14th Dec 2008, (83)
Wolf Waves
From a collective financial standpoint the US is now deeply into an increasingly violent and potentially terminal process.

16th Oct 2008, (82)
Systemic Chaos Will Continue
"The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the "deficit spending" policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.
Yet no effusions of authors however brilliant and sophisticated can alter the perennial economic laws. They are and work and take care of themselves. Notwithstanding all the passionate fulminations of the spokesmen of governments, the inevitable consequences of inflationism and expansionism as depicted by the "orthodox" economists are coming to pass. And then, very late indeed, even simple people will discover that Keynes did not teach us how to perform the "miracle ... of turning a stone into bread, but the not at all miraculous procedure of eating the seed corn..
There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved" - Ludwig Von Mises.

12th May 2008, (81)
Fire and Ice
"There is no salvation in becoming adapted to a world which is crazy." Henry Miller(1891 - 1980)
In a fire and ice world the forces at play are opposite and extreme. On the one hand deleveraging simply has to take place to restore the natural flow of credit and risk taking. Yet, on the other hand, this could get out of hand if it happens too quickly and turn the financial system to ice.
The Fed's remedy of extreme measures sets a very dangerous precedent in accelerating the measures and intensity with which monetary support can be injected into the financial system. Although this can provide short term relief, these actions are simply an acceleration of the interventions that got us into so much trouble in the first place, and ultimately produce the fire for inflation.
Making predictions in this environment is more than usually hazardous. Investors simply need greater awareness of the situation, and more extensive stress testing of their portfolio, as well as clear rules for the risk management of their assets, as instability becomes a greater risk.
The key change is that now the financial structure itself has become a major issue.

29th Feb 2008, (80)
The Dollar Myth
"The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency... Now the rest of the world is increasingly unwilling to accumulate dollars," - George Soros, January 2008
The US has been blessed with an enormous financial privilege for over 60 years as a direct consequence of the status of the US dollar as the world's reserve currency. However, the US dollar's status is now in steep decline. This decline takes with it the financial foundations that so many Americans have come to take for granted. Understanding and managing the dollar's decline will likely be one of the most important components of any investment plan in the years ahead, and it may also have far reaching lifestyle and social consequences.

5th Nov 2007, (79)
Lets Be Real
"Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing had happened." - Winston Churchill
We are reaching a point in time when government economic statistics increasingly look like some kind of alternative universe.
With the prices of energy, health care, tuition, food, and so much else rising steeply, does anyone still really believe that average prices are going up at only around 2.5%? With spending out of control, entitlement spending rising as far as the eye can see and taxes being cut, does anyone really believe that the budget deficit is well contained?
It no longer makes sense to accept published statistics at face value. Fortunately, with a little common sense and access to web sites like John Williams "Shadow Government Statistics", it is not too difficult to find out what is really going on at planet earth.
It turns out that many statistics have been "adjusted" for many years. It seems that every time the data methodology changed, the CPI was a little less than we thought before, growth a little higher, and the budget deficit just that little bit more manageable. Cumulatively, however, an enormous gap has opened up between what the statistics are saying and what we see with our own eyes.
A reality check has become a matter of urgency. What we find is that in many ways the economic world has been turned up side down over the last two decades, but economic statistics are trying harder and harder to pretend it didn't happen.
Being real today applies not only to our assessment of the economy but also to our investment choices. Appropriately chosen real assets need to form a sizeable part of any allocation. Also, without any substantive changes, we must continue to assume that disguised inflation remains the real economic policy.

23rd Sept 2007, (78)
Credit Super Cycle Endgame
After an extraordinary period of excessive credit creation, and financial engineering of staggering proportions we have now entered a new phase of the credit super cycle. Confidence is fickle and unpredictable, but more than likely the market turbulence of the last two months heralds a new and possibly chaotic period for the markets.
Many will argue that if the markets seem stable and well behaved that all is well. However, it is important to distinguish between short term palliatives, providing the appearance of stability, and deep seated issues that have gone well beyond the point of a quick fix.
At this stage the credit super cycle changes character. The cumulative build up in credit makes the continued management of business cycles much harder and increasingly prone to much greater instability. In short this is point at which the credit super cycle has reached the endgame.
More than likely we are now at a point where stagflation seems like the best option. Growth will probably remain weak as the real value of debt falls with sustained higher levels of inflation. As Hyman Minsky once said, "Stagflation is the price we pay for the success we have in avoiding a great or serious depression".

18th July 2007, (77)
The Dhandho Investor
"The Dhandho Investor" by Mohnish Pabrai is short, very simple to read and understand, and yet provides a highly comprehensive and effective approach to successful value investing.
The main lessons from this book are highly important for investors to understand, and in particular I find that investors are very rarely focused sufficiently on understanding the nature of risk. Finding low risk situations is the key to long term investment success, and low risk does not mean low return. This is the key to becoming a "Dhandho" Investor, and for most the surest path to becoming a very successful investor.

26th June 2007, (76)
Your Money and Your Brain
It's not that we are intellectually deficient, or that we are not capable of being rational. It's just that when it comes to emotional intelligence, we have no idea. Jason Zweig's new book "Your Money and Your Brain", which will be out in a few months, examines the reasons why most investors, including professional investors, are so often their own worst enemy. By examining how the brain works, we can learn a great deal about investing. Not just how groups of investors behave but also how we ourselves react as individuals.

4th May 2007, (75)
Sovereign Bankruptcy US Style
It is rare indeed to find any person, family, corporation or government entity that has concluded both of the following:
1. It is on course for bankruptcy.
2. It is going to do nothing about it, or is going to make bankruptcy even more likely.
Don't believe this ever happens? Take a look at the US federal government.
If anyone should know about the US federal government's finances, it is David Walker. Walker is the nation's chief accountability officer and head of the U.S. Government Accountability Office (GAO). His "60 minutes" interview is currently available in the Video section. The interview displays Walker's conviction that urgent action is needed to avoid bankruptcy for the US federal government. It also suggests that most politicians in Washington do not disagree with his basic conclusion, but the most remarkable part is that apparently no-one wants to talk about it, because no-one wants to do anything about it!
This may or may not be disturbing to you, as this is a long term issue and a "tipping" point still seems several years away. However, as an investor, I believe this issue can no longer be ignored. This note discusses how and why the coming "Sovereign Bankruptcy US Style" is already having an impact. It could be influencing your investments much sooner than you realize.

