Adaptation and Healing

July 31, 2012

The papers are rather quiet again this morning, which is a good thing. Looking through, I see considerable coverage of ongoing problems: the Financial Times (FT) has “HSBC sets aside $2 billion to cover fines” on page 1, and the Wall Street Journal (WSJ) has “States’ Hidden Jobless Woes” on page A4, “Crisis Saps Euro-Zone Confidence” on page A8, and “A War Footing in the South China Sea” on page A13.

There are also more encouraging articles, though, which have been unusual to find for the past couple of years. I made a point this morning on the CIO panel at the Financial Advisor conference that Europe has adapted to the crisis and is developing tools to make this a more chronic affliction than an acute one—arthritis as opposed to heart attacks. The U.S. has done the same thing, and as the crisis normalizes around the world, we are starting to see signs of healing.

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The Fourth Turning: A Book Review

July 30, 2012

I do not normally read, much less review, books that self-characterize as prophecy. Most such books, especially those written more than 10 years ago, are kindly described as being of historical interest only. To find one that actually got quite a number of things right—both in specific types of events and time frame—is therefore pretty interesting.

It gets even more interesting when the book’s next set of predictions is not only scary, but also in line with its earlier forecasts that proved largely correct.

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Let the Games Begin!

July 30, 2012

I am at the Financial Advisor magazine Innovative Alternative Strategies symposium today and tomorrow, where I will be sitting on the Chief Investment Officer panel. I will therefore be spending most of the day in sessions that I will talk about in later posts. That, combined with a relatively slow weekend in the news, makes this post a bit shorter than usual.

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Super Mario to the Rescue

July 27, 2012

Two lead financial and economic stories yesterday. First, the markets melted up on the announcement by Mario Draghi, head of the European Central Bank, that policy makers would do whatever was necessary to save the euro. The news hit the front page of the Financial Times (FT) with “Draghi triggers rally with bonds talk,” the front page of the Wall Street Journal (WSJ) with “A Pledge to Save the Euro,” and the front page of the New York Times (NYT) business section with “Stocks Soar After Pledge to Support the Euro Zone.” All good, except that we have seen this movie before:

Scene 1: European official pledges support, assures markets that everything is under control.
Scene 2: Markets react positively.
Scene 3: Everyone thinks about it some more.
Scene 4: Markets drop.

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Nixon Goes to China, Weill Calls for Breakup of Big Banks

July 26, 2012

This will be a brief update because I am on the last leg of the Commonwealth Live! road show. I was delayed in posting earlier this week because of travel, and I figure it is probably better to get a briefer posting up in real time rather than a longer one the next day. Let me know if you agree or disagree.

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Where We Are: Economics and Politics

July 26, 2012

Watch An Economic Update

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Yesterday’s News: Here Comes the Cavalry?

July 25, 2012

Nothing particularly new this morning. The meta-story about the Federal Reserve (Fed) getting closer to more stimulus shows up on page A1 of the New York Times (NYT) with “Fed Leaning Closer to New Stimulus if No Growth is Seen” and on page A1 of the Wall Street Journal (WSJ) with “Fed Moves Closer to Action.” The articles seem to deal mostly with what the Fed could do, in a tone that suggests that this is all speculation. Interesting that it shows up in both papers in similar ways. This is probably a leading indicator of future policy, but it’s not hard news as yet.

Europe continues to simmer, although the Europeans themselves don’t seem to be all that worried. The Financial Times (FT) has two articles, “Brussels patient despite Spain’s pressures” and “ECB stands firm on Spain’s pleas,” that talk about how European officials are not planning further action at this point—and are even going on summer vacation. This insouciance would be reassuring, maybe, if it weren’t contradicted by other articles from the FT like “Rome places spending controls on Sicily” and “German private sector woes mount” and by articles from the WSJ such as “Downturn Deepens in Euro-Zone Economy” and “European Crisis Seen Spreading to Russia,” both from page A8. The Europeans still don’t seem to get it, which is mind-boggling.

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Yesterday’s News: The Pain in Spain

July 24, 2012

Two big themes in the papers today—Europe’s continuing weakness and China’s growing assertiveness in the world.

