Monday, April 26, 2010

Zuckerman: Investing in an Age of Bubbles

Zuckerman: Investing in an Age of Bubbles WSJ 4/25/2010

Author of the Greatest Trade Ever, Gregory Zuckerman, explains to Simon Constable why he thinks the world of investing has changed and how small investors should be willing to try new tactics to make money.

What Paulson Taught Zuckerman About Investing

What Paulson Taught Zuckerman About Investing WSJ 4/24/2010

Author of the Greatest Trade Ever, Gregory Zuckerman, explains to Simon Constable how small investors can learn from the quirky outsider tactics of John Paulson, the hedge fund manager at the center of the Goldman Sachs subprime trading scandal.

Tuesday, April 13, 2010

The Economy Hit Bottom, But It Is Still Not Official

June, 2009?

Here at Mammon Among Friends, you have been reading for some time that the recession of 2007-2009 ended last June (i.e., June, 2009.)  The Business Cycle Dating Committee of the National Bureau of Economic Research (the NBER) ducked the issue, although it looks like a consensus agrees with me.  Their caution flows from a fear that we might have a repeat of 1980 and 1982 when we had either back to back recessions or one double dip recession.   The committee's decision was for the former.

I have no doubt we are well into a recovery and that the trough was June 2009.

Robert Gordon agrees: "It is obvious that the recession is over. Real GDP has recovered strongly from a trough in 2009:Q2 and by 2010:Q2 (the current quarter) will have reached (or be very close to) its value reached in the peak NBER quarter of 2007:Q4...The traditional measure of production used by the committee is the Federal Reserve Board Index of Industrial Production (IIP), which reached a well-defined trough in June 2009. For those who object that the IIP refers only to about 15 percent of the economy, the broader monthly measure real manufacturing and trade sales also reached its trough in June 2009. The private firm Macro Advisers has constructed a measure of monthly GDP that is available back to 1992, and this also indicates a cyclical trough in June 2009. While real GDI is flat across 2009:Q2 and 2009:Q3, quarterly real GDP reaches its trough in 2009:Q2, as does the average of quarterly real GDP and real GDI. Thus we have three monthly measures that reach a trough in June, the average of two measures of aggregate economic activity which reach their trough in 2009:Q2, and no clearly defined troughs occurring later than that in any series other than the traditional lagging data on aggregate hours of work and total employment."

Gordon is the senior guy on the committee now that Victor Zarnowitz is dead.   I'm in good company!

Jeffrey Frankel seems to be in the same camp. On April 5th, he blogged, "The recession is over."

What is a Recession?

A recession is a broad, sustained decline in a wide range of economic indicators. The committee has put increasing stress on GDP over the years , although not as much as they did in 1966. Still the monthly indicators are decisive and most of the coincident indicators are measures of private activity: e.g., real retail sales, industrial production, personal income minus transfer payments.

The committee's actual statement was:

"The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date."

Where Are We At?  Where Are We Going?

We certainly should have a strong recovery given how far the economy fell. The first part of a recovery is when things are at their worst. Places where the housing bubble was the worst will recover more slowly.

My greater concern is that the administration's health care payment "reform" and taxing will create a second recession much like the very severe Roosevelt recession of 1937-8.  That would not be pretty.

Saturday, April 10, 2010

Jamie Dimon, the boy from Queens, Mammon Among Friends' 2009 Banker of the Year, and hero of the financial crisis, has taken on Washington.   "Mr. Dimon Goes to Washington" Robin Sidel and Damian Paletta wrote last Wednesday that far from keeping a low profile in our bankerphobic time, "he's spent the past year launching his own campaign to stave off government proposals that would rein in profits, boost consumer protections and impose new fees."

Here is Robin Sidel discussing what they wrote with Kelly Evans and Evan Newmark.

Friday, April 09, 2010

Junk versus Quality

Is it time to shift from the bottom fishing bargains to the solid investments?

How to Buy a Mutual Fund

A mutual fund is an open ended investment company.  Here Jonathan Burton tells us to look beyond just what the fund has done lately when picking which fund to invest in.

You should also carefully examine your own personal financial objectives in light of your own financial consideration.

Market Geeks and Gold

Gold at $1,127 an ounce?

Technical analysts predict there is more juice in the gold rally.

Technicians focus investment decisions on psychology and pure supply and demand considerations. Since they look at chart patterns, they are often called "chartists."

Saturday, April 03, 2010

Three Imbalances Threaten Long-Term Economic Stability

 You can may have read the following commentary in the Wichita Eagle(3/25/2010):

The Economic Recovery

We are emerging from a financial and economic crisis of historic dimensions. Unemployment reached levels not seen since 1982. America suffered the largest falls in industrial output and housing starts since the "Roosevelt Recession" of 1937-38

However deep the recession, the recovery is well under way. A long list of indicators hit bottom last year and are rising: auto sales (February), durable goods orders (March), real retail sales (April), housing starts (April), and industrial production (June). The fall in global industrial production ended in March as did world trade's in May.