18th Feb 2007, (74)
Liquidity Game
There is no doubt that there are many good reasons why the stock markets around the world could have a good sized correction before long. The duration of the current rally has been exceptionally long and many indicators are signaling a warning. That being said how concerned should we really be?
There are still some very powerful positives. The central banks remain extremely supportive of the markets and are highly likely to remain so. This is very apparent from a simple but effective analysis of the key relationship between nominal GDP growth and interest rates, the current development of price indices, and recent actions taken by the central banks themselves.

15th Jan 2007, (73)
Massive Inflation Heavily Disguised
"The most important thing to remember is that inflation is not an act of god, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy." Ludwig von Mises.
The Bank for International Settlements (the central bank of central banks) pinpointed the issue, perhaps accidentally, in a recent study when it stated: "In recent years, when judged against traditional macroeconomic yardsticks, developments in global interest rates and measures of "liquidity" have been remarkable. It is hard to find a period in the postwar era in which inflation-adjusted interest rates have been so low for so long and monetary and credit aggregates have expanded so much without igniting inflation."
Many economists appear to regard this as the promised land of permanent growth and prosperity. As if somehow, there is some magic at work that has lasted so long it must be forever. However, it is ultimately a highly unstable set of circumstances. The trick here is to understand that, in reality, we are currently in a period of rampant inflation, albeit heavily disguised, and that once this is properly understood it should completely alter your whole investment outlook and assessment of market risk and tactics.

27th Nov 2006, (72)
Federal Reserve Exposed
It is not hard to show that Federal Reserve policy statements are typically confusing, contradictory, and misleading. The real reason for this is that the central bank has to disguise its real purpose and objectives. It is only in this context that you will be able to understand how the bank operates. Their purpose is to promote inflation through manipulation of their two policy instruments, which are interest rates and the money supply. Their record shows they have been very successful as inflation has been substantially higher since the Federal Reserve was established. However, policy statements have to disguise this because the central bank's ability to guarantee inflation is only possible so long as most people do not understand this is what they are doing.
Together with fiat money, central banks have enormous power to control the economy, and have many partners who can benefit from this monetary system. Government spending becomes much easier to finance, and the banking system can grow its balance sheets at a much more rapid pace, safe in the knowledge that the central bank will defend them from the devastating consequences of falling nominal prices.
However, this does not benefit everyone. Those who do not understand that the currency is manipulated and often undermined run a high risk of losing real purchasing power and may find it much harder to grow their real wealth. Investors need to understand that most Federal Reserve statements are bound to be misleading as they are designed to manage inflation expectations and other propaganda purposes, not to enlighten us. It is no wonder, therefore, that most people find financial markets and economics so confusing. They are purposefully being misled by the central banks, and their allies.
An accurate interpretation of monetary policy has to look through this smokescreen to determine true market effects and developments.

2nd Nov 2006, (71)
Hedge Funds: "Heads they win, Tails you lose?"
Hedge funds have grown dramatically in recent years. There are now some 8000 hedge funds, somehow attracting institutional investors as well now, so that total assets amount to about $1.2 trillion. Yet hedge fund returns have averaged below 10% over the last six years.
The popularity of hedge funds emerged when investors perceived a need to diversify away from "buy and hold" investing. However, just because market conditions change in ways that make hedge funds look more attractive, does not necessarily make hedge funds the right solution for most investors.
The fee structure for hedge funds is not only very high but it also leaves investors with a capped upside but unlimited downside. Conversely, hedge funds are richly rewarded by high fees and the clear incentive to take high levels of risk. This should be a matter of acute concern to investors. Long term returns do not necessarily rise just because greater risks are taken. Just consider technology stocks in the last decade.
Optimal investing is about maximising returns, while minimising risks, and lowering your costs as much as possible. Whether you are maximising returns by investing in a hedge fund is highly debatable, but for sure you are not minimising your risk, or lowering your costs. Furthermore, with a hedge fund you do not have access to your account information at any time on any day, and you can not withdraw money whenever you wish.
Surely it makes far more sense for investors to find an experienced Registered Investment Adviser, with a great track record and experience, who charges a reasonable flat fee for very efficient and effective asset management. Transparency and dialogue is then also possible with your manager, who is legally obliged to act at all times in the clients best financial interest, and must declare any and all conflicts of interest.
Maybe a hedge fund manager will provide a better return, and maybe not, it will surely be hard to tell in advance. However, there can hardly be any doubt that the cost and structure of a relationship with a Registered Investment Adviser is far more attractive to the investor. The optimal strategy for most investors should therefore be clear. Find a Registered Investment Adviser, who can manage your capital to your liking.

20th Sept 2006, (70)
Money Madness
Monetary policy has been used so excessively in recent years that it has now become increasingly ineffective. Remarkably, although interest rates rose over the last 2 years, the Federal Reserve continued to promote excessive credit expansion throughout. There never really was any credit restraint for the first time in any rising interest rate cycle.
The data clearly shows that since 2000 overall consumer expenditure added to residential investment has outgrown disposable income, for the first time ever and at an accelerating rate. So further credit growth looks increasingly limited given that consumer demand is saturated, personal balance sheets have deteriorated, and the savings rate has now gone negative.
The economy has therefore become acutely vulnerable to falling asset prices and the now more limited ability of short term interest rates to cushion any fall. We need to realize that once policy makers have embarked on a sustained period of excessive credit expansion, it is very hard to return to sound and stable monetary policy, as it involves imposing hardship. The usual course of events is to continue providing excessive credit for far too long. This is what occurred in the 1920s in the US, and the 1980s in Japan, with ultimately disastrous consequences.
We all need to understand that we are living in an era of "Money Madness". This creates huge distortions in the markets, the economy, and in society at large. It can continue for far longer than anyone can imagine, but do not be fooled into believing it can last forever.
For now, short term interest rates have significant room to fall from 5.25%, and could fall dramatically as we approach the next economic down cycle. Interest rates changes may need to become more aggressive as the effectiveness of monetary policy has been significantly weakened. This should provide a boost to equity markets, which are now very close to the most bullish phase of the 4 year election cycle, and a much more strategically bullish stance seems appropriate.

5th Sept 2006, (69)
Election Cycles and Instability
Market participants are all very well aware by now of the four year election cycle trades, and the key impact of this on all markets. This means that anticipation may well bring about a pre-emptive rally. This idea is reinforced by the outlook of the monetary authorities. They now appear to have a growing incentive to support the markets and economy, both from a political as well as economic standpoint.
To this extent it may well be that a more positive stance should be taken as regards the markets, as the chances are that any setbacks to either would most likely be met with significant policy support at this stage.

