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Macro and Micro Economics

By John Schroy, on May 2nd, 2010 |

Top-down analysis: excerpts

Here are some entry points to articles about macro and micro economics on this blog. Since these topics are often inter-related, to find a specific subject, you’ll find that the blog search engine and tags in the sidebar are also useful.

	Economic Theory: Opinion and analysis of the impact of current economic theory as it might effect the behavior of investors in various segments of the US capital market.
	Inflation: Discussion of the effect of rapid changes in the value of money on various investment products and markets. This includes the impact on such things as interest and exchange rates.
	New Economic Theory: Essays on new approaches to investment analysis that reflect on a top-down view of current capital markets.
	Security Analysis: Comments on techniques of security analysis that shed light on an overall appraisal of investment markets.
	US Fiscal Deficit: Essays on the excess of government spending over tax receipts and the impact of the budgetary deficit on inflationary expectations, interest rates, and taxation.
	US Trade Deficit: Articles on the US fiscal deficit and the demand for fixed income investments and the impact of the deficit on value of the US dollar and interest rates.
	World Economy: Essays on the impact of economic globalization on investment decisions of both foreign and domestic investors.

Top-down analysis: list of articles

These essays are focused mainly on various macro and micro economic factors that influence US capital markets.

Economic Theory - Academics battle over index fundsIn an editorial published on June 27, 2006, Burton G. Malkiel joined with John C. Bogle of the Vanguard Group, to fight for "capitalization-weighted indexing" against the insurgency of Jeremy Siegel, Eugene Fama, Robert Arnott, and Kenneth French, proponents of a heretical notion of "fundamental-weighted indexing".The first casualty in this war has been the Efficient Market Hypothesis, first nicked by Professor Siegel in his opening article.
Economic Theory - Adam Smith, the Pope and the Harvard Business SchoolPope Benedict XVI, in the encyclical 'Caritas en Veritate', writes in favor of ethical capitalism. This is a position very similar to that of Adam Smith who stressed the importance of morality in business.The contrary position is taken by the Harvard Business School that teaches that there are 'no right, no wrong answers' through its famous case method.
Economic Theory - Breakthrough Idea? Do not pay dividends!The Harvard Business Review of February 2007, featured a list of "Breakthrough Ideas for 2007" that shed light on the regard that US business executives and their mentors have for stockholders. The HBR recommendation was that executives who found their company with too much cash and who didn't want shareholders to find out that they did not know what to do with the money, should speculate in the takeover market, even though this was extremely risky and lacking opportunities. The obvious solution, "pay dividends" was ruled out as embarrassing.
Economic Theory - CFAs reject the Efficient Market HypothesisA recent poll of members of the British Chartered Financial Analyst Institute revealed that 77% of its members disagreed that investors acted rationally.This implicit rejection of the Efficient Market Hypothesis has far reaching implications for the structure and management of capital markets, including Modern Portfolio Theory, the use of betas, the justification for index funds, and the M&M Theories.Will the economists that proposed these theories return their Nobel prizes?
Economic Theory - Efficient Market Hypothesis: No proofThe Efficient Market Hypothesis continues to impede understanding of how capital markets work. This hypothesis suggests that world capital markets are guided by crowds of rational, competing, profit-maximizers, each trying to predict future market values of individual securities.The Efficient Market Hypothesis has never been proven. Indeed, no serious attempt has ever been made to subject this hypothesis to scientific scrutiny.
Economic Theory - Flow of funds chartbook publishedPrudential Equity Group Research LLC published a "Flow of Funds Chartbook" as of August 16, 2004, that was still available in PDF format on the their website at no charge in March 2006.This valuable statistical presentation was edited by the well-known economist, Dr. Ed Yardeni and has 35 pages of attractive charts on selected data series from the Federal Reserve National Flow of Funds Accounts.
Economic Theory - How an academic scribbler ate your pensionThe Crash of 2008 was exacerbated by a FASB mark-to-market rule that required financial institutions to write down assets below commonsense valuation. As John Maynard Keynes remarked, the problem was an academic scribbler's unproven theory, some forty years ago.That 'scribbler' was Eugene Fama and his unproven idea was called "The Efficient Market Hypothesis". The Crash of 2008 did much to discredit this harmful musing that supported Modern Portfolio Theory, mark-to-mark accounting, and unmanaged index funds.
