Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. But I can't by law give you advice, and I do make mistakes. Remember: the unexpected sometimes happens. Oddly enough, the expected does too, but all too often it takes longer than you thought it would, or on the other hand happens more quickly than you expected. The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Thursday, September 22, 2011

Class war

Billionaire Warren Buffett pointed out that he has a 17% tax rate, lower than all the other 20 ppl in his office who have tax rates between 33 and 40% but who have much lower incomes than he does. He thinks it should change. It should.

Monday, September 19, 2011

Time to split banks

UBS has just shown again why banks are not to be trusted.

Historically, banks which lent money (for example to buy houses or fund trade) were separate from banks which traded in securities.  But economists argued that this separation was unnecessary.  Banks, they said,  could be trusted to be sensible.

The GFC has I would have thought decisively destroyed that rosy view of banks and bankers.  The greed and folly of the banks plunged the world into a financial crisis which has still not been resolved.

When banks are "too big to fail" controls and regulations need to be tightened.  Banks involved in trading shares/currencies/derivatives should have much higher ratios of capital to assets than banks lending money to buy houses on conservative loan to valuation ratios.  The Lebanese banking system had no crisis during the GFC because Lebanese banks only lend you 60% of the value of the property.  With bank assets bigger than GDP, it's quite clear that lending banks should be tightly regulated, even as "merchant/investment banks" are not.

No one minds banks losing their own capital.  But when profits are privatised and losses socialised it's time to act.

US now = Japan in the 90s?

Another thoughtful article from Stephanie Flanders of the BBC.

Some quotes from the article:
In terms of economic growth, the US's performance over the last five years now looks no better than Japan's in the five years after its asset bubbles burst in the late 1980s. Indeed, in employment terms it has been considerably worse.

The jobs picture was already bleak at the start of the year - but, if anything it now looks even worse, with unemployment still hovering around the 9% mark, and a record 40% of the jobless now unemployed for more than six months. 

In the past, economists have tended to laud the flexibility of the US labour market: unemployment might rise more quickly in a recession, but it would then fall more quickly as the economy recovered, and long-term unemployment was always much lower. Now US labour flexibility seems only to be operating in one direction, while the "over-regulated" German labour market has performed surprisingly well.

A few startling statistics highlight the failure of the US economy to deliver jobs for its rising population: in 1958, 85% of working age American men were in work. Today, less than 64% have jobs, and - in case you think that is simply due to women entering the workforce - the share of all Americans, men and women, in work is now lower than it has been since the early 1980s. 

It's not only jobs. In its latest assessment of the US economy, the IMF looked in detail at the past ten US recessions. On nearly all the key measures - loss of output, employment, investment or growth in personal disposable income, the two downturns of the 21st century (2000-1 and 2008-9) have been the worst.

That is what gives rise to the suggestion that the US has already suffered a "lost decade" - at least on Main Street. Real average household income fell by 3.6% between 2001 and 2009, and real incomes have fallen again in 2011, as inflation has picked up but wages have remained flat. The weakness in earnings is also uncannily similar to Japan (see Capital Economics chart 8).

 All the evidence suggests that the US model of aggressive (some might say vicious) capitalism has failed.

Saturday, September 17, 2011

US Coinciding Index for August

Click chart to enlarge

I have all the data for my US coinciding index for August except one, which I've estimated.  In contrast to the weak employment data, the index is surprisingly robust.  I've plotted the 3 month rate of change in the index against a weighted average of the ISM industry and ISM services surveys.  Both series have been extreme-adjusted to remove statistical aberrations.  On the face of it, these data do not yet point towards a double dip.

The correlation between these two indicators is very close.  Of course, the 3 month rate of change would tend to lead the underlying series, which account for the absence of any leading relationship in the ISM surveys.

As always, clicking on the chart will give it you in the original size.

Friday, September 16, 2011


The European pollies continue to dither, but the key central banks are taking action.  Finally.

Stephanie Flanders has a thoughtful blog post about the whole mess here.

I still think Greece will effectively default.  Its burdens are too great now.  But .... it's just possible that the default will be orderly.

Interesting times.  I took some money off the table a few days ago, despairing that the Europeans would get their actions together.  The outlook today is brighter.  Somewhat.