28th July 2006, (68)
Creating free options
"We must dare to think 'unthinkable' thoughts. We must learn to explore all the options and possibilities that confront us in a complex and rapidly changing world. We must learn to welcome and not fear the voices of dissent. We must dare to think about 'unthinkable things' because when things become unthinkable, thinking stops and action becomes mindless." J. William Fulbright.
For the most part investors want to talk about what to buy and sell and when to take action. There is no doubt that this is important, but so often there is very little discussion about other areas of asset management that are just as crucial.
This note focuses mainly on the idea of using many different types of options and money management techniques to significantly improve the efficient management of capital. In a complex and rapidly changing world, investors need a framework that will enable them to dynamically manage their account in an effective and timely manner. Using options and an appropriate money management system not only helps investors make decisions, but it can also significantly improve their returns while minimizing risks.

12th June 2006, (67)
Are you wired for investment success?
"Experience is the toughest teacher because it gives the test first and the lesson later."
The data shows that non-professional self-directed investors achieve very poor investment returns. This can be clearly seen both in the futures market as well as in mutual funds. As these two areas span the whole spectrum of investment activity, self-directed investors need to consider why they are likely to differ from the norm.
It is important that investors think clearly about both their investment needs as well as their direct involvement. A checklist can aid in this self-assessment, but also aptitude and commitment need to be appropriately aligned for any realistic chance of achieving long term investment success.

3rd May 2006, (66)
Inflation Folly
Why do people who can readily explain why it makes no sense for anyone to dictate the price of tomatoes believe that it is reasonable for a central bank to dictate the price of short-term money?
Why do people who know that socialism has never worked and understand why it never can work, still believe that central planning is effective or feasible when it comes to money and interest rates?
Central banks are in the business of introducing distortions to the natural development of money and interest rates. What inevitably flows from their intervention and explanations of their activity is a great deal of confusion.
Indeed it is overwhelmingly clear that most people do not understand what inflation is, or even its correct definition. This allows central banks to take advantage of this confusion, while presiding over what is a deliberate policy of real and highly destabilizing actual inflation.

6th Apr 2006, (65)
Trade of the decade
It's too bad that the Dow Jones has just broken down to a new 7 year low, so early in 2006.
What? You don't understand what I am saying and think they are near all time highs?
Oh. You must be measuring the Dow Jones the old fashioned way. In terms of US dollars.
If you still are measuring your portfolio this way you probably don't realize that someone is picking your pocket, without you even realizing it. If so, don't worry there is still time, but you better get with the program as soon as you can.
The Trade of the Decade is just getting started. Make sure you don't miss it altogether.

1st Mar 2006, (64)
Will I have enough?
"Will I have enough?" We all ask ourselves this question, and more than once. It strikes at the heart of our own sense of financial security. Although there can't be a definitive answer as it depends on so many variables far in to the future, we can all clearly improve our prospects by formulating an effective plan of action and executing it well.
Now the question becomes "What is an effective plan?" This is where the controversy begins. Most investors are still directed towards a plan based on investment return projections, and come to assume that all they have to do is achieve a certain return on their assets and all will be well. Unfortunately, this approach is highly theoretical and dangerously oversimplifies the investment process. Not only does it start you off on very shaky ground it creates additional problems as you go along.
This is also the approach that has been used to analyze and value Defined Benefit Pension Plans (DBPP) with disastrous results. DBPP are now being abandoned as fast as corporations can get rid of them, and the PBGC, the federal agency which is designed to support them, is now essentially bankrupt. Shouldn't that tell you something about their financial planning?
There is another approach, which I believe makes much more sense, one based less on pie-in-the-sky and more on what we can realistically plan for. For this plan, the starting point is how much we spend each year or plan to spend. This is something we all have direct control over. It defines at the outset what is the essential purpose of all our assets, which is primarily to meet our living needs and places our investment approach in this context.
There are a number of great benefits to this approach, and three in particular stand out.
Benefit #1. This approach gives an immediate and realistic assessment of where you stand financially. Also you can continue to measure your progress year to year. You will not suddenly wake up one year before retirement and find that, after all, you do not have enough to live on.
Benefit #2. Your attitude to investing can be appropriately viewed in the context of your financial position. This will inform the level of risk and type of risk that is appropriate for you to take, which should be the first consideration before you start investing.
Benefit #3. This methodology appropriately avoids the one-size-fits-all approach to financial planning, which often suits the planner better than then client. Your investments need to be tailored to your own particular needs and objectives.
With so much uncertainty about future pension provision we all need to take charge of our own personal financial plan. Make sure that you have a good plan, and that you understand all the risks and assumptions you are making. You need to be confident that you have an approach that works in practice and will stand the test of time.

10th Feb 2006, (63)
Who's the Patsy?
"If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy." --Warren Buffett.
Today's games in finance and politics are a mystery to most, and yet we are all inevitably players. Making judgements in a highly distorted environment when you don't understand the players, their incentives, their rules and their bluffs can be highly dangerous to you well being. To make matters worse we now have a weatherman in charge who seems to have stood up and declared the end of hurricane season!
History and a few data points tell us clearly what game we are playing, but this clashes with current fashionable thinking. Understand the game and the players. Make your own rules not theirs. And whatever you do, avoid being the Patsy!

23rd Jan 2006, (62)
Election Cycle Trades
More than likely the election cycle trades we discuss are on track, and this will provide key guidance in trading a probably erratic 2006. The second year of the election cycle is a major turning point in this cycle both for interest rates and for equities.
While this may be enough, we should also be on guard about what is happening to our money. There are always some caveats and there are a number of additional factors that will influence the intensity of the cycle, timing and the asset choices we need to make.
The Fed recently announced that it will no longer publish M3 money supply statistics, and this astonishing development will make it much harder to track our money. Unfortunately we live in a world in which the state collects more and more information about its citizens, while providing less and less information about its own conduct.

1st Dec, 2005, (61)
The US Consumer

Although it is a trend that has lasted for decades, it is very dangerous to assume that the relentless strength of the US consumer will last for ever. This consumption has depended on ever rising debt levels relative to income. Indeed the ratio of debt to income has been accelerating. This cannot last.
The latest borrowing binge has been driven almost exclusively by rapidly rising house prices. Indeed Alan Greenspan's co-authored research piece last month showed that the entire growth of nominal GDP last year could be attributed to the housing market.
Now, however, it is clear that the housing market has reached a peak. Several indicators have now turned negative, with multiyear highs in inventory levels and a 20 year low in first time buyer affordability.
So far the link between what is now happening in the housing market and its effect on the economy is being ignored by Wall Street which is still forecasting 20% growth in earnings of consumer discretionary stocks next year. Do you think that there is scope for a sudden change in expectations?