Economic Theory - How will doctors react to Obamacare?Barack Obama failed to achieve his dream of nationalized healthcare for one simple reason.He forgot that doctors and hospitals were still operating under the Free Enterprise system. His focus was entirely on health insurance, as if this were the only road to healthcare. Doctors and hospitals are still in the private sector.They are still free to act — and react. And they will.
Economic Theory - Soviet-style capitalism on Wall StreetMost corporate executives of giant companies today are, in actuality, mere employees ('workers' in communist jargon) and are not capitalists or entrepreneurs at all.Their extraordinary remuneration schemes are provided without executives having employed or having risked any of their own capital and is often paid, even as a corporation slides into bankruptcy.Adam Smith recognized self-interest as a useful trait, but one that should not be allowed to override the nobler virtues.
Economic Theory - The Economist trashes modern economicsThe financial crisis of 2008 caused many to suspect that something is wrong with 'Modern Economic Theory'. That economists are not, in fact, 'scientists' is generally recognized. In July 2009, the Economist magazine ran a front-page story, reporting widespread disenchantment with mainstream economic thought.Strictly speaking, modern economics is not a science, but rather a belief system, like a religion.Nobel prizes in 'economic science' for work not based on the scientific method are like giving Nobel peace prizes to terrorists.
Economic Theory - The Epiphany of Jeremy SiegelThe topic "Baby Boom — Baby Bomb?" was debated by Michael Milken and Professor Jeremy Siegel in April 2006. This debate was featured in BusinessWeek in the article, "When Boomers Cash Out: A buy-and-hold legend sees tough times ahead." Professor Siegel is the guru of the Common Stock Legend, having authored the best-seller, "Stocks for the Long Run",
Economic Theory - The productivity vs. population debateThe 'Baby Boomer Bomb' refers to the expected effect of the retirement of the Baby Boomer generation on capital markets, particularly equities. In 2006, this issue was debated at the Milken Institute, and two solutions to the problem examined: Boomers being 'saved' by productivity and technology; and, alternatively, by selling their financial assets to the next generation.
Economic Theory - When cash is an investment strategyDeflation is said to occur when general price levels fall. The last important example of general deflation in the United States occurred during the Great Depression. Federal Reserve officials and central bankers around the world often regard deflation as a greater risk than inflation. Under the Obama administration, US central bankers are now wary of both deflation and inflation.
Economic Theory - WSJ debunks “Common Stock Legend”The long-held doctrine of blindly holding 'Stocks for the Long Run' is now being questioned.Jason Zweig in a Wall Street Journal opinion piece points out that the data on which the 'Common Stock Legend' is based turns out to be flawed.But then, we all knew that anyway.
Inflation - Bernanke’s “exit strategy” and inflationDespite massive government spending programs, without a clear plan for financing the deficit, Ben Bernanke continues to promise low interest rates for an extended period.This suggests that Ben doesn't understand that, even in inflation, there are ups and downs in employment and the business cycle. Low interest rate encourage the 'Carry Trade', not domestic employment.So, what is Ben's 'exit strategy' that will avoid the inflation that is being set up by Obama's spending?
Inflation - Can the Fed really manage inflation?It has been widely-publicized that Ben Bernanke, the new Federal Reserve Chairman, has strong views regarding the Federal Reserve Bank's responsibility and ability to control inflation in the United States. Most of the discussion about interest rates seems to start with the assumption that interest rates do indeed control inflation and that the Federal Reserve's ability to rig short-term rates gives it the power to stabilize the value of money.But is this assumption reasonable?
Inflation - Do index funds protect against inflation?Historical evidence suggests that, in the long-run, equities do not offer protection against inflation.Inflation usually brings high interest rates, which deflate the value of stocks.Inflation also confounds ordinary accounting practices and is often associated with bad government and turbulent times.One thing is certain, however. Stock prices will continue to fluctuate.
Inflation - Do stocks offer protection against inflation?There is a common belief that a managed, diversified portfolio of US common stocks provides protection against inflation. However, there is reason to question whether this protection currently exists.Considering today's equity prices, relative to intrinsic values, there is doubt as to whether common stocks offer the level of protection against inflation that many presume.