Europe first. Spain is the big news, with yields rising even higher into unsustainable territory, driven by the regions, as I discussed yesterday. The Financial Times (FT) leads on page 1 with “Spain costs stoke bailout fears” and follows on page 4 with “Madrid in duel with regions for aid.” Spain will end up in a bailout, probably pretty shortly, and, as the fourth largest economy in Europe, this is going to strain the system—maybe to the breaking point.

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Yesterday’s News: Things Fall Apart

July 23, 2012

There were no significant single financial events over the weekend, but there was continued fallout. The Financial Times (FT) led with “Deteriorating outlook drives Spain’s borrowing costs near euro-era highs.” Despite the bailout, bond yields are well above 7 percent—an unsustainable level—and appear likely to stay that way, according to the story on page B16 in the Wall Street Journal (WSJ), “Bailing on Spain’s Bailout.” Greece is also back in the news, on page 3 of the FT with “ECB raises pressure on Athens over debt collateral” and on page A8 of the WSJ with “ECB Adds to Pressure on Greece.” The European story is not over yet, and it may erupt back into the headlines in short order.

The U.S. picture in the press is a bit more mixed. The WSJ ran “Unemployment Rises in Six of 10 Battleground States” on page A3 on Saturday and “Price Check: Drought May Hit Grocery Tab” on page B1, but on Monday, page B1 had “As Homes Go, So Do Pickups,” which pointed out a recovery in truck sales and home sales. The weight of the coverage is still negative—note “Bleak jobs outlook raises heat on the Fed” on page 1 of Monday’s FT—but some nuance is creeping into coverage of the U.S. Maybe it is a leading indicator.

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On China, by Henry Kissinger—A Book Review

July 20, 2012

One of my newly adopted habits, as I discussed in my “Good Habits” post a few days ago, is to read a chapter a day from a book that covers something I want to know more about. Given the major role China plays in how the world is evolving, I had become fairly current on the Chinese economy, but I had no in-depth knowledge of the country itself.

I still don’t, really. What I do have is a much better sense of the political and historical context in which China makes decisions. I would describe Henry Kissinger’s On China as applied history—history applied to an understanding of how a country is likely to act in the future . . . and why. In that sense, it succeeds well.

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Another Slow Day

July 20, 2012

The papers this morning really only have two stories in common. The first is the U.S. drought and its effect on food prices; it’s covered on page 1 of the Financial Times (FT) in “U.S. Drought Triggers World Food Crisis Alert” and on page A1 (picture) and A11 of the New York Times (NYT) with “Widespread Drought is Likely to Worsen.” The FT compares the situation to 2008, when price peaks set off riots in 30 countries, noting that corn and soya prices are above the 2007–2008 levels and that wheat is up more than 50 percent in five weeks. The NYT reports that this is the most widespread drought in more than a half century; one-third of the nation’s counties have been declared federal disaster areas because of the drought, covering more than half of the continental U.S.

This means food prices will be increasing around the world—an annoyance in the U.S. but a critical problem in poorer countries where food is a significant part of the total budget for most families. We can expect to see bumps in inflation rates around the world, which may present a particular problem for China. One more story to keep an eye on over the next couple of months.

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Yesterday’s News: The Sausage Factory

July 19, 2012

I went looking for the actual sausage factory quotation from Otto von Bismarck, but apparently he was not the person who originally said it, and even the misattributed versions don’t say exactly what I want to say. So let’s take a big step down from Otto to the Urban Dictionary for a definition of a sausage factory.

“An unpleasant process, especially one that is hidden from public view, that is used to produce a widely consumed product: lots of people like sausage, but few would enjoy watching leftover animal parts ground up to make it.”

This is the theme of the news today. The ultimate goal, of course, is fiscal stability and economic recovery, but getting there is proving to be tough. Government is getting hit in many ways. From the Wall Street Journal (WSJ), we have “Post Office Might Miss Retirees’ Payment” on page A2 and “House Votes to Require Detailing of Budget Cuts,” while the New York Times (NYT) has “Years of Unraveling, Then Bankruptcy for a City” on the front page, as well as “South Carolina Governor’s Budget Ax is Blunted by Legislature,” “Detroit Mayor Confirms Cuts to Workers’ Pay and Benefits,” and “Maine Debate Hints at Rift on Medicaid After Ruling.” These headlines concern all levels of government—federal, state, and municipal—and both major parties, as well as both spending increases and spending cuts. The one theme is that limitations on available resources are now hitting.