14th Nov, 2005, (60)
Cyclical price inflation set to fall
"Inflation is always and everywhere a monetary phenomenon" - Milton Friedman "CPI inflation rises 4.7%!" It's a great headline, but should we worry? Maybe, but there a few more misunderstood concepts than inflation. The recent credit boom resulted from exceptionally low interest rates and the house price boom. But now interest rates are not so low and it looks almost certain that the house price boom is over. Overall the credit engine is now reversing at a time when consumers have inadequate savings, and falling real incomes. With this background cyclical inflation will soon be falling.
Not only does this mean that interest rates are close to peaking, but also that the US dollar's one year rally is now very mature. We called a stronger dollar in January (Market Notes 42) this year as the US dollar would benefit from widening interest rate differentials in its favour. However, the current account deficit has continued to widen. Stable to lower interest rates and a weaker dollar will make foreign bonds doubly attractive. Particularly high yielding foreign government bonds with very high credit ratings.
We have several specific recommendations for those who believe this could be a good time to diversify out of US dollars after the recent rise.

31st Oct, 2005, (59)
Beware Bernanke
Bernanke's appointment to chairman of the Federal Reserve is hardly a surprise. He has been the frontrunner for some time. This Harvard-educated, MIT-refined, Princeton-immersed economist has spent so many years in the elite cloisters of Ivy League academia that surely no-one inside the beltway could possibly object to his credentials.
Bernanke also has enough political awareness that he has supported his backer's interests at key junctures. So it likely that he will be confirmed. As such he will be a powerful economic figurehead that the considerable vested interests in our economic system will seek to support and even deify. Above all, the key in managing the flawed paper money system is to maintain the illusion of confidence and control, much of the game is psychological.
So why is it that there is still something so deeply disturbing about his appointment? It turns out that there are several problems. I can find 5 reasons why we may have to watch Bernanke very carefully.
If we examine Bernanke's statements in detail there is a great deal that is disturbing. The whole process has been far too political for genuine credibility, and his policy solutions are either disingenuous or deeply troubling. Taken together with his overconfidence and policy activism there will be clear concerns about this appointment from the markets.

12th Oct, 2005, (58)
The State and the Nation
Most Americans seem to passionately believe in the wisdom of our founding fathers and the constitution that they produced. Remarkably, however, they also seem unaware of the extent to which we as a nation have also perverted their principles and wisdom.
The size of the state has expanded far beyond what our founding fathers intended, with the rise of corporate and state collectivism at the beginning of the 20th century. We surrendered control and monopoly rights over our currency to banking interests with the 1913 Federal Reserve Act. Finally we abolished the gold standard in the early 1970's, in favour of paper money. All that has followed since was predicted by our founding fathers. Budget deficits as far as the eye can see and much else besides.
While this history won't necessarily provide any guidance on what the markets will do in the next week, month, or even next year, I believe that we need to be highly aware of our historic context for any longer term investments. We are in effect in a kind of twilight zone. It is hard to see to any immediate changes to our current system, but it is equally hard to see this system surviving in the long term, particularly when the baby boomers retire in force.
We are fortunate that we still can read the wisdom and follow the principles so clearly laid out by the founding fathers. In the current environment this is easier to say than do, but it can be done. Capt. Ian Fishback should be inspiration to us all.

29th Sept, 2005, (57)
Paper, Gold and Wisdom
"All the perplexities, confusions and distresses in America arise not from defects in the constitution or confederation, not from want of honor or virtue, as much as from downright ignorance of the nature of coin, credit and circulation."
- President John Adams
Few people understand the key link between the monetary system and the kind of behavior and society we promote. Let alone the scale of the state and its relationship with citizens. There is a great deal more at stake than just a convenient monetary unit. Although we have had a paper money system for decades, there is a choice.
George Washington, Andrew Jackson and many of our founding fathers are displayed on US paper money, but this is no endorsement by them. Indeed the founding fathers were passionately opposed to paper money! Just read what they had to say on this subject.
Although the current paper money system is deeply entrenched and will most likely be sustained for several more years, the markets may well transition well in advance, most likely towards the tried and true gold standard. Indeed as gold has recently broken out to multi-year highs in terms of Yen, Euros, and even the relatively strong dollar, it seems that many people have already begun to make that choice.

14th Sept, 2005, (56)
"Matrix" Money
How can the US be the most prosperous nation on earth, if it has more debt than anyone else? Is our economy really so healthy if our trade deficit is exploding? If we have a strong dollar policy, why has the dollar fallen by 30% in the last 4 years to multi-decade lows? How can we spend a fortune going to war and still afford to cut taxes? Can we just borrow and spend money whenever we feel like it, without consequences?
All this contradiction and confusion stems from the maturity of the paper money system we are in. It is as if we are living inside the "Matrix" oblivious to the truth outside. While it is important to understand how the "Matrix" works while we are still lost inside, we should also understand that paper money has never lasted. The message of history and human behavior is clear on this point.
For those who can see outside the "Matrix", we need to alter our economic behavior and exposure. We may not know how long the current version of paper money will last, but would you ever buy a house below sea level in a major hurricane zone and hope a hurricane would not come along one day?

7th Sept, 2005, (55)
Home Truths
Leaving aside the tragedy in New Orleans, we focus on the elements ganging up against the house price boom. Affordability, insider selling and now the Federal Reserve judging from their recent Jackson Hole pronouncements.
Housing has its cycles like everything else, but does anyone realize how dependent the whole US economy has become on this one sector? The house price boom now probably accounts for at least half of US economic growth, possibly more when one considers the incredible debt expansion that has gone with it.
Politicians and economists have rushed to conclude that the US economy has shown remarkable resilience in the face of multiple constraints. But the trick is simply massive debt creation that has dwarfed any negative factors. Debt creation in recent years has been accelerating, to a 200 billion annual pace in 2005 just from mortgage refinancing, despite higher short term rates. But any weakening in the housing market will also lead to more subdued debt expansion.
Once the housing market and debt expansion moderate the true colors of the US economy will be unmasked. Then it is likely that the recent doubling of gasoline prices will finally have a more normal impact on the economy. Unfortunately, as the chart below indicates, this suggests a recession in 2006.

