The Great Debate

from Jeremy Gaunt:

Twisted Sister and the Federal Reserve

Jeremy Gaunt

Sep 21, 2011 05:31 EDT

The Federal Reserve's "Operation Twist" has set the literary- and musical-allusion juices flowing.  It is all about the Fed selling or not rolling over short-term debt and buying long-term bonds instead in order to keep borrowing costs low.

But that is frightfully dull for economists, analysts and reporters trying to get attention for their work. So, so far we have heard:

-- "Let's Twist Again", a reference to the 1960's Chubby Checker record about the dance craze . Problem is that the second line is "Like we did last summer", and the Fed did nothing of the sort, launching plain old quantative easing instead.

-- Twisted Sister might be a contender, but the heavy metal band's big hit "We're Not Going To Take It" probably better descibes market reaction to euro zone debt-crisis policy.

-- "Twist and Shout",  a reference to the rock song covered by The Beatles, among, others.  This is better. "Well, shake it up, baby, now" could indeed be the clarion call from financial markets for the Fed to so something, almost anything. But "Come on and twist a little closer, now, and let me know that you're mine" might be going a little far.

-- So the prize for now goes to literature not music:  "Oliver Twist".  Young Master Twist's  "Please Sir, I want some more"  just about sums it up.

Any others?

from Global Investing:

Solar activities and market cycles

Natsuko Waki

Nov 29, 2010 12:33 EST

Can nature's cycles enrich our finance and market theories?

Market predictions based on the alignment of the sun, moon and the earth and other cycles could help investors stay disciplined and profit in economic storms, says Daniel Shaffer, CEO of Shaffer Asset Management.

Shaffer writes that sunspot activities show that the sun has an approximate 11-year cycle and as of March 31, 2009, sunspot activity has reached a 100-year low (this, interestingly, coincides with a cycle low in equity markets, reached sometime mid-March in 2009).

But a low in solar activity seems to be followed by a high. Scientists are predicting a solar maximum of activity in sunspots in 2012 that could e the strongest in modern times, according to Shaffer.

"The concern is that something weird is going on and that the current extreme low in the sunspot cycle, similar to the stock market, can be followed by an unusually high sunspot cycle leading to a solar maximum, or in other words, a peak in sunspot activity," he writes in his latest book.

"Our analysis is currently indicating a stock market low in the United States in approximately year 2012, which coincides with either a sunspot low or high depending on the cycle. "

from The Great Debate UK:

Signs are positive for markets and economy

-Kully Samra is UK Branch Director at Charles Schwab. The opinions expressed are his own.-

There is no doubt that since the lows in March 2009 the U.S. market has rallied massively. However, at Charles Schwab we believe that whilst economic progress will continue, we must look to the months ahead with some caution.  We remain optimistic regarding the equity markets in the longer term and the economy in the short term, but recognise that increased volatility will likely characterise 2010.

Over the last month, we’ve certainly experienced a sense of this increase in volatility in the US markets and we would stress the importance of a diversified portfolio and an appropriate asset allocation that matches one’s risk tolerance in order to combat this. Investors should also ensure that they assess and rebalance their portfolios to fit the market conditions.

Despite this, the U.S. economy is undoubtedly still continuing to improve, evident from the initial read on fourth-quarter gross domestic product (GDP) which presented a much-better-than-expected 5.7 percent. Up to this point, the recovery that we’ve witnessed since March 2009 could be described as V-shaped. However, it will become more difficult for data to continue to move in that nearly vertical pattern. This will likely result in at least some flattening in the rate of improvement in the economy at some point in 2010, possibly making the recovery square-root shaped.

One thing that we’re keeping our eye on at Schwab is the increasing debt levels in the US. In the decade to September 2009 it’s taken nearly 6 dollars of debt to create 1 dollar of economic growth. This is clearly not sustainable, and is a threat to the long-term stability of the US economy. To give this some context, in the 1950s, it took 1.36 dollars of debt to create a dollar of economic growth. Government shake-up?

Although it may seem like an obvious point to make, it is near-impossible for investors to catch or predict every move in the equity market. The Greek banking crisis and the election upset at the Massachusetts Senate election are prime examples of this, as both events impacted short team market action in the U.S.

