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Archive for June, 2012

Shake the Myopia Mood

June 29, 2012 Leave a comment

Myopia is the mood of the era. (If myopia isn’t an official “mood” yet, let’s make it one. Like melancholy, amour, and that depressive vacancy we all feel in February when football is over.)

What’s the fate of the EU? Spanish yields at new euro-era highs? Is China only going to grow (gulp) 8% this year? And what about cotton prices! Oh cripes…the supreme court decision!

These are all questions for prop traders—people with a daily, monthly, quarterly, even yearly, focus. My bet is, if you’re an average investor, all this stuff feels uber important but has little or no real importance on building long-term wealth. And yet some investors occasionally get so caught up in the myopia they forget all about goals and the discipline of wealth building.

Learn to put stuff of the moment into perspective. A longer view, above the noise, shows a world of great opportunity with cheap stocks. If you think euro problems will sink the world for all-time, or middle east unrest will unravel all wealth, you simply have never studied history. Even if the euro capsizes wholesale, capital markets have withstood far tougher and rougher, and equities over the long-term have delivered. It’s the path to get there that’s often ineffable.

Myopia is generally depressing, isolating, feverish. I don’t like any of those things and neither should you. Shake the mood. Read a book like Peter Diamandis’ Abundance.

R.I.P Anna Schwartz

June 27, 2012 Leave a comment

“Anna Schwartz was one of the greatest economists of the twentieth century… Anna had done path-breaking research since the 1930s in assembling the monetary statistics that were at the heart of her three monumental books written with Milton Friedman — “A Monetary History of the United States” ( 1963), “Monetary Statistics of the United States” ( 1970) and “Monetary Trends of the United States and United Kingdom“( 1982). I had the good fortune of collaborating with her on papers ever since; we just finished writing ( with Owen Humpage of the Cleveland Fed) “ U.S. Exchange Market Operations in the Twentieth Century.”

-         Anna Schwartz, Pioneering Monetarist – Michael Bordo

Indeed. Her work will have a lasting impact for a long time to come.

Credit Rating Agencies Forget Markets Look Forward

June 26, 2012 Leave a comment

Many of Friday’s headlines read like this:

Bank Downgrades in U.S. Prove Mistaken as Credit Risks Wane

It’s not so much (or perhaps, not only) that Moody’s, Fitch, and S&P are “mistaken” about the banks—it’s that they’re pretty much always the last to recognize reality and reflect it. That’s because, by and large, credit rating agencies pretty much do as human brains are wont: take the recent past and extrapolate it into the future.

This is one of the foremost and ultimate investing mistakes. Capital markets look forward and price in the expected future. Credit ratings agencies are reflecting today in their ratings what’s already done and past about the banks. They, like most folks, are not able to see clearly the future, and therefore use the recent past and assume trend continuation.

Oh, they’ll have their fancy models, special analysts with their special techniques, and other secret sauces to confirm and give authority to their prognostication. But in the end, credit ratings tell you more about the past than the future—making them awful forecasting tools.

“Ro-ro”? Uh-Oh.

June 21, 2012 Leave a comment

The notion of risk-on/risk-off is so tempting to believe in. But it’s rote nonsense and always has been. There is no lever traders and fund managers pull each day where they all decide today is a “risk on” or “risk off” day.

There are millions of separate interests and views affecting the markets, all days, always. That correlations sometimes go up, and sometimes go down tells you nothing about how anything is likely to behave moving forward. Non-serial auto-correlation has been a fact of investing life basically forever no matter how volatility and correlation spikes or quells.

Also, what’s risky changes! What’s risk today is different than perceived risk a few years ago. Remember when the euro was the safest place to be? Now it’s a risk asset!

Don’t be fooled by this stuff—market cycles see changes in leadership and periodic corrections. Volatility and correlation will do the same.

Why Not Winston Churchill?

June 20, 2012 Leave a comment

I often get asked about the importance of reading and writing—what it does to the mind and the long-term positive effects. Particularly because few in investing and finance learn to speak and write with acumen.

