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Latest Observations, January 2014

 

 

 

 

Inside Indian Taper Terror
When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global!
MarketMinder, Fisher Investments, Elisabeth Dellinge, November 8th 2013

 

 

Quote

on the Fly

 

 

Addicted to the Apocalypse

"Once upon a time, walking around shouting “The end is nigh” got you labeled a kook, someone not to be taken seriously. These days, however, all the best people go around warning of looming disaster. In fact, you more or less have to subscribe to fantasies of fiscal apocalypse to be considered respectable." Paul Krugman, New York Times, October 24, 2013

 

Be Like Water: The Philosophy and Origin of Bruce Lee’s Famous Metaphor for Resilience

"If you put water into a cup, it becomes the cup. You put water into a bottle and it becomes the bottle. You put it in a teapot, it becomes the teapot. Now, water can flow or it can crash. Be water, my friend." Brainpickings, by Maria Popova, May 2013

 

The Land Co. of Florida and the Florida Real Estate Bubble
The Florida Land Bubble of the 1920s has been hailed as a precursor both to the Stock Market Bubble of the late 1920s and the real estate bubble of the 2000s.
Global Financial Data, Bryan Taylor, 22th October 2013

 


1995 Government Shutdown
"Back in November and December of 1995, President Bill Clinton and Speaker Newt Gingrich faced off and shut down the government twice."
Bespoke Investment Group, September 30th, 2013

 

 

 

The Bank War

After the First  Bank of the United States recharter was defeated, the United States suffered defeat in the War of 1812, and suffered from a lack of fiscal order and an unregulated currency. As industrial and commercial interests expanded after the War of 1812, politicians advocated for the creation of a second Bank of the United States to promote the economy.
Global Financial Data, Bryan Taylor, September 26th 2013.

 

 

 

Did Bernanke Study The First Bank of the United States?
"The bank was part of Alexander Hamilton’s plan for stabilizing and improving the nation’s credit by establishing a central bank, a mint, and introducing excise taxes."
Global Financial Data, Bryan Taylor, September 20th 2013

 

Do (Some) University Endowments Earn Alpha?
Financial Analysts Journal, Brad M. Barber and Guojun Wang, September/October 2013

 

71 reasons to be bearish from 1934 to 2005
Daily Speculations, Steve Ellison, August 2013

 

Quote

on the Fly

 

"Some have come to expect the Fed to keep the markets levitating indefinitely. This distorts the pricing of financial assets, encourages lazy analysis and can set the groundwork for serious misallocation of capital." Federal Reserve Bank of Dallas, Richard W. Fisher, August 5, 2013

 

Red flag!
The curious case of (NYSE) Margin Debt
Deutsche Bank, August 2013

 

Cotton Candy Economics

Sugar, a staple commodity, has taken on a growing share of our diet over the past century. But it wasn’t always like that. There was a time, around the first half of the 19th century, when sugar was considered more of a “precious” commodity, in the same league as gold.

Lobnek Wealth Management, Altug Ulkumen, August 2013

 

Summer of Love

If the pattern in the stock market mirroring 1967 that has unfolded so far this year holds in the second half, we may see a volatile market with a slower pace of gains — but more record highs ahead.
LPL Financial, Jeffrey Kleintop, August 5 2013

 

The exception “à la française” of bond yields
The French government has enjoyed low financing yields since the onset of the global financial crisis. Yet it appears to us that fiscal fundamentals do not justify such a narrow yield spread with German Bunds.
Lombard Odier, August 5, 2013

 

What drives international equity and bond holdings? An empirical study
Applied Financial Economics,  Lieven De Moor & Rosanne Vanpée, May 2013

 

 

Quote

on the Fly

 

Fears of "lost decade"

"In fact, we've had non-stop "new normal" headlines for four years. Except new normal didn't happen". Interactive Investor, Ken Fisher, July 25th 2013

 

Easing’s Quantitative Analytics
Data show current Fed policy is contractionary for the economy, and in our view, its eventual end should be bullish for stocks.
Fisher Investments, July 12, 2013

 

The Fed's Bind: Tapering, Timetable and Turmoil
"I see striking parallels between the dramatic recent sell-off in U.S. Treasuries and the Great Bond Crash of 1994."