6th Aug, 2005, (54)
Stock market warning! - Mutual funds at bullish extreme

By now it should be no surprise, but it turns out that over the last 40 years mutual fund managers in aggregate have a perfect record. They are perfectly wrong! Once again they have reached extreme levels. Given their record you need to exercise extreme caution on the stock market. You might also want to to reconsider how much you have invested in mutual funds!

1st Aug, 2005, (53)
Growth: Obsession and Confusion
Investors and politicians can easily become seemingly obsessed with growth. Investors believe it helps their equity returns and politicians need at least the perception of economic growth to help them get re-elected. But is all and any type of growth really so profitable for investors?
There is clearly a great deal of confusion about this. Some sectors of the economy have grown spectacularly for decades and produced nothing but consistent losses for investors. High growth (often high technology) stocks always seem to attract a great deal of attention, but how often do investors really end up making a profit? We examine the current fascination with Satellite Radio stocks.
Growing economies also produce a great deal of interest. But how long will the growth last? Do investors really understand what drives the economy and make realistic assessments about its sustainability?
Where does the US economy fit in to this equation? Should a sustainable expansion be based on growing income levels, or are rising asset prices and debt creation just as good? How much further can asset prices go and debt expand, with interest rates continuing to rise relentlessly?

1st July, 2005, (52)
China changes the ball game
China's revaluation of the Renmimbi (RMB) is very smart. Without giving much away they have taken the political sting out of US complaints concerning China's foreign exchange policy. It has also introduced a new structure that will serve well in the medium term.
This move has only minor market impact in the short term. The scale of the revaluation is small and China will still resist much further revaluation, at least for now. Furthermore, the longer term implications while profound are counter to current market cyclical trends.
Nevertheless, investors should be aware that we are are now playing a new ball game. The US dollar is no longer the sole currency benchmark for Asia, or the rest of the world, and the world now has a new currency variable - the RMB.

1st July, 2005, (51)
Great Expectations?

What do you expect to make from your investments? How can you determine what reasonable expectations should be? Government bonds yields are now as low as they have been for decades, and so offer historically low returns, but does that really mean that equities will produce much higher returns?
We examine a historical calculation of 10 year returns on equities, based on initial equity market valuations, with over 100 years experience to draw from. We conclude that it is far from clear that prospective equity returns look better than for bonds. Equity investors have generally not yet adjusted to the post bubble environment of much lower long term investment returns.
Realistic expectations are a key part of your strategy. Chasing highly valued stocks in the hope of high returns, is a losing game for most investors, but there are other approaches which are much more likely to be successful and they involve far less risk.

7th June, 2005, (50)
Numerical Microphobia

As we feared, in the current highly unusual economic cycle, the US economy is slowing much sooner than most expected and at much lower interest rates. While many continue to debate how strong the economy is, two highly reliable indicators, that have worked well for decades, are now showing clear signs of a slow down. Taken together the case is compelling.
This is deeply troubling because we have never seen, in our living memory, this level of weakness in the developed countries of the world with nominal and real interest rates this low at the beginning of a downturn.
Investors can no longer ignore the signals from the bond markets. If the slowdown continues a recession will soon follow, then investors will need to consider possible economic outcomes that they have never experienced in their lifetimes.

1st June, 2005, (49)
China Collision Course

The recent demand by the US that China should immediately revalue its currency may or may not be good domestic politics. However, it is almost certainly a vast international policy error.
Both the demand and the threatened tariffs are internationally illegal, and the charge of currency manipulation is bogus, given that the exchange rate has now been fixed for 10 years! It is hardly a new development. It is also poor advice for China and for what benefit to the US? It is hard to see any and much of what the US is proposing would most likely backfire badly. Added to this it is terrible diplomacy at a time when the world economy badly needs some vision and leadership.
For so many reasons, China will probably decide not to comply. Then US politicians may well find that the trade tariffs they are threatening may not be as widely popular as they currently seem to think. They would harm several multinational corporations, slow world growth and possibly raise prices in the US.
We must all hope that some common sense will prevail and the key relationship for the world economy between China and the US is not too badly damaged.

17th May, 2005, (48)
Global Bonds Signal Deflation

Much of the world's interest rates are now already as low, or lower, than they were in the two previous deflations of the 1890s and the 1930s. Indeed German 10 year government bonds are at new 120 year lows.
Deflation in Japan has been dismissed for many years as an oddity peculiar to Japan. But if European bonds are now signaling deflation in Europe, we will no longer be able to dismiss it so lightly. Rather it will likely become a world wide issue.
For most investors deflation has never happened in their lifetime, and they believe the Fed can somehow avoid it. But this simply means they are completely unprepared. The clear message from the global bond market is "watch out".

9th May, 2005, (47)
"Affluenza" and the Fed game

A new virulent disease has been sweeping across the nation and much of the world. "Affluenza" can be deadly if not discovered early. We make sure you know what it is and how you can deal with it.
Now that Paul Volcker, the previous Federal Reserve Chairman, has declared his grave concerns about the US "Economy on Thin Ice", and Stephen Roach, the chief economists at Morgan Stanley, has lambasted the credibility of the current Federal Reserve, it's now open season on what the "Feds" are up to. We analyze in detail what they have become and what their current game plan is.
Very few people seem to have understood the nature of the current economic cycle. As we show, it is quite unlike any other cycle we have experienced in our lifetime. This has several important consequences for the length and strength of the current cycle, and key investment implications, particularly for the bond market, but also for equities.

13th April, 2005, (46)
What would Jefferson do

Never talk about sex, religion or politics? Well markets don't operate in a vacuum independent from politics and so sometimes we have to touch on politics and hope we don't end up offending everyone. Thom Hartmann's recent book "What would Jefferson do?" provides great insight into something called "Democracy". This book provides remarkable clarity on defining what this is, as well as several new insights on its long history, whether it is a natural state of affairs, and it's record. It also goes into great detail on how it has been applied in the US and altered over time.
As Paul Volcker's recent Washington Post article highlights, the US now faces an incredible set of "dangerous and intractable" circumstances. But how well is Democracy working these days, and how much hope is there that policy solutions will be found that will be to the benefit of the majority? Can anyone really believe that the Federal Reserve has any answers, or are they part of the problem? What's an investor to do? Perhaps take some advice from Voltaire.