Inflation - Getting ready for inflationThe Obama administration's policies of increasing taxes and attacking capitalists in the midst of a recession suggests that the future may be deflation and continued unemployment. However, Obama's popularity is falling rapidly. The voters may rise up in 2010 and put a stop to his destructive policies.However, the effects of the extreme deficit spending of the Pelosi-Reid Congress will continue. This suggests that the threat will be inflation, not deflation.How prepared are Americans for high inflation? This article outlines what to expect.
Inflation - How inflation impacts EPS and PE ratiosThe Obama administration and the US Congress are laying the foundations for high inflation when the economy eventually recovers from the recession.US equity investors should be ready for the effect that a rapidly devaluating currency may have on earnings-per-shares and price-earnings ratios.Inflation effects corporate taxes, depreciation reserves, and the reliability of financial statements.
Inflation - How the US may avoid inflationThe Obama administration is passing deficit spending programs of such magnitude that inflation is inevitable unless steps are taken to remove money that will be pumped into the economy as the government pays its bills.The classical solutions are to sell government bonds, increase taxes, or increase bank reserve requirements. The last tactic can be extremely effective if carried to the extreme. This is what I call 'The Nuclear Option'.
Inflation - How to survive the coming inflationWhen the government spends much more than it takes in, inflation results. The Obama administration is spending a lot more that it should.In fact, Congressional authorization for deficit spending is now at historic levels. Will Americans paper their walls with dollar bills when inflation hits?So far, most Congressional authorizations have not been disbursed. But as spending budgets are executed, inflation should kick in.
Inflation - Inflation and the lure of REITSReal Estate Investment Trusts were beaten down by the Crash of 2008. However, in anticipation of an inflationary environment, we note that REITs are selling at significant discounts. This situation may present opportunities in an inflationary environment.However, REITs are tricky and risky. Investors should consider doing their own research when venturing in this market.
Inflation - Money market funds will signal inflationMoney market funds, like banks, receive money from depositors repayable on demand, which they invest in debt instruments. Their spreads are far less than those of commercial banks and they have no reserve requirements.The difference between a MMF and a commercial bank is that one issues equities while the other issues debt callable on demand.When inflation hits, short-term interest rates with MMFs will be the first to rise because of their razor-thin effective spreads.
Inflation - The collapse of the dollar and US bonds?The supremacy of the US dollar is not yet dead, but portents of a fatal cancer — inflation — are there for all to see.The extreme, profligate spending of the Obama administration, combined with populist, irresponsible bank lending policies promoted by Barney Frank and Chris Dodd, portend rising interest rates, the collapse of the bond market, and the end of dollar supremacy.Furthermore, a large part of the American electorate doesn't understand or is unaware of what lies ahead.
Inflation - What inflation does to the insurance industryWild 'stimulus spending' by the Obama administration, together the trillion dollar costs of the imminent government health programs, are likely to bring inflation at a level usually seen in developing economies.This article discusses the impact of high inflation on the insurance industry. If inflation reaches 25% or more, life insurance and annuities will be among the first casualties. The capital market is also likely to shrink.
Inflation - When will inflation kick in?The lack of fiscal restraint of President Obama on the healthcare issue, the ’stimulus bill’, and other ‘progressive’ legislation in the pipeline, combined with the jobs-firsts-inflation-last attitude of Fed Chairman Bernanke — leave little room to doubt that sooner or later the United States is likely to enter the realm of double-digit inflation.Inflation is likely be the final and deadliest blow to the retirement dreams of many Baby Boomers. When the stock market crashes, one can hope for a recovery some day. With inflation, the losses are permanent and final.
Inflation - Why Obamacare will lead to stagflationPresident Obama proposes to give health insurance to those who cannot afford it now, paying for this social program by increasing taxes on the largest investors and small business owners.The cost of health care in the US has increased over the last fifty years because of inflation, medical advances, and the common practice of employer-paid health insurance, which results in insured care receivers often being unaware of the price.Obamacare increases the demand for healthcare without increasing the supply of doctors, while taxing the most productive sectors of society.