Guggenheim Investments, Scott Minerd, July 2013

 

 

 

Food for the Mind from Friedrich A. von Hayek

A selection of observations from the great Austrian economist. In stark contrast to the neo-classical school Hayek reminded us that a good economist is also a student of history, philosophy, psychology, sociology and even of biology.
Investments Office, July 2013

 

 

Quote

on the Fly

 

“As the Federal Reserve prepares to wind-down unconventional monetary policies (yes, we did see the chairman’s latest “clarification") the emerging markets have been reminded that they are price takers in the global capital markets…” GaveKal Research, July 2013

 


Deflationary Boom?
"The defining feature of the present market and economic environment is incompatibility, juxtaposing weakness in emerging markets, materials, and inflation-protected securities with strength in equities and the U.S. dollar, a spike in interest rates, and an unusually steep yield curve in Treasury securities."
Hussman Funds, John P. Hussman, July 8, 2013

 

S&P 500 Drawdowns since 2010
Summer corrections are nothing new since the equity rally began in 2009.
Investments Office, June 2013

Central Bank Asset Purchases and Financial Markets
Interesting comments and charts from an external member of the Bank of England's Monetary Policy Committee.
Bank of England, David Miles, June 2013

 

"Designed in California, Assembled in China"
Apple vs. Foxconn stock price since 2004
Investments Office, June 2013

 

The Canary in the Coal Mine

"The recent string of surprise downside moves in markets may be the canary in the coal mine for global investors."
Guggenheim Partners, Scott Minerd, June 2013

 

Germany vs. Spain
....in a few simple charts.
Bank of England, Charlie Bean, May 2013

 

Present and Emerging Risks to the Gold Trade
The notion of gold as a hedge against systemic risks is flawed. We believe that the concept of gold’s role as an insurance policy needs to be narrowed significantly.
GMO, Amit Bhartia and Matt Seto, April 2013

 

 

 

The Crowd: a Study of the Popular Mind

An influential book from 1895 on the social psychology of crowds. For investors there are interesting parallels to be drawn with financial markets as well as with the current political and social mood.
Gustave Le Bon (1841 – 1931)

 


What style-timing skills do mutual fund “stars” possess?
Journal of Empirical Finance, Li-Wen Chen, Andrew Adams, Richard Taffler, March 2013

 

 

 

Quote

on the Fly

Risk Shift from West to East
“While stronger growth is prompting the Fed to consider a tapering of easing, growth indications in China continue to point lower. As economic risks shift from the West to the East, and with China also rebalancing its economy away from the manufacturing sector (…)”. Morgan Stanley, May 2013

 

 

 

 

Day and Night When Taking out the Keynes

This chart plots compounded return for SPY day and night (open-close, close-open) for the prior bull market of 3/03-10/07. 

Daily Speculations, Kim Zussman, May 8, 2013

 

 

Tricky (Central) Bank Predicaments
Wednesday, Fed Chairman Ben Bernanke announced the central bank would maintain its pace of quantitative easing (QE) in light of moderate improvement in US economic activity. However, as we’ve detailed many times before, we view the Fed’s QE policy moves as grossly counterproductive to its stated aims.
By Fisher Investments Editorial Staff, May 3, 2013

 

Reinhart and Rogoff Were Wrong Even Without the 'Spreadsheet Error'
"When governments spend with abandon (deficits just a form of finance) there's a smaller capital base for the productive to access, so when it comes to government spending the tragedy is not whether it occurs in deficit or surplus, but the Microsofts and Intels, the cancer cures, and the transportation innovations that never materialize thanks to politicians consuming so much capital."
RealClearMarkets, John Tamny, April 2013