16th March, 2005, (45)
Boiling a frog

Here is the mountain of debt that will become the monument to Alan Greenspan's stewardship at the Federal Reserve. Slowly, consistently, but relentlessly this is the main economic factor that has shaped and characterized the US economy in recent years.
Unfortunately, while creating credit is highly pleasurable, credit contraction is not quite so much fun and all the indications are that the current cycle is mature. This is clear from the record trade deficit, rising asset prices, and even signs of inflation - all clear consequences of excessive credit.
The thing about debt is that - "If there is a lot of debt, a small error in our appraisal of asset values can be fatal because leverage magnifies mistakes." - Jean-Marie Eveillard. Ask Long Term Capital Management. With all their Nobel prize winning brains they still did not understand the nature of excessive leverage and debt. Think the Federal Reserve understand the amount of leverage and debt they have fostered, and the risks it entails? Don't be fooled. Understand the game that is being played and prepare.

14th Feb, 2005, (44)
Bonds, Credit and Houdini
Wall Street consensus is once again wrong about the bond market. While we have shown that this it normally the case, on this occasion there is a huge difference between what the bond market is indicating and what most investors and Wall Street seem to believe. In my experience it never pays to ignore what the bond market may be signaling, after all it has the best track record.
As we analyze the bond market we find a far more plausible explanation of the economy that isn't even complicated. It also provides a much more convincing fit with economic and market developments. Investors need to be fully aware of this perspective.

2nd Feb, 2005, (43)
Rollercoaster Investing
Without realizing it most investors are rollercoaster investors, often with high costs. The conventional approach of a high and permanent allocation to equities for your investments is certain to give you a high level of volatility, as the equity market falls on average by 43% through a recession cycle. Sooner or later we always have a recession. Unfortunately, for all this risk, your medium term investment outcome is still very uncertain.
Since 1800 there have been 7 secular bear and bull markets. We have all the numbers so you can see what usually happens or at least what has happened over the last 200 years. It turns out that equities are a good medium term investment only around half the time. There are many reasons why the conventional approach of a very high permanent allocation to equities may not be the optimal approach for you. Lots of risk and a very uncertain outcome.
A focus on consistent absolute returns will most likely produce lower risk and lower costs, and if well managed can produce higher long term returns as well. This is the approach I use in all my trading and investing. Here is an example of one of my accounts over the last three years:

11th Jan, 2005, (42)
2005 reversals
In just the first week of 2005 we have had a classic reversal in the dollar. In the last note we suggested that there was not much further room for a dollar devaluation, yet the market was reaching peak pessimism on the outlook for the dollar. Now the dollar trade weighted index has taken out the December highs with an impressive rally.
After a 4 year collapse in the dollar from 127 in July 2001 to 80.5 in December 2004, we have a reversal. If our working assumption now becomes a rallying dollar, the outlook for US assets may be about to change dramatically.
This is occurring at a time when both the bond market and the equity market have a significant bias in terms of sentiment and positions, based to a large extent on a weak dollar. If we are right about a medium term change in the direction of the dollar as signaled by the market, conditions are also ripe for a reversal in equities before long.
Also be leery of the lousy track record of the consensus in the bond market. Once again positions, sentiment and consensus has a heavy bearish bias in the bond market. A more aggressive Federal Reserve, higher interest rates, weaker economic and earnings growth and a strong dollar may ultimately provide the set up for a buying opportunity.

8th Dec, 2004, (41)
World economy on a knife-edge
While there is a growing awareness that the external imbalances of the US have become unsustainable, it appears that there is still very little understanding about how this will be resolved. As this is the key issue facing the markets and the world economy it is worth spending some time working through how this will play out.
Currently it is hoped that all that needs to be done is to devalue the dollar. This is the easiest part of the solution for policy makers who still hope that other more difficult measures will not be necessary. But is this realistic?
How can a minor adjustment to the dollar solve the US imbalances if it pushes all non-dollar countries towards recession? If a weaker dollar boosts growth in the "dollar block" at the expense of everyone else how can an increasing growth disparity work to reduce current account imbalances? Is growth in the "dollar block" really so healthy? So many questions remain unanswered, but the idea that dollar devaluation by itself will solve the world’s imbalances is unrealistic at best.
In truth the measures necessary to reduce current imbalances have not even begun to be employed. Without these measures the situation will only deteriorate further. Something has to change and soon, and current market consensus may well be misguided.

12th Nov, 2004, (40)
Currency Warfare
Is the US taking a page from the 1973-74 decline of the dollar, when US Treasury Secretary John Connally told Europeans that the dollar was "our currency" and "your problem"?
In September 2003 I wrote in Market Notes 12 that I believed it was too early to expect a revaluation of the Chinese currency, the Yuan, against the US dollar. Well, I believe the time has come to change this view. For almost a decade this fixed exchange rate has been a great benefit to the Chinese economy in particular. It also broadly suited the US, despite some complaints. However, it is becoming clear that economic self interest is now beginning to diverge.
While we are not there yet, and China will be the last to agree, the fixed exchange rate is not only limiting the extent to which the dollar may need to devalue, but it is imposing a double blow on European economies. As the dollar falls against the Euro, the Yuan also falls against the Euro. And as growth is beginning to falter outside China the pressure for a revaluation of the Yuan is beginning to build.
A change in such a key currency link will have a number of important consequences for all markets as well as the world economy. Of course the markets won't wait for it to be announced before it begins discounting such a key event, and it has been remarkable how weak the dollar has already been since the US election despite relatively strong US data.

18th Oct, 2004, (39)
The new investment benchmark
On Tuesday October 26th 2004 an new investment benchmark will be introduced by the Treasury. It is the beginning of semi-annual issuance of 5 year TIPS (Treasury Inflation Protected Securities).
The introduction of the 5 year TIPS security should be a major event for investors. 5 year TIPS not only have the three key benefits all TIPS have (which we describe), but they maximize the benefit of the imbedded option in TIPS with extraordinary low volatility and asset safety. Indeed they are so safe that by constructing a ladder (spreading purchases over each semi-annual issue) you can construct a high yield alternative to cash that is hedged against both inflation and deflation.
Beyond this, 5 year TIPS also provide investors with the most attractive advantages of investing directly in bonds. These securities provide such a remarkable combination of risk/return benefits that used appropriately they can become an investment asset that is also a cash alternative!
Just as most houseowners have a mortgage. Most investors should have a portion of their portfolio in the new 5 year TIPS.