Businesses are facing the same types of constraints. Some are facing them more or less voluntarily, as in “Big Banks Prepare Another Round of Cuts” from C1 in the NYT, and some involuntarily, as in “Four Banks Targeted in Euribor Probe” from page 1 of the Financial Times (FT) and “In Its First Action, Consumer Bureau Takes Aim at Capital One” from page B1 of the WSJ. Some are starting to fight against particular problems—see “Utilities Fear Approach of Fiscal Cliff” from page 5 of the FT, which describes how utilities and other dividend-paying companies are planning to fight the pending increase in dividend taxes from 15 percent to more than 43 percent.

Finally, individuals are facing the same problems, both at high levels, as in “Economic Fears Hurting Obama, Poll Indicates” from the front page of the NYT,and at middle class levels, as in “Uncomfortable Accounting: Retirees Wrestle with a Pension Buyout from GM.”

In the absence of breaking news, the consistent story here is that choices are being made across the board about how to raise more and spend less, and it isn’t pretty. But the factory has to keep rolling, so expect to see a lot more of this going forward.

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Yesterday's News: Circular Firing Squads and Changing Times

July 18, 2012

I have mentioned a couple of times in the past few days that I think regulators and banks will be scrambling to deal with the LIBOR scandal. Said scramble seems to have started.

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Yesterday’s News

July 17, 2012

After a tough weekend and Monday for finance, we have a slow day. There are no articles of particularly new financial or economic interest on any of the front pages—nice to see that for a change.

There are a couple of themes though. In the business section of the New York Times (NYT), three articles highlight conflicts between regulators and financial companies. On the front page are “British Bank Fighting Bid for Data in Rate Case,” which is about the LIBOR scandal, and “Regulators and HSBC Are Faulted by Senate,” which discusses the money laundering scandal. On page 3 is “U. S. Consumer Bureau to Oversee Companies That Handle Credit Reports.” On page C1 of the Wall Street Journal (WSJ), you’ll see “Senate Probe Faults HSBC” and “Banker Accounts on LIBOR Conflict.” And on its front page, the Financial Times (FT) has “Regulator hits out at Diamond over Libor”—but that’s not really new.

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Yesterday’s News

July 16, 2012

For both the weekend and this morning, the headlines are uniformly anti-financial. Let’s take a look at the front pages:

Financial Times

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What Can Go Wrong

July 13, 2012

A couple of days ago, at the end of a post on reasons for optimism regarding the economy, I promised that the following day we would discuss what could go wrong. And of course, something did go wrong—I didn’t discuss it. In any event, Friday the 13th just seemed like the right time to discuss the downside—so here we are.

Uncertainty continues

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Friday the 13th

July 12, 2012

It’s Friday the 13th, widely considered a bad-luck day, and if the Financial Times (FT) lead—which states that banks face a $22 billion bill for LIBOR-related misdeeds—is correct, it certainly is bad luck for them. U.S. regulators are trying to get their side of the LIBOR story out, with reports in the business section of the New York Times (NYT) and on page C3 of the Wall Street Journal (WSJ) that Tim Geithner, then-president of the New York Fed, is said to have noted problems with the LIBOR rate-setting process and attempted to correct them. Apparently, the problems were not corrected, as we are finding out, but the Fed wants us to know that at least Geithner tried. The story just keeps getting more interesting by the day.

Other than that, economic reporting is actually rather upbeat for a change. Page 1 of the NYT reports that economists see signs of a pick-up. Not a fast pick-up, as the article notes, but renewed growth in the second half of the year. On page 4 of the FT, an optimistic take on China’s growth is reported, and on page 3, Ireland seems to be on track with its bailout requirements. Finally, the first page of the NYT business section reports that California municipal bankruptcies are not seen as a trend, despite three in the past couple of weeks. Good to know.