 

Financial Market Volatility: Assessing Risk
Volatility is often cited but seldom quantified for many economic series. Over the years, we have sought to provide a perspective on this concept in many investment decisions. One primary lesson we have learned is that when we provide a context for the concept of volatility, decision making is improved.
Wells Fargo Securities, Economics Group, John E. Silvia, April 23, 2013

 

The Great Recession? Crisis? How About Relearning? 
"Despite a high level of drama in nearly every corner of the economic globe, we have yet to settle on a catchy description for this particular period in history."
Alhambra Investment Partners, Jeffrey Snider, April 2013

 

 

 

Quote

on the Fly

"The old market adage 'Don't Fight the Fed' lately has a global ring: don't fight the Fed, the Bank of Japan, the ECB, the Peoples' Bank of China, the Bank of England, or particularly the strong US dollar, the World's major funding currency. Policymakers are getting their way."

Michael Howell, Crossborder Capital, April 2013

 

 

Reindustrialisation Risk
"Most see the prospect of America reindustrialising as bullish. In my view, that depends on whether you are an economist or whether you are an investor."
Morgan Stanley, Gerard Minack, April 2013

 

 

 

France Is On The Brink of A Secondary Depression

 

"...having reached the logical limits of its decades long experiment in state-run welfare-capitalism France is far more exposed than even its struggling neighbors."

 

GaveKal, Charles Gave, April 2013 

 


US Federal Debt in kilotonnes of Gold
...from 1900 to 2013
pricedingold.com, April 2013

 

 

Quote

on the Fly

 Only in Japan

""No tip please, it's my job", somebody told me at my hotel today."

 Luxeat, Aiste Miseviciute, April 2013

 


Cash Is Dead! Long Live Cash!
“What explains the rapid rise in currency holdings at the same time that other methods of payment are displacing the greenback?”
Federal Reserve Bank of San Francisco 2012 Annual Report, John C. Williams

 

 

 

Financial Repression in North Korea 

The price of rice has increased by roughly 28,500% over three years, meanwhile the North Korean Won is in a free fall. Sounds familiar?


Investments Office, April 2013 

 

 

A Londoner during the first era of globalization
"But, most important of all, he regarded this state of affairs as normal, certain, and permanent...".
The Economic Consequences of the Peace , John Maynard Keynes, 1919

 

Missing/Avoiding the Best & Worst Days of S&P500 from 1993 to 2010
Pension Partners, LLC, Michael A. Gayed, September 2010


Investing in What You Know: The Case of Individual Investors and Local Stocks
Journal of Investment Management, First Quarter 2013

 

 

Would the real Peter and Paul please stand up?
"Aware that we worry too much in a world growing more wary and distrustful, it is here we place an increasing premium, here that we seek refuge from financial folly and here that we expect the next bull market."
Edelweiss Journal, Issue 12, 11 March 2013, by Dylan Grice

 

Dispelling the myth of a great rotation
A popular current financial theme (witness Baron’s recent cover piece) is the so-called “great rotation” out of expensive US bonds and into comparatively cheap US equities. We are wary of a simplistic and massive rotation thesis. Why?
Lombard Odier Private Banking, Investment Strategy Bulletin, March 2013

 

 

Hyperinflations, Hysteria, and False Memories

"Hyperinflation is not purely a monetary phenomenon. To claim that is to miss the root causes that underlie these extraordinary periods. It takes something much worse than simply printing money."