28th Sept, 2004, (38)
Market Signals, Debt and Democracy
Once again the bond market is confounding market pundits and economists. An historical analysis of the outcomes compared to Wall Street consensus forecasts shows that this is nothing new.
We show 6 market based signals which indicate why bonds have outperformed the consensus and may continue to do so.
Almost all current analysis completely disregards what has now become the major issue confronting the US economy - debt. At current levels and rate of debt accumulation, it is now hurricane season for investors. Without a good plan and effective insurance your financial house could get blown away.
History has shown us over and over again that the issue of debt resolution has been a decisive factor in the longevity of advanced democracies.

14th Sept, 2004, (37)
The Pension Crisis and what you must do now
For our own protection we now need to face the facts. Pension systems in the US are essentially bankrupt. Do you think you are safe? If your pension depends on the federal government, the states, or a defined benefit pension fund, your pension is now at risk. All you have is a promise that you will receive a pension many years from now. But how valuable is this promise when it is clear that the money needed to pay you will not be there.
The problem is so big that no-one wants to deal with it. Crunch time is still a few years away and whoever is in charge right now will be long gone when the inevitable pension default occurs. But for the tens of millions of retirees that will be hit there can be no delay. If you wait until retirement you will not be able to react in the event of a pension payment default. You need to understand your own situation right now so that you can best plan for retirement and reorganize you pension to make sure that your retirement is not a throw of the dice.
There are also some wider ramifications which should influence how we should invest, but this note shows why current pension schemes are bankrupt and what we must do now to plan for our retirement.

1st Sept, 2004, (36)
The truth about long term stock returns
When we are not sure what to do we often check out what everybody else seems to be doing. Usually this works well. It can help us find good restaurants and guide us to the best movies. Sometimes there is wisdom in crowds. Unfortunately when it comes to a highly cyclical and entrepreneurial endeavor like investing and trading, following everyone else is an approach that is doomed to failure. It simply means that you will have your biggest position at the highs and your smallest position at the lows - a consistent recipe for losing money. And yet, as we show, this is exactly what most investors do. Most investors have once again returned to a very high allocation to equities after the rally in 2003. As the "boomers" get closer to retirement the stakes on investment returns are growing increasingly crucial in determining retirement lifestyles. So what is the true reality of long term returns on stocks? What are reasonable expectations and are stocks really a good deal for long term investment? As it often the case history provides us with an excellent guide. It shows us what long term returns have been as well as what is reasonable to expect. It also guides us also as to when is a good time to be aggressively invested and when to be more cautious. If you want to invest in equities make sure that you are not just following the crowd. Understand the returns that are reasonable to expect and the risks you are taking to get those returns. This notes provides you with the evidence you need to create your own informed opinion.

10th Aug, 2004, (35)
Blind faith and ruin
At the risk of oversimplifying multiple books, letters and statements, Ayn Rand, Alan Greenspan's erstwhile mentor, was a strong proponent of truth and reason, rather than faith, as an approach most issues in life. So one would hope that Alan Greenspan would provide us with truth and reason, but perhaps his agenda or motivations have changed since those heady days in the 1960’s. The Federal Reserve's recent forecast of strong growth for the next 18 months, reaffirmed in today's FOMC statement, doesn't square with current negative real interest rates, which are in theory highly stimulative. It doesn't add up. Clearly, either the Fed doesn't have much confidence in its own forecast or it is just hoping that it's remarkable policy measures in recent years will somehow work out. Have some faith is what they are saying.

As traders or investors we need a little more truth and reason than this so it is time for a reality check. Taking a longer term view to put the recent recovery in context, it looks like the current concensus or Fed view represents an optimistic extreme. It is hard to see how an ailing economy can get traction without employment growth when the economy is already slowing down and stimulus measures are fading. Particularly the US economy which has so many medium term growth constraints.

However, so far a weaker economy or recession seems to be in no-one’s forecast. Blind faith in the Federal Reserve’s outlook remains the consensus. Stock markets drop an average of 43% during a recession so this is no idle issue, and have you noticed that the stock market may already be signaling trouble ahead?

The 1-2-3 Stock Market Model TURNS TO SUPER RED LIGHT MODE. BE CAREFUL. The stock market model, which had been in Yellow light mode since April 2003, turned to Super Red Light Mode (with all three signals negative) in mid-July. What does that mean?

Although the model is not a short term timing tool as it can easily be "out" by 6 months or so, it has a remarkable long term record. In the last 30 years, according to Steve Sjuggerud, the 1-2-3 model has had all three signals against us three times. The first was before the 1987 crash, so it was a pretty good signal. The second time was in 1994. After that signal, the market was relatively flat. And the third time was in 2000 and it gave a warning of the 2000/02 bear market.

22nd July, 2004, (34)
Real Versus Financial Assets
The performance of real versus financial assets is a dramatic long term cycle. In the last century this cycle has lasted for around 35 years and the swings have been enormous. From 1966 to 1980 gold outperformed the Dow by a factor of 27.8, but in the next 19 years the Dow outperformed gold by an astonishing multiple of 43.7. If you can get this allocation right, nothing else matters. Just focusing on some of the key factors suggests that the recent outperformance by real assets is just the beginning. In general the relative case for real assets is compelling. We are now in fully in "Red Light" condition on the "1-2-3" stock market model. All three indicators have now turned negative. This signals that portfolios should now be moved to a defensive stance. The last indicator turn negative just yesterday as shown below by the S&P 500 moving below the 45 week moving average for the first time since early 2003.

6th July, 2004, (33)
Systems Trading
Just a marginal advantage at the casino's can generate enormous profits. A small edge played with discipline and consistency can transform the desert in Nevada into the fastest growing city in America with several of the world's largest hotels. Having an edge in your investing can also make the difference between long term success or failure. Do you really have a valid strategy or system that gives you a genuine expectation of good investment returns, whatever the market does? Most investors do not. System trading can give you just this. As an example, we look at the "Time Machine" and what it can do for us if used appropriately.

9th June, 2004, (32)
Greenspan and his boom
Greenspan has assisted in what Stephen Roach, chief economist at Morgan Stanley, describes as "the most powerful combination of monetary and fiscal stimulus in modern history" during the last few years. More than ever the current "boom" has been the creation of the central bank and Alan Greenspan himself. But now Greenspan faces the acid test of all his policies and advice of recent years. The success or otherwise of the current interest rate cycle will determine the legacy of Alan Greenspan as well as so much else. How Greenspan manages this process will be crucial. Interest rates of 1% have begun to look absurd or "atrociously speculative" as Bill Gross puts it. But while a policy tightening at the June 29/30 Federal Reserve meeting looks a certainty and is well discounted, there seems little understanding of what typically happens over a rising interest rate cycle. The current cycle could be extreme. It starts from remarkably low interest rates with record levels or leverage and debt, as well high valuations across most asset classes.

