Free Markets, Free People
The story of professional curmudgeon and cynic Ambrose Bierce and The Devil’s Dictionary. Bierce’s astringent satire and observations made Twain seem treacly sweet:
POLITICIAN, n. An eel in the fundamental mud upon which the superstructure of organized society is reared. When he wriggles he mistakes the agitation of his tail for the trembling of the edifice. As compared with the statesman, he suffers the disadvantage of being alive.
HISTORY, n. An account mostly false, of events mostly unimportant, which are brought about by rulers mostly knaves, and soldiers mostly fools.
MAN, n. An animal so lost in rapturous contemplation of what he thinks he is as to overlook what he indubitably ought to be. His chief occupation is extermination of other animals and his own species, which, however, multiplies with such insistent rapidity as to infest the whole habitable earth and Canada.
SATAN, n. One of the Creator’s lamentable mistakes, repented in sashcloth and axes. Being instated as an archangel, Satan made himself multifariously objectionable and was finally expelled from Heaven. Halfway in his descent he paused, bent his head in thought a moment and at last went back. “There is one favor that I should like to ask,” said he.
“Man, I understand, is about to be created. He will need laws.”
“What, wretch! you his appointed adversary, charged from the dawn of eternity with hatred of his soul — you ask for the right to make his laws?”
“Pardon; what I have to ask is that he be permitted to make them himself.”
It was so ordered.
HEAVEN, n. A place where the wicked cease from
troubling you with talk of their personal affairs, and the good listen with
attention while you expound your own.
For several years now we have been trying to explain repeatedly that buybacks are in general a bad deal. Jason Zweig looks at the question. That being said, the The PowerShares Buyback Achievers Portfolio has done very well over the last three years. We’ll let that hang there and discuss in more detail later.
Economics proceeds on the assumption of ‘given data’ and produces a beautiful, aesthetically satisfying theory to show how these data determine a resulting order, but [economists] forgot that these data are purely fictitious: the data are not given to anybody.— F. A. Hayek
Ben Bernanke and the Costanza Effect
Yesterday I wrote The Bear Arrives. Then it left in the space of less than an hour. Supposedly it is because a new plan is coming to save the Eurozone. This one seems to require lenders to take more losses. Unsurprisingly some banks are not happy with that idea. Still, we may be getting somewhere. Somebody will need to take a loss. I suggest this interview from Kyle Bass to put this in perspective:
there’s only one way out in my opinion of this debt mess and it’s through restructuring and that means default. It’s not the end of the world. It just means a lot of people are going to lose a lot of money and then we’ll get up the next day and go back to work.
Researchers believe they have found the written form of the ancient Pict language.
UCLA has restored Robert J. Flaherty’s LOUSIANA STORY (1948), a portrayal of Cajun life and the disruption an oil company causes when it enters the bayou.
The Robin Hood Tax is a bad idea, at least as described.
While a recession may be coming, Mark Perry reviews the reasons we are “not experiencing any of the significant, persistent and widespread declines that would lead the NBER to declare sometime next year that the U.S. economy entered a recession in any of the recent months.”
Auto Sales strength should help lead to a weak, but improved, GDP number for the third quarter.
More doubts about leveraging the EFSF
Capital goods orders and shipments remain strong according to Ed Yardeni:
It’s hard to put a negative spin on such strong numbers, other than to note that they looked this strong during the previous two cycles when they peaked and then took a dive. On a more fundamental basis, capital spending is driven by corporate profits and cash flow, which have been very strong. They should remain strong, though both are likely to grow at slower paces through next year.
On the other hand he sees issues for earnings overall going forward, especially in the materials sector.
Odds are that there will be lots of disappointments in the earnings season ahead, most likely led by the Financials and Materials sectors. Of course, the bad news for the quarter may have been discounted already. However, there could also be lots of cautious guidance about Q4 and 2012. Industry analysts are already trimming some of their earnings estimates for next year, particularly in the Financials sector.
Goldman is getting more and more bearish.
“What is the gross number and what’s the difference between the gross and the net?” Citi CFO John Gerspach replied: “I don’t think that the gross number is relevant.”
It isn’t? So, we are all supposed to trust that as an industry (really, five US banks) you have a handle on a total derivatives book of 332 Trillion! Seriously? This reminds me of one of my favorite posts from back in 2008, JP Morgan, Lehman and Nightmares:
Personally there are better ways to make money than hoping a company with 90 trillion in derivatives exposure has a handle on it in my book, but then again, I am admitting that I have no idea what I am talking about, and cannot find anyone else who does either.
Warren Buffet often speaks of defining a circle of competency when investing and staying inside it. It doesn’t matter how big the circle is, just knowing when you are inside it. Well, 90 trillion in derivatives exposure is outside of my circle of competency to assess.