GMO, White Paper, February 2013 , James Montier

 

 

Quote

on the Fly

"...in the 1960s the US dollar accounted for roughly 50% of World economic and financial transactions, whereas today the figure is likely as high as 70%.
The Dance of the Dollar, Crossborder Capital, March 2013
 

 

U.S. Manufacturing and the Importance of International Trade:
It’s Not What You Think
Federal Reserve Bank of St. Louis Review,, Kevin L. Kliesen and John A. Tatom, January/February 2013


The Effect of Language on Economic Behavior:
Evidence from Savings Rates, Health Behaviors, and Retirement Assets
Yale University, School of Management and Cowles Foundation, December, 2012 , M. Keith Chen


The "Big Five"
"...Lehman was a small player compared with any of the Big Five. If Lehman Brothers was too big for a private-sector solution while still a going concern, what can we infer about the Big Five...?"
Ending 'Too Big to Fail': A Proposal for Reform Before It's Too Late, Richard W. Fisher, President and Chief Executive Officer, Federal Reserve Bank of Dallas January 16, 2013

 

Currency Wars Or Just Approaching Dollar Strength?
The recent jump in forex volatility is understandable. A similar theme coloured the mid-to-late 1930s.
Crossborder Capital, Michael J. Howell, 20 February 2013


The Foolproof Way To Fight Deflation or the Road to Ruin?
The Euro is making headlines again, this time not due to its possible imminent disappearance as a currency but rather as a result of what many regard as its undue strength.
Variant Perception, February 12, 2013

 

Shall We Dance?
"But I remain convinced that investors are accepting historically elevated risks here, and that it is misguided to reach for speculative returns in an overextended market, simply out of repugnance for zero interest rates."
Hussman Funds, John P. Hussman, Ph.D., February 11, 2013


Are We Like Sweden? Recovery in the Labor Market
More than 20 years ago Sweden suffered a severe financial crisis that brought unemployment to an all-time high. To this day the unemployment rate has not returned to where it was before the crisis.

Federal Reserve Bank of Cleveland, Emre Ergungor, February 7, 2013

 

 

How People Earn and Use Money: Vibrant Vintage Illustrations from 1968

The illustrations capture both the era’s characteristic biases and the naiveté of an overly simplistic view of the market economy.

 

Brain Pickings, Maria Popova, December 2012

 

 


The Control Engineers And The Notion Of Risk
"Volatility no longer measures the risks involved in holding certain assets but instead measures the amount of the manipulation that the poor prices are enduring."
GaveKal Research, Ideas, December 14, 2012 , Charles Gave

 

Shadow Interest Rates and the Stance of U.S. Monetary Policy

"…current U.S. monetary policy may be considerably easier than commonly understood."
James Bullard, Federal Reserve Board - St. Louis, November 2012 

 

The Murky Economics of Green Technology
The boom and bust pattern is a familiar one with emerging industries and technologies.

Investments Office, January 2013

 

Merry Capitalism!
Henry Ford once famously quipped if he’d asked his customers what they wanted, they’d have said, “A faster horse.”
Market Minder, Emily Whitney, December 2012


No territory, no profit: The pirate organization and capitalism in the making
Our goal in this short essay is to envisage a broader picture that takes seriously other types of organization that gravitate at the periphery of capitalism’s territories.
M@n@gement, 2012/3 - Vol. 15, Rodolphe Durand, Jean-Philippe Vergne

 

 

 

Empire of Silver

 

By the end of the nineteenth century, thirty-two banks (or "piaohao") with 475 branches were in business covering most of China. They were organised as single proprietaries or partnerships, where the owners carried unlimited liability. "Empire of Silver" is a 2009 film of the rise and fall of the largest piaohao, "Tien chen Yuan", in the Shanxi province during the prosperous days of the Ching dynasty.

Investments Office, December 2012

 

US Birth Rate Hits New Low – A Nation of Singles
"The US birth rate fell to a record low in 2011. The marriage rate is tumbling as well. And the number of single Americans is now at a record high. The implications of these developments are troubling, not only for the economy, but also for the investment markets and the continual expansion of the federal government."
Mauldin Economics, December 21, 2012 , John Mauldin, Gary D. Halbert, Outside the Box

 


The IMF's linear views on Greece
If you ever were sceptical on the credibility of the IMF's forecasting skills, this chart will help underpin your doubts!
Investments Office, December 2012

 

 

Rome's Terms
The friends of Rome were to be made strong, but not too strong...