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Yesterday’s News

July 12, 2012

Another day without front-page crisis news—a good thing. The New York Times (NYT) did not have any economic or financial articles of note in the front section, while the lead articles in the Wall Street Journal (WSJ) had the Fed weighing more stimulus—old news. The Financial Times (FT) noted the yield record for U.S. Treasury sales—1.459 percent for the 10-year, the lowest ever. Kind of surprising this did not make either the WSJ or NYT.

The economic slowdown implied by record-low U.S. Treasury yields was consistent with the stories deeper in the papers. The NYT led the business section with the pending year-end fiscal cliff and the effect on the economy of related business uncertainty; reported to have gone up by more than half since April, business uncertainty could knock up to 0.5 percent off of growth this year. The effect of the disquiet over the lifting of the debt ceiling last year was given as an example of how uncertainty can postpone business decisions, including hiring. The NYT also had an article on how the Fed is divided over additional stimulus, creating even more uncertainty.

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7/12/12- Good Habits

July 12, 2012

This post will be a bit different—I am writing it on the road, so I don’t have access to many of my usual resources and tools. I am therefore going to take the chance to talk about something nonquantitative that I find helpful in both an investment and a noninvestment context.

One of the significant perks of my position at Commonwealth is the ability to talk with a wide range of experts in a wide range of fields. A couple of years ago, at our Chairman’s Retreat, we had a speaker who was an expert in the field of happiness.

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Yesterday’s News

July 11, 2012

Looking at the headlines, again it’s more evolution than revolution, continuing with ongoing themes. Spain continues to be a topic of interest, with the Wall Street Journal (WSJ) running an article on page A7 about how Spain will have to cede bank control to European regulators. The Financial Times has a front-page article on how Spain is stepping up austerity, while the New York Times (NYT) has an article in the business section on how, now that Spain has negotiated easier terms, it must meet them.

The LIBOR rigging scandal remains a hot topic, with a shift in focus. Where earlier discussion was on what happened and who was to blame, now the articles focus on who will be paying for it. The NYT has a front-page article on how the scandal has instigated a scramble for damages, and the WSJ has an article on page C2 about U.S. lawmakers joining the LIBOR probe. This will be a much bigger topic in days to come, as it has been described as banking’s “tobacco moment,” with prospective liabilities that could go into the billions.

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Another Reason for Sustained Recovery

July 11, 2012

We talked yesterday about housing. We discussed how it is bottoming, how it is poised—at some point—to start a recovery, and how that is a very good thing for the economy. It’s good for several reasons—largely because of the employment the sector generates and the multiplier effects it has on other areas of the economy.

Housing can be considered a durable good. Because it is a long-term asset that is purchased with financing, it reflects, to some extent, the buyer’s vision of the future. The stabilization and incipient improvement of this sector is also a sign that the U.S. population has started to recover psychologically from the crisis, which is an underappreciated element of what has to happen before recovery really kicks in.

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Yesterday's News

July 10, 2012

We have another day without a single overarching theme in the newspapers. The U.S. papers, the Wall Street Journal (WSJ) and the New York Times (NYT), lead with domestic politics. The WSJ hits on union political spending and on the beginnings of the battle over the extension of the Bush tax cuts. The NYT looks at fundraising by the presidential campaigns—Romney is ahead—and the evolving political incentives on the tax-cut extensions and health care. This is a pretty interesting article, as it highlights the evolution of the incentives we discussed in an earlier post in the context of intra-party politics. The bright line for a cutoff of $250,000 in income for the tax-cut extension, as opposed to $1 million, actually appears to run through the Democratic Party to a greater extent than I would have expected. Likewise, there appears to be some evolving Republican support for parts of the health care bill. These intra-party arguments will only get more complicated, particularly on the health care side, as voters start to process what they will now be losing, either on the expiration of the tax cuts or on a repeal of the health care bill. Don’t expect simple party line votes on either—that may be what we get, but it really is not as simple as that.

The Financial Times (FT) focused on Europe and China again. Key issues include an accelerated plan to aid Spanish banks, which also makes the “What’s News” column in the WSJ and the business section of the NYT. Overall, this is probably a good thing, but it does not seem to have impressed the markets to any degree. The LIBOR fixing scandal is also highlighted in the FT; the problem continues to expand to other banks besides Barclays. and we can expect to be hearing a lot more about this going forward.