Inflation - Will gold protect you against inflation?In 35 of the last 50 years, gold prices have fallen relative to inflation. On four occasions, gold has fallen 50% or more. Gold does not track inflation, but rather anticipation of hyper-inflation or war.In 2010, gold prices were soaring, reflecting fear of inflation from fiscal excesses of the Obama administration and continuation of war in Iraq and Afghanistan. If Obama is a one-termer, gold prices could fall.
Inflation - Will US home prices be higher in 2015?This article is in response to a reader's comment as to the future of US housing prices. Specifically, whether residential prices will rise 30% by August 2015. I argue that this is essentially a question as to whether the Obama administration will lead to continued deflation or a return of inflation.I present a series of arguments for predicting inflation and consequently the revival of residential real estate prices by 2015. Basically it comes down to the declining political fortunes of Barack Obama intersecting with the excessive spending habits of the Pelosi-Reid Congress.
Macro and Micro Economics - Economic recovery may wait until 2016The current economic crisis, which started with the market crash of 2008, is a 'game-changer' that requires effective leadership with a firm grasp of economic reality and a willingness to introduce sensible bipartisan reforms in many areas of financial markets.Unfortunately, these conditions are unlikely to be met before 2016. In the meantime, history suggests that there are likely to be many false rallies and dashed hopes before true recovery begins.
New Economic Theory - An encyclopedia of world capital marketsToday, Capital Market Wiki has "gone public", after thirty months of development effort. This is a free encyclopedia of world financial markets that anyone can edit, based on semantic wiki technology and Capital Market Taxonomy.This non-profit project is sponsored by the Center for Capital Flow Analysis and addresses informational shortcomings in increasingly complex capital markets.
New Economic Theory - Analysis of corporate governance'Corporate governance' is a buzz-word that came into vogue as employee-executives were able to wrest control of public corporations from the real owners, long-term investors.Misuse of stock buybacks, excessive executive remuneration, and conflicts of interests are issues that security analysts must now study.The analyst's question should be, 'Which stakeholders control the company?' and 'Are their interests the same as those of investors?'
New Economic Theory - Collaborative researchThe complexity of modern capital markets and the flood of relevant information on the Internet have made the security analyst's job more difficult.Traditional commercial sources of investment data no longer adequately cover the market.Collaborative research techniques offer competitive advantage to forward-looking institutions.
New Economic Theory - Creating a research communityPost Modern Security Analysis calls for collaborative research of open source investment information.But how can such collaboration be organized?This article describes how the wiki concept, Capital Market Taxonomy, and pre-defined topical outlines facilitate the process.
New Economic Theory - Fish schools, covariance, and DYORSecurity market observes have long noted that investors seem to jump hither and yon, like the synchronized swimming of schools of fish.This phenomenon is given the mathematical term 'covariance' and a numerical measure called 'beta'.Covariance is a central concept in Modern Portfolio Theory, and also in Technical Analysis with the saying 'the trend is your friend'.
New Economic Theory - Free information has a time costThe Crash of 2008 showed that the Efficient Market Hypothesis was fantasy. Although there is a huge amount of free information about investments available on the Internet, this takes time to extract and understand and time has a cost.With too much free information, the law of diminishing returns kicks in. Critical information passes unnoticed.Technologies are now available that allow us to take advantage of free information more effectively.
New Economic Theory - How was Capital Flow Analysis developed?Capital Flow Analysis is a technique for interpreting flow of funds accounts developed by John Oswin Schroy over the period 1998-2004 and published on the website, "Center for Capital Flow Analysis".This article provides background notes that describe how, where, and by whom the methods of Capital Flow Analysis were developed.
New Economic Theory - Inefficient market portends bumpy recovery Markets can be inefficient for different reasons and persist for long periods. The transition between one type of inefficient market to the next is usually a period of strife and uncertainty which may last five to fifteen years. Looking back at how the economy emerged from previous transitions, I note that in each new period, equity prices started at reasonable levels. This was true at the beginning of the Roaring Twenties, the Post WW II Period, and the Reagan Era. It is as if markets, recognizing prior inefficiencies 'reset' and start over. However, for the current market to 'reset', it will be necessary for equity prices to fall considerably, which will have dire consequences.