The nightmare is what if it is outside of JP Morgans circle?
Personally the idea that Trillions, netted or not, are within anyone’s circle of competency is ridiculous.
We are often told that we cannot be about to have a recession because they are always preceded by an inverted yield curve, to which we reply:
- Glad to know the Fed can therefore outlaw recessions.
- Funny, when we pointed out a few years ago the yield curve was inverted and flashing recession the yield curve wasn’t considered such a great barometer.
Ruslan Bikbov at BofA Merrill Lynch found that a weak argument and decided to adjust for that fact and then tested his method. What do you know, the yield curve is flashing recession.
HSBC says there will be no hard landing in China.
Deutsche Bank agrees forecasting a slowdown to 7% and a drop of 10% in housing prices. However, this interests me:
Readers may ask why we are not projecting a 30% drop in property prices. Those who understand China’s political economy should know that a 15% decline in average property prices in 35 cities within a few months must be accompanied by a range of economic and social consequences. These will include a sharp decline in real estate transactions, a visible deceleration in real estate investments, rising unemployment in the property construction and agency sectors, a further decline in construction material prices, demand destruction due to inventory destocking, and finally a worrying decline in GDP growth and the resulting concern of social stability. In other words, the government will most likely not tolerate a 30% drop, and probably not even 15% in our view. We expect real estate policies will likely be relaxed way before a 30% price decline is observed.
I see, the old “the government won’t allow it” explanation. Maybe, but the idea that we can assume government policy can control the economy is awfully presumptuous. Now that we know that can be done, market and economic realities be damned, we should all just merrily bid stocks up because governments have eliminated business cycles, haven’t you noticed?
Sam Harris on the Future of the Book and how writers need to adapt.
(Cross Posted at Risk and Return)
Bring Out Your Dead-carnage on Wall Street
Dividend cash outs are EEEEVVVVIIILLLL!!!!!
“In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.” – Rudiger Dornbusch
Free Markets Work: Bailout Riven Caricatures Don’t- John Hussman conducts a beat down on certain memes.
In an absolutely shocking announcement Greece will not meet its deficit targets. Similarly we are astounded to find out that Madonna is not a virgin.
Via Michael Kitces exactly what do you do to shut down a deceased person’s social media accounts when they die? In Has Your Client Asked: What Happens To My “Tweets” When I Die? we walk through the basic policies for Twitter, Facebook, and LinkedIn to close the accounts out. It even covers how to memorialize a facebook page, so friends can leave remembrances.
Next time you are in New Orleans, I suggest you consider a tour of star bartender Chris Hannah’s favorite places. Oh, and definitely stop by the French 75 and ask for something old, classic and hardly served so he can show his stuff. Maybe a Martinez. Oh, and invite me! Just don’t tell him I called him a star, he would hate that.
Is that bullish? Or is the ‘dumb money” right this time? I can believe either way for now, but longer term I believe we will see this continue until the secular bear ends in a whimper at very low valuations because nobody cares anymore. The stock market won’t be relevant to most people’s lives because they won’t be in it. See 1982.
On the coming war between investment bankers and traders as our banks shed thousands of workers. Footnote three might be missed so we quote it here:
It is also no matter of indifference in today’s environment that when an M&A banker screws up or fails to close a deal, he loses only time and a potential fee. When a prop trader or structured products banker screws up, he can blow a hole in the side of his bank larger than all the revenues earned by all of his compatriots all year. And when a whole industry of capital markets bankers screw up, it can blow a trillion dollar hole in the side of the global economy. Or so I hear.
Have you ever wondered which NFL team is most attractive? No, I haven’t either.
The Danish decide to tax fat. McQ is not amused…okay, in a way I think he is.
Further evidence that risk factors, equity risk premiums and the whole idea that volatility and beta are positively related to return doesn’t work is an anomaly that we have been pointing out for some time. Lower beta and lower volatility and high quality all outperform riskier fare. More special cases for Fama and French to explain away.
We have explained that dividends are the key to understanding stock returns for the market as a whole. Yes, even for growth stocks and other low dividend players. For reasons not unrelated to the discussion above, we will also enjoy pointing out that dividend payers have crushed the market since 2000 and the gap is continuing to grow.
Finally, progress on that whole flying carpet issue.
We see that the global economy is decelerating rapidly, but maybe we will avoid an out an out recession. Gavyn Davies looks at the difference between the hard (slow but positive) and soft data (heading into recession.) The question is how will the gap close?
Doug Kass’ recent bullishness has been fading. To help himself think things through has 10 Questions for the Bulls and Bears. He starts today with the Bulls.
The story of Coca Cola’s stock price in pictures. Key takeaways: Dividends made a big difference. The price went up way faster than profits, and then sat there for 13 years.
