raise the expectation of taxes, engendering uncertainty in the business community and leading to significant declines in private capital investment. This lowers the impact of a fiscal stimulus by one-fourth to one-half and possibly significantly more, depending upon conditions. An equity stimulus doesn’t have this negative aspect. The data after March 2009 make clear that the equity stimulus drove the economy. Greenspan acknowledged that an equity stimulus brings with it an increase in private debt, “but not more than the system can handle.” [...]
Although the housing market is recovering – foreclosures are clearly declining, and the market is beginning to clear – Greenspan said he was reminded of 2008. At that time, half of remediated mortgages went into default again after six months. As prices have gone up and people have built up equity in their homes, that proportion has now fallen to 10%. The key to recovery is having people build up equity in their homes. As that happens, it builds up a cushion; as prices go up 10% or 15%, the underwater homes are cleared out. Remediation made no sense. If we had let the markets adjust themselves, that is, allowed the kind of selling climaxes that clean out an illiquid market and caused prices to fall to a level where the market cleared, we would have been far better off, according to Greenspan. [...]
~ Adam Jared Apt, synopsis of Alan Greenspan speech given to Boston Security Analysts Society, February 12, 2013
People don’t realize the significance of equity prices, and asset prices in general, for day-to-day economic activity, according to Greenspan. His research shows that equity markets are not only a leading economic indicator, but, much more important, they are fundamental creators of economic activity. Approximately 6% of the growth in GDP is funded by a rise in equity values, on average, though this varies considerably. As a result, increasing equity values can be even more important for economic growth than fiscal stimulus.
The problem with fiscal stimulus is that we measure it gross, by how much it puts into the economy, but we don’t put debits against it. The evidence is unambiguous, according to Greenspan, that rapid increases in deficits raise the expectation of taxes, engendering uncertainty in the business community and leading to significant declines in private capital investment. This lowers the impact of a fiscal stimulus by one-fourth to one-half and possibly significantly more, depending upon conditions. An equity stimulus doesn’t have this negative aspect. The data after March 2009 make clear that the equity stimulus drove the economy. Greenspan acknowledged that an equity stimulus brings with it an increase in private debt, “but not more than the system can handle.” [...]
Although the housing market is recovering – foreclosures are clearly declining, and the market is beginning to clear – Greenspan said he was reminded of 2008. At that time, half of remediated mortgages went into default again after six months. As prices have gone up and people have built up equity in their homes, that proportion has now fallen to 10%. The key to recovery is having people build up equity in their homes. As that happens, it builds up a cushion; as prices go up 10% or 15%, the underwater homes are cleared out. Remediation made no sense. If we had let the markets adjust themselves, that is, allowed the kind of selling climaxes that clean out an illiquid market and caused prices to fall to a level where the market cleared, we would have been far better off, according to Greenspan. [...]
~ Adam Jared Apt, synopsis of Alan Greenspan speech given to Boston Security Analysts Society, February 12, 2013
Mar 1, 2013
Abbey Joseph Cohen on missing the stock market rally
Short-term concerns about the automatic spending cuts notwithstanding, my models peg fair value for the S&P 500 index (^GSPC) at 1,575 - a 4 percent premium to Thursday's close. There are other models, including the Fed model, that show fair value as high as 1,700 or 1,750.
[The rally] is supported by improving fundamentals in the U.S. economy and, very importantly, valuation. [With] equities at a (price-to-earnings) ratio at 14 times earnings, they're just not expensive.
Our sense is that there is a lot of cash on the sidelines. Investors may do well to put that money to work in stocks - or to shift out of longer-term bonds into stocks, the better investment.
But even in a rising interest rate environment, equity bull markets historically retain some strength for a while, as the market responds to an improving economy. ~ Abbey Joseph Cohen, Senior Investment Strategist, CNBC, March 1, 2013
[The rally] is supported by improving fundamentals in the U.S. economy and, very importantly, valuation. [With] equities at a (price-to-earnings) ratio at 14 times earnings, they're just not expensive.
Our sense is that there is a lot of cash on the sidelines. Investors may do well to put that money to work in stocks - or to shift out of longer-term bonds into stocks, the better investment.
But even in a rising interest rate environment, equity bull markets historically retain some strength for a while, as the market responds to an improving economy. ~ Abbey Joseph Cohen, Senior Investment Strategist, CNBC, March 1, 2013
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