26th May, 2004, (31)
Strategy and Investment Success
There is one rule that all the most successful traders and investors agree on. Yet despite its conceptual simplicity most investors simply ignore it. Unfortunately, most investors fall into a series of traps or errors with the inevitable consequence that their long term performance is very poor. Make sure that you are not amongst them.
Warren buffet is probably the most successful long term investor in US equities of recent decades. He has just declared his investment activity for Q1 2004. What he is doing sends a clear message. In not advisable to bet against him if you are truly a long term investor. For this and for many other reasons we are at crucial time. Investor's simply must have a valid and effective investment strategy in order to be successful in the years ahead and the sooner the better. Do not count on "buy and hold" as this strategy.

11th May, 2004, (30)
TIPS going mainstream
The Treasury has announced that it is going to dramatically expand the issuance of TIPS (Treasury Inflation Protected Securities), and widen the maturity dates it issues to 5 year and 20 year maturities, in addition to the existing 10 year schedule. TIPS as a result will become a major part of the $3.66 trillion Treasury market. Investors will have much greater access, choice and liquidity in this key investment sector. All these changes are reviewed and we assess the choices that are now available, including the new exchange traded fund, with ticker symbol 'TIP'. There are 6 key arguments in favor of investing in individual bonds rather than funds, although TIP does have some advantages. The outlook for bonds and TIPS is reviewed. In Market Notes 27 on March 9 we wrote that it was time to take profits on TIPS with real yields at record lows of 1.4% on the 10 year. Now that prices have collapsed and yields have risen dramatically to around 2.25% is it time to start reinvesting?

21st April, 2004, (29)
Inflation/deflation still unresolved
Increasingly, the markets are moving up a narrowing path that includes inflation on one side and deflation on the other, and the happy middle of the path where markets can rally without volatility is narrower and narrower. Once again Alan Greenspan has told us we don't need to worry about either inflation or deflation. Indeed we have been told this so often that we have to begin to wonder. Only one other time since 1831 have we had interest rates at 1%. This alone tells us that we are in an extraordinary period with "emergency" interest rates. And yet apparently there is no emergency. In reality the Federal reserve have declared all out warfare against the apparent evils of deflation. But history tells us that deflation can be very benign. Indeed in the period between 1873 and 1900 the US experienced a deflationary boom rather than a shock. It was this deflationary period that catapulted America into the role of the world's leading industrial power. At that time the Federal Reserve didn't even exist. The Federal Reserve has now created a superficial boom which has driven economic imbalances, debt and property prices in particular, to extreme levels. Unwinding these imbalances will be extremely difficult and could easily go wrong. We have still not "escaped" deflation as yet, but now if the Federal Reserve ultimately fails the resulting deflation will be much less benign. Welcome to the Federal Reserve's great deflation gamble! Despite the market's current conviction that the economy and inflation are now taking off the longer term outlook is still far from clear. This cycle is unusual in many ways. The degree of policy intervention recently has been unprecedented. This leaves investors with an unusually difficult outlook. As the famous Austrian economist Friedrich Hayek remarked, "the more the state 'plans' the more difficult planning becomes for the individual".

4th April, 2004, (28)
Payroll Pirouette
Each month the financial world is turned upside down by the payroll numbers. We still have our Violent Cycles (see Market Notes 23) but the perceived length and amplitude of these cycles is dramatically altered by the latest numbers. The latest numbers suggest that instead of a cycle with almost no job growth we are now having a more normal cycle albeit a weak one given the scale of policy stimulus. Nevertheless we are likely at the point where policy shifts from stimulative to restrictive. Both in the US and more widely in the "Dollar Zone" with China already in the process of tightening policy. This about face has widespread implications. The bond market should trend lower for the time being, and possibly aggressively, and the dollar may well bounce against the Euro. Equities have a window of opportunity to trade higher but with some new contraints. In the current environment investors will have to remain highly flexible as the intensity of policy and its effects have never been greater, so it is unusually difficult to read the underlying trend. The current appearance of strength in the world economy is likely to be unusually fragile.

9th March, 2004, (27)
Outside the box
Whichever way you look at the payroll numbers the labour market is far weaker than anyone expected at this stage. Yet standard economic thought remains convinced that as long as you apply enough stimulus then growth, jobs, and inflation are just around the corner its just a matter of when. Well by now we are around the corner far enough to see that it just ain't working! A piece of this puzzle is missing and it's about time to start thinking "outside the box". This note discusses a highly plausible additional factor which makes much more sense of the data we are seeing. But if we're right this has enormous implications not just as regards choice of assets but also as regards policy. Whether we are right or wrong about this you better be aware of this possibility and the outcomes that it may lead to.

1st March, 2004, (26)
Risk and options
Low interest rates and abundant liquidity have a remarkable impact on asset prices and in particular high risk assets. In 2003 in didn't really matter what the asset was it's price went up. Junk bonds, commodities, equities, house prices you name it, and the higher the risk and the lower the quality the better it performed. This dramatic out performance of low grade assets has now reached record levels as measured by Junk bond yield spreads, the price of options on the Nasdaq index, and many other valuation metrics. Significantly the market has now just begun to reflect this as recently high risk assets have begun to under perform. The current environment provides investors with a remarkable opportunity to upgrade the quality of their assets and to dramatically improve their risk-adjusted returns as the election policy cycle in the US shifts from positive to negative over the next year.

16th Feb, 2004, (25)
Prosperity or illusion?
Most Americans believe that they are becoming more prosperous. But what's this? Warren Buffet says "Net Wealth is being exported at an alarming rate". And this is why he is investing outside of dollars for the first time ever. So are Americans becoming richer or poorer? Enormous shifts are occurring in the balance sheet of America. Corporate America has greatly benefited and surveys suggest they are very optimistic, but have you examined what they are actually doing? Actions speak louder than words. Meanwhile, consumers are increasingly under immense pressure even though spending so far has held up well. Policy makers continue to tell us that all is well and this was Alan Greenspan's main message last week in testimony to Congress. But could he really say otherwise? And if everything is so good why is it that policy both in the US and Japan has never been so aggressive? With every passing month of data the outcome of whether the current US recovery will develop self-sustaining momentum becomes clearer. Indeed my own opinion is that this debate is pretty much over.