Lesson for us? It was too expensive (Buffet has admitted he should have sold) and now after 13 years we believe it is attractive as are many high quality stocks. The rest of the US market? Not so much.
The legendary value investor Jean-Marie Evillard agrees with us that the US is still not cheap, despite claims I heard on CNBC repeatedly throughout the day that stocks were “incredibly cheap.” The kool-aid is obviously still flowing. You can hear his views in this excellent TV interview.
Steve Leuthold is likewise loaded for bear. Lots of good thinking:
For me, one of the long-term tragedies is that the stock market is trading today at a level that we first crossed on the upside back in 1998. I was so bearish then, that had you told me that prices would be unchanged 13 years later, I would not have been surprised. But I certainly would have expected better value would have been re-established in the U.S. stock market by virtue of 13 years of flat action and improving fundamentals. It shows how extreme those late 1990s valuations were.
Stunningly, Europe trades at 10 times normalized earnings. The U.S. is trading at a 65% P/E premium to Europe. The historical average has been more like 15%. You could argue maybe there should be some additional premium in this environment, given what Europe is going through, but the odds are that this is going to narrow here in the next 12 to 24 months.
We need to get through this bear market before we start planning for the next bull, but we would expect something fairly similar to what we have just gone through. This was a 26-month run, which isn’t too far off the historical median. We need to disabuse ourselves of this recently adopted notion that bull markets and economic expansion tend to last six to eight years. The historical norms are much shorter than that.
Bill Gross is sounding gloomy:
There are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years.
Bob Janjuah sounds the gloomy tune as well. He sees a lower bottom in October and then a strong rally to 1200 on the S&P with hope in effective government policy driving things upward. Then:
In or within a year from now I expect global equities to be 25% to 30% lower. My S&P500 target for the low in 2012 remains 800/900, and I think an ‘undershoot’ into the 700s is entirely possible. For the valuation-focused, assume S&P 500 EPS in 2012 of $90/$100, and P/Es in the 8 to 9 area – I see this kind of P/E as the new norm in the kind of world we are in. In this bearish outcome I would expect 10-year bund yields at 1% to 1.25%, 10 year UST yields at 1.25% to 1.5%, and 10-year gilts below 2%. The USD should do well, credit and commodities should not.
In the everybody knows the truth whatever it is department, we have this from Frank Stephenson:
Today’s prize goes to John Judis who writes in The New Republic (gated),
“You know, when Herbert Hoover had to face a financial crisis and then unemployment, his strategy was to balance the budget and cut spending …”A question for Mr. Judis: In what world, sir, does spending going from $3.1 billion to $4.6 billion (during a time of deflation no less) constitute a CUT in spending?
This is also a good time to plug Steve Horwitz’s new Cato piece, “Herbert Hoover: Father of the New Deal.”
Finally I cannot recommend highly enough Ken Burns Prohibition.
An introduction to the linguistic peculiarities of the professional kitchen.
Should Larry Ellison and Oracle be running scared?
We are seeing that fewer and fewer companies are deciding to go public. Professor Bainbridge looks into why.
We keep hearing that Bank Of America can get past its legal troubles over mortgages, and it may well. However, shareholders are still pushing a $50 billion lawsuit over the purchase of Merrill Lynch.
Tales of the Cocktail has a great new site. Yes, I’ll be there again next Summer. I say we arrange a meeting at the French 75.
Albert McMurry gives us the last part of his series on his frist trip to New Orleans for Tales:
It’s said that if you look at New Orleans’ history — founded by the French, occupied briefly by the Spanish and sold to the Americans— that there’s a real sense that we’re simply the latest landlord to sit in the chair, and well after we’re gone, this city will remain New Orleans. JT rightly stated that it is the type of city where you rest when you’re tired, eat when you’re hungry and drink when you’re sober.
That was one of the things I enjoyed about Tales, all the people who had never been to New Orleans, which for some reason surprised me. Thanks for coming Albert. Hope to see you come back soon.
The bubbles in China are showing the classic signs of a top. If “Ghost Cities” are not enough, Ponzi schemes associated with investment in them should be. Even more so in that it bubbled up in the shadow banking system.
Of course, that doesn’t mean we can’t get excited at opportunities popping up. Russia is getting very cheap!
Willem De Kooning appreciated as an artist and a cultural phenomena
Calpers wonders if it can hit their return target of 7.75% long term. I am dubious without more inflation they can do so.
China may be slowing, but our economy has hit stall speed. Our economy has never slowed to this level and not gone into recession within a year:
As the chart illustrates, the latest YoY real GDP, at 1.6% (revised upward from 1.5% in last month’s GDP estimate), is below the level at the onset of all the recessions since the first quarterly GDP was calculated — with one exception: The six-month recession in 1980 started in a quarter with lower YoY GDP (1.4% versus today’s 1.6%). And only on one occasion (Q1 2007) has YoY GDP dropped below 1.6% without a recession starting in same quarter. In that case the recession began three quarters later in December 2007.