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Economic Update

July 10, 2012

Just finished giving a talk on the economy at Commonwealth Live!, so thought that might be a good thing to share for general comment.

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Yesterday's News

July 9, 2012

There is nothing particularly new today—mostly commentary of a follow-up nature on trends already in place. The common focuses are China and Europe.

For China, the New York Times (NYT) has an article on the front page of the business section about the premier’s call to spur the economy. Given the recent policy actions that China has already taken, this seems to be confirmation that weakness is continuing. China has taken a big hit from weakening demand in both Europe and the U.S. The situation may be getting worse for them, with a front-page article in the Financial Times (FT) about a pending China/EU trade dispute. As I discussed in an earlier blog post, protectionism is on the rise, and this is one of the latest manifestations. Rounding out coverage, the Wall Street Journal (WSJ) had an article on page A6 about China’s growth challenge. China is becoming a larger issue, as the “certainty” of a soft landing seems to be getting much less certain.

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Taking a Ferrari into the Back Country

July 9, 2012

A couple of days ago, I wrote about how financial factors and decision models are receding in importance compared with other, noneconomic factors. While there are examples around the world that illustrate the process, it still is not necessarily apparent, given the constant financial headlines, whether and why this should be the case. I think it is helpful to take a look at the same phenomenon from another angle to show why this change has to happen and why, in the end, it will be a good thing.

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Market Update for the Quarter Ending June 30, 2012

July 6, 2012

A strong month at the end but losses for the quarter

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Market Thoughts Video for July 2012

July 5, 2012

[youtube http://www.youtube.com/watch?v=pOXsPZnx3FA]

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7/5/12 - Yesterday’s News – Quickly

July 5, 2012

This will be a quick post because I am actually on vacation today and for the rest of the week, but am still reading the papers and thought I would write a quick note.

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Independence Day

July 3, 2012

On an industry level, and certainly on a personal level, a different article caught my eye in today’s New York Times. On the front page, J.P. Morgan was called out for favoring its own mutual funds in its advisory business. The basic idea is that its brokers and advisors were encouraged to sell proprietary funds over funds from other companies that might have been less expensive or better performing.

One of the key advantages of an independent agent for consumers is the lack of institutional incentives to select one service provider over another. In a past life, I had a mortgage brokerage company, and we dealt with a wide range of lenders and investors. Often, when we talked with prospects, they would ask what we could do that their bank could not. “Maybe nothing,” was our honest answer. “But, when you buy a car, do you look only at one dealer and take what it says as the best model and price?” The answer was usually “no”—and our point was made.

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Yesterday’s News

July 2, 2012

One of the things I do every morning is read at least three papers, the New York Times, the Financial Times (FT), and the Wall Street Journal (WSJ). I like to see what is going on—or, at least, what the paper’s editors think is going on. Even in our 24-hour Web world, I still think there is value in looking at what the editors and reporters think is worth putting on paper. With that said, I thought I would try a regular posting called Yesterday’s News that sorts among those papers to identify what is most interesting and important. I will be doing this most days.

The lead economic and business story today, from both the WSJ and FT, was the factory output report. U.S. industrial production, as shown in the Institute of Supply Management (ISM) report, was at the lowest level for three years and had the first actual decline for three years. The figure dropped from 53.5 to 49.7, which was well below expectations. Any level below 50 means a decline, and industrial production is now at 2009 levels.

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Incentives and Politics

July 2, 2012

I am still digging into the Supreme Court’s decision not to strike down Obamacare, and have not yet fully digested either the economic implications or what we can reasonably expect to happen in the “unintended consequences” category, which I always find the most interesting part of an analysis. While I table discussion of the act itself, though, I think it’s worth mentioning the ways that the implementation will create new political incentives and how that will play out in the political process.

First of all, the fact that the bill is now considered largely constitutional lays the groundwork for implementation. I suspect that many states controlled by Democrats will move as quickly as possible to expand the health insurance rolls while states controlled by Republicans will do the opposite, and for the same reason: once the uninsured get health insurance, they have an enormous incentive to make sure, through political action, that it does not get taken away. If estimates are correct and 30 million people will get insurance, then there are millions of votes which, through self-interest, now have an incentive to vote for the Democrats.

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