New Economic Theory - Innovative institutional research methodsThe Crash of 2008 led to questions concerning the scope and quality of institutional investment research. The flood of open source investment data on the Internet presents opportunities to researchers.There are new ways to manage institutional research, including separation of fact-gathering from data analysis, out-sourcing, student-sourcing, and home-sourcing, financial taxonomy, and semantic wikis.
New Economic Theory - Intrinsic valueThe target of classical security analysis is 'intrinsic value', a fuzzy concept defined as the value justified by the facts.Financial markets have become vastly more complex since the days of Graham & Dodd.Since the 1960's, stock prices have generally exceeded 'intrinsic value'. New techniques are needed now to handle the flood of free investment information.
New Economic Theory - Managing complexityModern capital markets have become so complex that security analysis methods of the 1930s are no longer adequate.Excessive, daunting complexity is the reason that security analysts must move now beyond Graham & Dodd.Complexity is not only in financial information, but in collateral issues such as institutional operations, the interaction of foreign and domestic taxation, and structural risks.
New Economic Theory - Moving beyond Graham & DoddSecurity Analysis is the study of facts about negotiable instruments for the purpose of determining whether a particular instrument is appropriate for a specific investor at a particular time and the intrinsic value of the security compared to its market price, if any.The technique has evolved over time with the changing nature of information.In the 21st century, with a flood of open source information and increasingly complex, global markets, new approaches are necessary.
New Economic Theory - Moving beyond Standard & Poor'sCurrent publishers of financial statistics, like Standard & Poor's and Moody's, only deal with a tiny fraction of the useful data now freely available on the Internet. This article traces the historical development of 20th century financial publishers and suggests new sources and techniques available to Post Modern Security Analysts in the 21st century.Semantic wikis, collaborative research, Capital Market Taxonomy, and free data collecting tools like Zotero are discussed.
New Economic Theory - New technology in investment researchOpen source intelligence techniques (OSINT) are useful in mining investment information on the Internet. OSINT has well-defined procedures developed by government intelligence agencies like the CIA and MI5.Capital Market Wiki is a new tool for collaborative investment research, based on OSINT methods and Capital Market Taxonomy.The objective is to develop actionable investment intelligence from the vast sea of free, unfiltered raw information now available.
New Economic Theory - Open source financial intelligenceFundamental investment analysis provides competitive advantage to those investors who understand that the Efficient Market Hypothesis, the basis for Modern Portfolio Theory, has now been shown to be false.Moreover, the methods of Graham & Dodd, dating from the 1930s, are inadequate to meet the challenge of millions of terabytes of unfiltered facts, freely available on the Internet.This article discusses the application of OSINT techniques, developed by national intelligence services, to the needs of investment analysis.
New Economic Theory - Operational versus financial informationThe Crash of 2008 suggests that understanding the operational details of capital markets can be as important as traditional Graham & Dodd security analysis.This article, Part Nine in the series on Post Modern Security Analysis, discusses Capital Market Taxonomy as applied to market operations and the use of a semantic wiki in collaborative research.
New Economic Theory - Seeking investment opportunities The Crash of 2008 signaled a turning point in capital markets. The stock buyback era seemed to have ended. The Efficient Market Hypothesis was discredited. The inability of market experts and major institutions to place a fair value on thousands of securities indicated basic problems in security analysis and the handling of freely available information.This article describes new challenges facing fundamental security analysts in the early 21st century, and the consequent opportunities.
New Economic Theory - Taxonomy for collaborative researchPost Modern Securities Analysis deals with methods of collaborative research that are designed to deal with the tsunami of free, open source investment information now available, principally on the Internet.The range of information relevant to capital markets is so vast that specialized technology is required to process data and organize collaboration with efficiency.Capital Market Taxonomy and the use of semantic wikis are discussed in this article.
New Economic Theory - The economics of security analysisTotal salaries of securities analysts working for financial institutions in 2006 amounted to only 1/100 of one percent of the value of outstanding corporate equities, domestic and foreign corporate bonds, and municipal bonds in the US market.The exceeding complexity of modern capital markets, combined with too little being spent on investment analysis, has put the savings of millions of Americans at risk.