Republican Rome, by H. L. Havell, 1914

 


The Ghost Towns of China 
Fiscal policy to nowhere, and capital (credit) missallocation on a gargantuan scale
Investments Office, December 2012

 

 

Quote

on the Fly

"The advances to Greece might well come to be known as the Buzz Lightyear loans from a maturity standpoint: “To infinity…and beyond!”"
Gary Jenkins, Swordfish Research, following another Greek debt deal, November 28th 2012
 

Rare Earth Prices and the Baltic Dry Index post-Bubble
Anyone remembers the rare earth media hysteria 18 months ago, and how China was supposed to corner the market for these metals? Well, we haven't heard heard much on the topic lately...
Investments Office, November 2012

 

 

The Roman Denarius and Euro: A Precedent for Monetary Union?

 

For most of the 500 years of its existence, the currency of the Roman empire was diverse.

Gresham College, Lecture, 3 April 2012 , Dr Andrew Burnet

 

 

Do Hedge Funds Really Generate No Alpha?
The first finding of the analysis is that correlation between the HFRI index and the S&P 500 index passed 90%. The second finding is that HFRI's alpha is now zero.
Insider Monkey, November 22nd 2011, Meena Krishnametty

 

Keynes is an unwelcome guest in Switzerland !
Government debt reduction ("Schuldenbremse") policy since 2002
Investments Office, Novembre 2012

 

 

Popular Delusions

Memo to Central Banks: You're debasing more than our currency

"History is replete with Great Disorders in which social cohesion has been undermined by
currency debasements."

Société Générale, Cross Asset Research, October 2012, Dylan Grice

 


Swiss Exchange Rate Policy in the 1930s. Was the Delay in Devaluation Too High a Price to Pay for Conservatism?
In this paper we examine the experience of Switzerland’s devaluation in 1936.

Working Paper, August 2006 , Michael Bordo, Thomas Helbling and Harold James

 

The Latin Monetary Union: Some Evidence on Europe’s Failed Common Currency
The Latin Monetary Union was initiated in 1865 by France, Belgium, Italy, and Switzerland.

Korea University and Cornell University, July 2003, Kee-Hong Bae and Warren Bailey
 
What Is That Performance Costing Me?
Lobnek Wealth Management, November 2012 , Altug Ulkumen, CFA, Independent Contributor

 

 

        

Volatility of an Impossible Object: Risk, Fear, and Safety in Games of Perception

"The market is no longer an expression of the economy… it is the economy."

 

Artemis Capital Management

Christopher Cole, October 4th, 2012 

 

British witch trials and inflation in the medieval period
The following chart shows the UK price index over the period with the incidence of witchcraft trials. Note the peak in trials coinciding with the peak of the price revolution.
Popular Delusions , Société Générale, Cross Asset Research, Dylan Grice, 2 October 2012

 

 
 


 

 

Cool Charts

 

 

 

 

 

 

 

 

 

Themes

 

Asia

Bonds

Bubbles and Crashes

Business Cycles
Central Banks

China

Commodities
Contrarian

Corporates

Creative Destruction
Credit Crunch

Currencies

Current Account

Deflation
Depression 

Equity
Europe
Financial Crisis
Fiscal Policy

Germany

Gloom and Doom
Gold

Government Debt

Historical Patterns

Household Debt
Inflation

Interest Rates

Japan

Market Timing

Misperceptions

Monetary Policy
Oil
Panics
Permabears
PIIGS
Predictions

Productivity
Real Estate

Seasonality

Sovereign Bonds
Systemic Risk

Switzerland

Tail Risk

Technology

Tipping Point
Trade Balance

U.S.A.
Uncertainty

Valuations

Yield