The outcome of the Massachusetts senate election, which gave the Republican Party a 41st seat in the Senate, has tilted the balance of power in Washington, exacerbating what was already a volatile atmosphere. It appears that some of the major proposals of the Obama administration are likely to be scaled back, which could provide some more certainty for the economy.   The proposed health care program has largely been taken off the table for now, as has major cap and trade legislation, both of which were met with some opposition by the business community.

from MacroScope:

The end of capitalism

Jeremy Gaunt

Nov 23, 2009 11:09 EST

Hard to imagine with financial markets still buoyant and newspapers full of tales of bonus greed, but there is still the possibility that captialism will end.  At least there is according to prestigious investment consultants Watson Wyatt in their latest study called "Extreme Risks".

The firm listed the demise of the system of private ownership as one of 15 threats to investors and the global economy that probably won't happen but which it reckons are worth worrying about anyway. The idea behind the report is that such things as climate change, the break up of the euro zone and war are always worth being included in an investment risk management process.

As for the future of capitalism:

In our view, the most likely scenario is moving along from one end of a spectrum where market is king (minimum regulation) towards the other end, where we could see more onerous regulations and government intervention in, and control of, the economy. The extreme risk, however, is the demise of the capitalist system and the end of the market as the primary means of resource allocation.

And the impact:

The economy would be likely to run a higher risk of failure and economic growth would be sluggish in the long run due to lower productivity.  Centrally controlled economies tend to be characterised by shortages, which are inherently inflationary. Private investment activities would collapse or even be terminated. The end of capitalism is simply the ultimate extreme risk. The economy is likely to be associated with extreme uncertainty and a large amount of wealth destruction during the transition period.

Watson Wyatt does try to give its free market clients some hope, suggesting that buying gold may be one way to hedge against the propect of capitalism's demise. But it admitted that in such a circumstance investors would probably be more concerned about the return of their investments rather that the return on them.

from The Great Debate UK:

Is a bubble burbling in financial markets?

Jane Foley

Nov 4, 2009 14:24 EST

-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.

A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it "fair" value. According to the efficient markets theory this would not happen.

If bubbles are a natural outcome of financial market activity it is relevant to ask whether the very loose fiscal and monetary policies of many central banks and governments are presently sowing the seeds of the next bubble.

Even though the real economies of the U.S., UK, Eurozone and Japan continue to be defined by expectations of rising unemployment and falling real wages, access to cheap money has already helped restore the profitability of many investment banks.

In turn, this has fed risk appetite which is evident in the rally in stocks since the spring, increased demand for "risky" currencies and a recovery in commodities prices. Brent oil has rallied by 128 percent from its 2009 low. The ability of oil to rally despite the existence of oil supplies well above the seasonal average suggests there is already speculative element in this market which could be in danger of driving prices above their fair value.

This week’s meetings of the Federal Reserve, the Bank of England and the European Central Bank have focussed attention not so much on rates, but on the extraordinary policy decisions taken by these central banks in the wake of the financial crisis and whether conditions are ripening in favour of a gradual withdrawal of some of these policies.

Don’t believe the hype

Neil Unmack

Sep 17, 2009 14:23 EDT

– Neil Unmack and Agnes T. Crane are Reuters columnists. The views expressed are their own —

By Neil Unmack and Agnes T. Crane When some of the most influential financial thinkers of our time failed to call one of the biggest bubbles since the Great Depression before it burst, a little skepticism about the recent run-up in stocks is a healthy antidote to the cheerleading that typically accompanies big gains.

Given the enormous size of the last bubble, the current round of inflation in financial markets perhaps should be called by another name — maybe “bubblette” would better suit the times.

The hallmarks, though, are similar: Access to cheap credit helps re-inflate depressed prices, but eventually the explanations for extended gains start looking flimsy. Stocks started entering that territory in August when many pointed to better-than-expected earnings to justify the surge in prices that have taken major gauges to their best levels for the year.

The price-to-earnings ratio for the S&P 500 currently stands around 26.5 based on operating earnings for 12 months through June. That’s well above the historical average of 19.26, according to S&P senior index analyst Howard Silverblatt.