There is Cicero, who is wonderful on most of these subjects. But why not study Winston Churchill? I make it a point to read something of his every year. Not only was Churchill a prolific writer and tremendous orator, he was also a great exemplar of the making of wit, intellect and psyche via the acts of writing and reading.

Charlie Rose: A Discussion about Winston Churchill

Mr. Churchill’s Profession: The Statesman as Author and the Book That Defined the “Special Relationship” by Peter Clarke

How Could New BOE Liquidity Be Bullish?

June 19, 2012 Leave a comment

So. The Bank of England is offering new liquidity to British banks. My sense is much of the market will interpret this as “this just shows how weak and fragile the system is right now.”  But in my view this is an example of why the likelihood of a repeated Lehman-style panic is getting more remote. Ostensibly, the BOE’s plan is to help with things like household lending and consumption in the UK , but in reality this is probably about creating a ballast in case everything goes haywire on the continent and the euro breaks up.

One of the governing principles of this blog is: markets are pretty darn effective discounters of the widely known, believed, and feared. This isn’t just about pricing stocks into the future; it’s also how capital markets work. This event, rather than showing weakness, is instead another example of capital markets moving ahead of potential problems, ballasting them before they happen. This was not the case for Bear/Lehman/AIG, etc.—markets were not expecting those events and hadn’t braced for them. But they are bracing now. This is the nuts and bolts of the process of markets anticipating widely expected outcomes and therefore something else happening, in my view.

Note: equity markets rallied last week, with leadership in Europe.

RIP Ray Bradbury – A True Iconoclast

June 7, 2012 Leave a comment

The only way to beat the markets long-term in investing is to be an iconoclast. Ray Bradbury was one of our finest, and most human, sci-fi writers. He was a great writer first, and a science fiction writer second. Much like Philip K Dick, Robert Heinlein, and Isaac Asimov, his visions of the future influenced thinkers for generations to come.

Ray Bradbury, Prolific Science Fiction Writer, Dies at 91 – Laura Tillman

Futurism in general is a fascinating topic for investors to grapple with. It’s fun and awe-inspiring to think distantly into the future about what could be. But note: most every long-range forecast ends up wrong, and markets only discount a couple years into the future at the very most. Futurism is big danger for investing sanity. So have fun with it, but don’t invest today on vague notions decades in the fore. Here are a few recent favorite futuristic tomes:

The US GDP Revision is Good News

June 1, 2012 Leave a comment

Yes, Q1 GDP growth was revised down to 1.9% from 2.2%. But look at a basic breakout:

Personal Consumption: +2.7%

Private Domestic Investment: +6.3%

Exports: +7.2%

Imports: +6.1%

(Note: the traditional GDP calculation nets these two out, which then becomes a negative. But this blog has long held that savvy investors like to see big, heavy export and import growth.)

Government: -3.9%

Government -3.9%! Essentially, the US economy is thundering along like a classic Detroit muscle car, while—and supply siders and fiscal hawks alike will love this—the government contracts big time.

Most folks will look only at the top line GDP number and perceive tepidness—looking just one level further reveals a very healthy US economic picture.

(Source: www.bea.gov)

Look the other Direction

June 1, 2012 Leave a comment

A great rule of investing thumb is to look where others aren’t looking—what’s widely focused on is already largely contemplated and priced into capital markets. A similar lesson is also often applicable when thinking through public policy and geopolitics.

With everyone talking a potential Greek exit from the euro…

A Greek Euro Exit Could Be Worse Than Expected – Michael Sivy, TIME

…look the other direction: how might the European Union move toward greater federalization?

What Exactly Is a ‘Eurobond’ Anyway? – Catherine Boyle, CNBC

I don’t have any clear view on how all this plays out either way, but don’t get caught focusing on all the same things everyone else is—in politics and in markets, the path to many outcomes is seldom explicit, and often counterintuitive. It should not surprise in the least that a potential outcome of Eurozone break-up talk is the opposite—greater federalization and less direct democracy.

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