Most economists are sanguine about the long term but judge the current recovery to be fragile and weak. The consensus is wrong. This recovery is solid and broad-based.

Emerging economies (particularly Brazil, China and India) are leading a worldwide expansion. America's longer-term prospects are the real worry.

The Reckoning

Three major imbalances threaten the country's long-run economic stability and prosperity. We went into this crisis with a trade deficit equal to 5 percent of GDP and savings rates near zero. Government deficits equaled 1.2 percent of GDP when unemployment was still only at 4.6 percent. We could finance these imbalances only because the rest of the world was willing to lend us trillions of dollars. That dependence is neither in our long-term economic nor geopolitical interests.

This overdependence on foreign credit led to massive misallocations of America's resources. The housing bubble grew from 2003 and peaked in August 2006. Over that time period, home-building sucked an extra $900 billion in real resources away from the rest of the economy.

Finance and real estate grew to over 20 percent of the economy. Our brightest young graduates found it more attractive to become financial engineers rather than build planes and invent new products. We will be paying for this deadweight loss in higher unemployment and lower economic growth for many years.

The Future

Correcting the imbalances means we must save more and use less of what we produce for ourselves. In other words, Americans face lower living standards

Lower standards of living and a falling dollar will translate into higher domestic prices. If policymakers misinterpret those rising prices and continue to fight structural change with the wrong tools, they will start a vicious policy cycle culminating in the loss of the dollar as the world's reserve currency and unpredictable turmoil.

Where are our policies now? This recession was global and induced a global response. Many nations including America have disinterred the theories of John Maynard Keynes to justify massive government spending programs ("fiscal stimulus") to fight the recent economic recession. Central banks have used the ideas of Keynes' nemesis, Milton Friedman, to justify vanishingly low interest rates ("monetary stimulus") and unprecedented financial market interventions ("quantitative easing") toward the same end. This focus on the short term is crowding out the need for correcting the economy's imbalances. I doubt either Keynes or Friedman would wholly approve of the sins being committed in their names.

And in the Long Run...

What makes a great statesman? Historian J. Rufus Fears found three essential elements. A great statesman clearheadedly identifies and analyzes a major problem. Then he implements a solution that works both in the short run and in the long run. Focusing on the immediate problems of the 1930s, Keynes dismissed "the long run, (when) we are all dead."

Yet in the 1940s, Keynes turned around and engineered a remarkably resilient postwar monetary system. That act of statesmanship produced peace and prosperity for generations. Contrast that with current economic policy, where "in the long run, we are all in the soup."

Friday, April 02, 2010

You Doubted that We Are in a Recovery? Jobs Up by 162,000 Confirming the Household Uptrend

Confirmation for the Recovery

Mammon Among Friends has been dating the cyclical trough at June, 20010. Skeptics can now finally find confirmation that there is indeed a recovery in the jobs data announced this morning.

The Bureau of Labor Statistics announced, "Nonfarm payroll employment increased by 162,000 in March, and the unemployment rate held at 9.7 percent. Temporary help services and health care continued to add jobs over the month. Employment in federal government also rose, reflecting the hiring of temporary workers for Census 2010. Employment continued to decline in financial activities and in information."

The Household Survey of Employment

I have been following the household data very closely.  While noisy and trend distorted by the Census Bureau's insensitivity to the need for useful time series, the household data do not suffer from the cyclical biases of the payrolls data.

The unemployment rate remained at 9.7 percent in March, below its cyclical high of 10.1 percent in October.  For three months, households have reported large increases in employment after a huge drop in December (During Christmas, retailers did not hire as many workers as the seasonal adjustment process projected.)  Labor force growth has been strong.

Employment increased faster than population again in March.  Common sense dictates that the employment ratio, which hit bottom in December,  should be a long lagging indicator.  Bottoming out six months after the cyclical peak would be consistent with that characterization.

The unemployment rate is now five months past its cyclical high and the employment ratio is three months past its cyclical low.  This reflects the global recovery.

The Economic Recovery

We are emerging from a financial and economic crisis of historic dimensions.  Unemployment reached levels not seen since 1982.  America suffered the largest falls in industrial output and housing starts since the “Roosevelt Recession” of 1937-8.  

However deep the recession, the recovery is well underway.  A long list of indicators hit bottom last year and are rising: auto sales (February), durable goods orders (March), real retail sales (April), housing starts (April), and industrial production (June.)  The fall in global industrial production ended in March as did world trade’s in May.
Aircraft orders were up sharply in February according the the Census Bureau for the second straight month.  The BLS payroll data indicated aerospace employment was level for March (it does not break out the detail in its monthly reports.)