In his 2011 Jackson Hole speech, Chairman Bernanke observed that “growth in the second half looks likely to improve.” Our look at YoY GDP percent change suggests that we must indeed see stronger second half growth to avoid the recession that now appears to be a definite risk. If Q3 real GDP shows a continuation of the current trend, the NBER will likely pick a month in Q2 as the beginning of a new recession.
While overseas stocks are looking cheap there is nothing to suggest that they are not risking going lower. Many countries, including the US, are at risk of recession or severe slowdowns. All are well below trend from a long and intermediate term trend following standpoint. Dow Theory says stay away and the behavior of leading stock indicators, is bad. The Shanghai is still leading on the way down and High Yield funds are breaking support.
The Dow Jones and the S&P 500 joining hands?
I am not sure how I missed it, but did you know there is a controversy at the University Wisconsin-Stout over a Firefly poster?
Albert Edwards is still maintaining his long held projected bottom of 400 on the S&P500. Now that is even lower than I have ultimately expected. But hear him out! He also has held since 1996 that ultimately the 10 year treasury would end up at 1 1/2%. That was, and until this year, had seemed even more outlandish, but here we are:
Jeremy Grantham of GMO says this is “no market for young men”. Maybe now I am over 50 it is my time! Yet my forecast of the S&P bottoming at 400 is still met with utter derision. I have been underweight global equities since the end of 1996 and overweight government bonds. Meanwhile US 10y bond yields have fallen from 7% to 1¾%, a hair’s breadth from our longstanding 1½% target. Similarly, in my very humble opinion, S&P at 400 is almost inevitable.
I suggest reading the rest (it is short) but there is good news. The long standing bear promises to be a bull when that happens.
On the other hand Cullen Roche is more optimistic:
- This is a household balance sheet recession in the USA and not a corporate balance sheet recession as was experienced in Japan. Because their corporations were so excessively indebted their equity market remained weak for many decades as companies paid down debts rather than focusing on profit maximization.
- US corporations remain incredibly diverse and their broad global footprint has allowed them to remain profitable even during this historic downturn.
- US corporations have cut costs massively and are already experiencing close to no growth in domestic revenues. Without a massive collapse in foreign revenues corporate profits are unlikely to experience a decline that would warren stock prices at the 600 level as the Japan comparison might imply.
In short, without some sort of unforeseen catastrophic event in China or Europe I find it hard to believe that stock prices in the USA will follow the Japan story down to the 600 levels…..
I tend to be in the middle of them on this, between 600 and 700 (or its inflation adjusted equivalent) sometime in the next five to seven years, but I’ll adjust my expectations as needed. Either way, the risks are high.
Josh Brown has a great interview with Jeffrey Gundlach. I especially like this:
On Stock Dividends Being “Higher than the Yield on a Ten-Year Treasury”: he says this is nonsense because there is no risk parity between a stock and a Treasury bond, he says you have to look at this comparison on a volatility-adjusted basis or not at all. For example, If the yield on the ten-year bond doubles overnight from 3 to 6%., you’ve lost about 20% of your principle – but if Microsoft’s yield doubles from 3 to 6% overnight, you’ve probably lost 50% of your principle. Apples and oranges.
We will just repeat ourselves, those using the yield versus treasury argument to tell you stocks are cheap are dangerous to your wealth.
They are still trying to ban shorting, and banks are still declining.
Tyler Cowen on leveraging the EFSF has some of the same issues as I do:
I’ll repeat this link for background. I would feel better about the idea if the context were: “We can always go back to the trough, but leveraging the fund is the easiest way for us to strike quickly and decisively.” Instead I see too much of: “We can’t get any more from our taxpayers, so we’d better stretch this one as far as we can.” That’s just inviting the speculators to set up camp against you.
Who will fund the leverage? BRICS? American investors? Ultimately other Europeans? All of those parties already can construct their own leveraged positions in Italian government debt, if they wish. So presumably the leverage will be a hidden subsidy to the financiers, one way or another, to get them to participate. Subsidizing the debt buyers, rather than guaranteeing the debt (admittedly that may be impossible and undesirable for Germany), hardly seems like the way to go. You bear the costs of the bailout without any assurance it will work.
This German-language video suggests many of the German representatives do not know what they just voted for.
“Germany voted for the EFSF extension. Greece celebrated by going on strike.”
Of course, we don’t know if Slovakia will even approve the EFSF. Yep, the grand dreams of Euro stability hinge for the moment on Slovakia.