New Economic Theory - The Inefficient Market HypothesisEventually, at some point, without an efficient market, common stocks become mere baseball cards.Sooner or later, some Baby Boomer, pressed to pay his bills in retirement, will find that one can't live off the dividends of common stock and that when everyone is trying to cash out their holdings at the same time, market prices plunge to levels that seemed inconceivable for generations. But it will simply be the cost of allowing an inefficient market to flourish for so long.This article discusses the concept of inefficient markets and the practical consequences.
New Economic Theory - Truth, fact, and opinionIn security analysis, it is important to get the facts, before forming an opinion. Effective collaborative research calls for rigorous separation of the fact-gathering from the decision-making stages of the process. This article shows how fact-gathering of open-source information on the Internet could have saved investors from the Madoff calamity.This is Part Eight in a series on Post Modern Security Analysis.
Security Analysis - A securities analyst’s greatest challengeThe Crash of 2008 raised questions as to the competence of many who work in the profession of security analysis. There are dozens of schools providing professionals with training and certification in this field. However, know-how is not enough.Commonsense and hard work can be more important than theoretical training and the ability to use the terminology.This article discusses an endemic problem: Laziness.
Security Analysis - An encyclopedia of world capital marketsToday, Capital Market Wiki has "gone public", after thirty months of development effort. This is a free encyclopedia of world financial markets that anyone can edit, based on semantic wiki technology and Capital Market Taxonomy.This non-profit project is sponsored by the Center for Capital Flow Analysis and addresses informational shortcomings in increasingly complex capital markets.
Security Analysis - Are profits as good as claimed?On January 28, 2006, an Associated Press dispatch proclaimed: "Corporate Earnings Good Despite Headlines", stating that "corporate profits remain very healthy overall, and the majority of corporations are beating expectations." Are these assertions true and does this mean that the outlook is rosy for the average investor in US equities? This article argues that the answer depends on who you are.
Security Analysis - Are stocks over-priced or a bargain?Depending upon your point of view, the US stock market is either vastly over-priced, or a great bargain — and if you have a split personality, you could both be right!This peculiar state of affairs occurs because two radically different yardsticks can be applied in measuring corporate performance: one based on an unquestioning respect for Generally Accepted Accounting Principles, and the other based on commonsense, an appreciation for cash in hand, and the time-honored principle of, 'What's in it for me?'.

Security Analysis - Crowd sourcing investment researchFree, easily available investment information is largely unexploited. This is because there is too much of it.Information, to be useful, must be processed. This processing has a time cost.This article describes how new technology allows securities research to evolve beyond the industrial techniques of the 20th century.Crowd sourcing and collaborative research, semantic wikis, and Capital Market Taxonomy are discussed in this article.
Security Analysis - Crowdsourcing opinion is not factual researchPost Modern Security Analysis calls for facts, not opinions. Collaborative research, not the crowdsourcing of opinion, is required.A tsunami of raw, unanalyzed open source information now overwhelms the market, calling for new tools and new ways to motivate researchers.To this end, Capital Market Wiki has tweaked the Wikipedia model, added a semantic structure and built-in incentives, and has created a system for collaborative investment research.
Security Analysis - Five reasons why Google Finance is a winner Google Finances is a top-rated tool for investment research of US stocks. It features a smart, well-designed interface for fundamental or technical analysis. For both long-term investors and short-term traders, ease of use puts this tool ahead of Yahoo Finance in the US market. For further articles on Google Finance, sign up for the free RSS feed in the sidebar.
Security Analysis - Fundamental analysis and the data tsunamiWhereas, in the days of Benjamin Graham, an analyst could count on Standard Statistics to provide the essential facts, three-quarters of a century later, this is no longer true in the case of its successor, Standard & Poor's.The tsunami of free financial information and increasingly complex markets, have driven up the cost of traditional security analysis. The less expensive route, technical analysis, is now favored by many. We must move beyond Graham & Dodd if fact-based analysis is to remain relevant.
Security Analysis - How much are US equities over-valued?Commonsense analysis shows that US equities are at least 40% overvalued, a conclusion supported by many academics and John Burr Williams's formula.This suggests that many retirement plans, based on equity investments, may be in trouble, if (or better, when) stocks fall to reasonable values.This article, using John Burr Williams' famous formula, shows how the market may be valued.