To get back to normal, the economic recovery will have to be powerful enough for earnings to meet more optimistic expectations. The price-earnings ratio for the FTSE 100 is still just below its historic average, but nevertheless stands at its highest since July 2004.

There are good reasons to rejoice about the recovery in stocks — for one, they make last year’s losses less painful. But there are also plenty of reasons to think the market will pull back in the near term, and to foresee a rude awakening if the much talked-about V-shaped recovery fails to deliver.

from Commentaries:

Long on volatility, short on meaning

Agnes Crane

Sep 3, 2009 15:02 EDT

It's hard not to be cynical about what the markets are supposedly telling us this week.

Don't get me wrong, I think markets can be a good barometer for sentiment and a leading indicator for trends before they bubble to the surface.

But their behavior this week suggests that the few traders and investors working during these dog days of summer are more interested in pushing prices around for short-term gain than making a bet on where the economy and financial markets are heading.

It's nothing new that trading desks are thinly staffed in the last weeks of summer, but after last year's rude interruption of summer holidays, more are taking advantage of the relative calm this year to soak their feet in the ocean rather than man the phones.

That's caused some interesting cross-currents that are making the message a bit of a muddle. Today, for example, oil prices rose early on hopes of an economic recovery while gold, a haven for those seeking a safe harbor, marched toward $1,000 per ounce as investors grew more cautious.

And Treasuries, after two days of solid gains despite better than expected economic data, fell today as investors continued to look to the stock market rather than data for clues.

Treasury yields, in fact, had been threatening to break back to lows seen in May even though the government has flooded the market with new notes -- $70 billion more to come next week -- and the economy has improved markedly since then.

Get ready for the “Great Immoderation”

J Saft

May 8, 2009 05:01 EDT

– James Saft is a Reuters columnist. The opinions expressed are his own –

The recession will soon be dead, laid to rest alongside the idea of the “Great Moderation”, a set of hopeful assumptions that underpins expectations about economic growth and asset valuations.

This, when investors, bankers and executives ultimately realise it will cause them to pull in their horns, take less risks and be less willing to pay high prices for assets.

Economists, observing that since the 1980s recessions have been mild and short and expansions long and robust, developed the theory that better economic management, namely cutting rates in the aftermath of bubbles, globalisation and, get this, improvements in financial markets, had led to a sort of best-of-all-possible-worlds “Great Moderation”, in which economic volatility fell and with it the risk premia required for holding financial assets.

This little theory has, needless to say, come somewhat unstuck during the current downturn which has been great but far from moderate.

This raises the uncomfortable possibility that the last 25 years of good times were just a bit of luck, or even worse, an artificially engineered consumption binge with central banks and governments playing a role similar to what Chicago tavern keepers used to do — opening up early so last night’s patrons can have a quick nip to take the edge off on the way into work.

It’s a debate which is far from academic and its outcome will influence much more than the actions of central bankers and regulators.

The recovery will feel familiar: lousy

James Saft

May 5, 2009 14:10 EDT

– James Saft is a Reuters columnist. The opinions expressed are his own –

The good news that the United States cannot keep contracting the way it has been is not to be confused with a return to robust expansion, a point financial markets eventually will grasp.

Consumers, the mainspring of the U.S. economy, will see the cash from government stimulus slip through their fingers but will still face very ugly personal balance sheets and a brutal job market. Their party is not going to get started again for some time.

And falling interest rates will have a hard time sparking investment by businesses until they become convinced that a recovery in manufacturing will do more than just take inventories from nearly empty to barely stocked.

The basic hope for the U.S. economy, that inventories are being run down so swiftly that a turn in the cycle must come, has been more or less confirmed by recent data.

The ISM manufacturing index advanced to 40.1 in April from 36.3, and especially encouraging is a sustained rebound in new orders, a leading indicator of forward demand, which having been more or less moribund in the early months of the year, now is in a sustained uptrend.

Inventories are still being cut, but this, optimists argue, is setting the stage for a recovery when managers see that their depleted stocks represent the threat of losing out on business.