Security Analysis - Is security analysis a science?A pretense of scientific basis has weakened the usefulness of security analysis in the modern era. Fancy mathematics serve to cloud the minds of investors.The collapse of Long Term Capital Management and the Crash of 2008 were assisted by the injection of 'junk science' into investment decisions.Can (or should) security analysis be considered 'scientific'?
Security Analysis - Jeff Skilling explains US corporate ethicsUnfortunately for society, Jeff Skilling of Enron told the truth according to tenets of moral relativism learned at the Harvard Business School and with McKinsey and Company, when, on being sentenced to decades in prison, he said, "That's the way the game is played. You win some, you lose some."Skilling was a representative of corporate executives of his time. He did not work alone, nor was he an isolated 'bad apple'.
Security Analysis - The heroic, solitary analyst is long goneThe old-fashioned, heroic security analyst, working alone in a dark room with a stack of annual reports, in a snow-bound house in Omaha, far from Wall Street, is less likely to solve investment riddles today, than fifty years ago.The analyst of the 21st century must be ready to engage in collaborative research. The future lies in modern knowledge handling technology, including OSINT techniques, crowdsourcing, wiki software, and capital market taxonomy.
Security Analysis - Why false bull markets are likelyOver the years, I've read quite a number of books on investment. Not all are worth the effort. Among those that I consider valuable, I would cite Graham & Dodd's "Security Analysis", "Fooled by Randomness" by Nassim Nicholas Taleb, Wu and Zakon's "Elements of Investments", and "The Great Depression: A Diary" by Benjamin Roth. The latter brings a message that is especially relevant in these trying times — a warning that early optimists regarding recovery are often as badly burnt as those who failed to foresee the original crisis.
US Fiscal Deficit - Debasing the dollar; destroying a nationThe dollar has declined against other currencies since nine-eleven.Costs of asymmetrical warfare and being the "world's policeman" cannot be sustained indefinitely.On top of the cost of a long war, the Obama administration is heaping profligate government spending designed to redistribute wealth.The winner may well be Osama bin Laden, dead or alive.
US Fiscal Deficit - US deficit soars six-foldThis "Obama Deficit" is about six times the fiscal deficit for the year 2003 and at the highest level in American history.The Federal Reserve Flow of Funds accounts for Q2 2009, estimates the US fiscal deficit (on an annual basis) at $1,294.9 billion.Uncontrolled spending by the US government and the lack of any clear plan as how these outlays will eventually be financed has resulted in the world fleeing dollars.
US Trade Deficit - America's best unemployment insuranceWhen the Sage of Omaha, Warren Buffet, fretted last year that the trade deficit signified that foreigners were taking over the United States, he echoed common misunderstandings about the excess of US imports over exports and the growing volume of dollar assets held by the rest of the world.The nice thing about the US trade deficit is that it represents the exchange of foreign goods and services for dollars, not foreign money.
US Trade Deficit - Falling US dollars and exportsWhen the US fiscal deficit grows rapidly and Americans are reluctant to save, more dollars in foreign hands are needed to absorb the necessary issuance of government bonds. Should the trade deficit begin to shrink, foreigners will have less dollars to finance the United States. The combination of deficit spending, low domestic saving, and a slowing in the growth of the trade deficit makes inflation more likely.
US Trade Deficit - Growth of trade imbalance slowsAccording to a US Bureau of Economic Analysis release of July 12, 2006, the US trade deficit leveled off during 2006, with a difference between imports and exports of goods and services of $63.8 billion in May 2006.Since the trade deficit is a major source of funds for the US bond market, a slowing of the rate of growth of the deficit will effect interest rates.
US Trade Deficit - Interest rates have been falling for decadesSince the 1980s, the US. trade deficit has been a constant force in the American economy, rising more some years than others, while corporate bond yields have been generally falling.Because rising trade deficits lead to increased demand for fixed income securities, and because issuers have not fully met this demand, the price of bonds has risen for twenty years, while bond yields have fallen.
US Trade Deficit - Trade deficit continues to support bondsThe excess of imports over exports means that cash is flowing into the US capital market from abroad, which should continue to prop up long bond prices. The January trade deficit, annualized, represents a 13% increase over the trade deficit of 2005.Since the trade deficit increased 18.3% in 2004 and 15.1% in 2005, the current rate of increase seems to indicate slower growth in the trade imbalance.
US Trade Deficit - Working off the US trade deficitForeigners hold $16.8 trillion in US financial assets as a result of selling more goods to Americans than they buy from them. Since the 'deficit' is all in dollars, the United States has no problem in 'paying it off'.One way this 'deficit' could 'go away' would be for US exporters to sell $16.8 trillion more in goods abroad than Americans import from abroad.Another would be for foreigners to use their dollar balances to buy non-financial assets in the United States, like real estate.Still another way, would be for Congress to engage in deficit spending to a degree that the dollar inflates and becomes worthless.The Obama administration may be moving towards the last alternative.
World Economy - Finding a job in the new capital marketThe Crash of 2008 was the end to what I call, "the old capital markets".A new era is beginning, but form and detail are hidden in the mists of change. It may be a decade or so before new structures and directions are visible.Many were thrown out of work by the Crash, but before getting into the unpleasant chore of actually looking for a job, you should consider whether or not you even want to work in the new capital markets.
World Economy - Multiple central banks weaken the euroThe multiplicity of independent central banks is the Achilles heel of the eurosystem. A bank, controlled by the government, in a fiat money environment, that acts as the paying agent for that government, has — in effect — the capability to print money (although not necessarily banknotes).Imagine, tomorrow the headlines in the Wall Street Journal read "$100 billion is inflationary euros issued without the knowledge of the European Central Bank". What would be the effect of the news on the value of the euro as a reserve currency?
World Economy - National flow of funds accounts: JapanThe Bank of Japan publishes quarterly statistics on Japanese national flow of funds accounts in Excel format, in English, on their website.The flow of funds accounts is a matrix showing financial transactions among various economic entities, and corresponding stock data on financial claims and liabilities of them.
World Economy - The rise of demutualized stock exchangesSecurities exchanges are being transformed from "stockbrokers' clubs" into profit-oriented companies selling services to customers. Long the 'masters of the universe', stockbrokers are expected to become less influential. Free from the constraints of small broker-dealers, demutualized exchanges are in the midst of rapid modernization and dramatic change. Computerized trading, book-entry settlement, central depositories, and cross-border exchanges are now the norm, not the exception.
World Economy - UN SNA: Not ready for prime timeIn 1993, after thousands of hours of committee work by economists and bureaucrats from all nations, the United Nations, with the blessing of the International Monetary Fund, issued a recommendation for a System of National Accounts (known as SNA 1993).Compared to the Federal Reserve National Flow of Funds Accounts, the United Nations SNA 1993 is not a product that is ready for prime time.
World Economy - US Dollar falls 50% against Brazilian RealSince 2003, the US dollar has fallen almost 50% against the Brazilian Real. What caused this to happen and what does it mean for the future of the dollar?The reason for the strong real is the excess of Brazilian exports over imports. Government policy resulting in extremely high internal interest rates attracts holders of these dollar reserves to invest in short-term Brazilian debt.However, not all is rosy in Brazil.
World Economy - US Treasury supports dollarsIn the financial crisis, the US Treasury took steps to protect the dollar as the world reserve currency, allowing AIG funds to pass through to foreign banks and engaging in currency swaps with foreign central banks.However, the Pelosi-Reid Congress, by unprecedented domestic spending, has raised a real possibility of future high-level inflation. It will be up to US voters whether government finances return to a reasonable basis. The Federal Reserve cannot neutralize the negative impact an out-of-control Congress.
World Economy - What is 'international liquidity'?It used to be that the term 'international liquidity' meant the relative amount of resources available to a nation's monetary authorities that could be used to settle a balance of payments deficit. In the days of the gold standard, this would mean access to gold that could be used to redeem a nation's currency held by foreigners.After Bretton Woods and the advent of the dollar-gold exchange standard, liquidity came to mean access to dollars, either held as reserves or as credit lines, or the SDR system maintained by the International Monetary Fund.
World Economy - Who chooses the global reserve currency?Who determines the 'world reserve currency'? Central bankers? IMF officials? College professors?The answer is 'none of the above'. In an open, global economy, the world reserve currency is determined by the judgment of millions of importers and exporters in many countries.The world reserve currency is decided by consensus and the personal decisions of exporters as to what currency they will accept for their goods.On this basis, it's too early to count the dollar out.