You may have noticed a relatively new feature on the blog, “Ask Brad” (on the right side of the page). The first question that came in was a good one from Tim Bourdon, who wrote: “You mentioned that we are in better shape now than five years ago, but Europe is still in a much riskier position. If their market falls apart, are we strong enough to withstand that?”

This is a good question because it cuts to the core of how much risk has actually been reduced, post-financial crisis. The real danger, in 2008 and 2009, was that the financial markets around the world would seize up as banks refused to lend to each other. That would have led to a cascading series of defaults as banks, unable to get their money back from where they had lent it, would in turn be unable to pay their creditors. A downward spiral would result, bringing down the whole system. Europe was a key part of this, and it is this risk that I highlighted in my earlier post.

To the surprise of many, the Federal Reserve decided yesterday to continue its stimulus program at the current levels, buying $85 billion of Treasury and mortgage-backed bonds per month. Not only did it opt to continue buying at current levels, but Chairman Bernanke repeatedly went out of his way to note, in the press conference afterward, that the Fed reserves the right to continue stimulus, no matter what the various metrics it had previously used as targets do. He seemed to be walking back much of the guidance he had previously provided, trying to make the Fed harder for the market to predict. With this action, he succeeded.

Yesterday’s post about Tesla and the valuation of its stock prompted some second thoughts after I sent it off, particularly the offhand mention of déjà vu. I stand by the conclusion that Tesla’s stock is probably overvalued, but I think it’s worth spending some more time talking about the company as a bellwether for very positive changes in the U.S. economy. What Tesla means extends well beyond whether the company makes it or not.

Let’s set the wayback machine to the dot-com boom. I remember it well, as I was running a start-up in Seattle at the time, among other things. The world looked like it was changing for the better; the new economy was going to make us all rich. People were going to play, shop, and communicate online.

My wife, Nora, is a gadget freak. She had (and used) a PalmPilot. She is all over her iPhone. She used her MacBook Air laptop so much and so effectively that I ended up getting one as well. She has a TDI Clean Diesel VW and optimizes her mileage with the way she drives.

The big news this weekend was the dog that did not bark: Larry Summers withdrew his name from consideration for chairman of the Federal Reserve. There are headlines on this in both the New York Times and the Wall Street Journal, among others, and it was a lead question I discussed on CNBC this morning.

Which, of course, makes the average person ask, “So what?” Why do I care that an economics professor and former government official isn’t going to apply for a job? How does this affect my life?

A good question, and the short answer is interest rates. The longer answer is that it affects how much you pay to buy a house or a car, and how many jobs are created, as well as many other aspects of your daily economic life.

Of the candidates for the chairmanship of the Fed, Larry Summers would have injected the most uncertainty into the system. As a former Treasury Secretary and academic superstar, he unquestionably has the firepower to do the job, but there were questions about his ability to work well within the system. As a Federal Reserve outsider, he lacked the connections a long-term internal candidate would have, and it wasn’t clear that he could work effectively with people who disagreed with him.

His policy positions were also a key issue, with his work on Wall Street and positions on deregulation when he was Treasury Secretary prompting key Senate Democrats to announce they wouldn’t vote for him. Ultimately, it seems that opposition by the Democrats was what caused him to withdraw.

As I write this, stock futures are up and interest rates are down. On the surface, the market seems to be saying it’s glad Summers withdrew, but I don’t think it’s as simple as that. What the market is really saying is that it’s glad uncertainty has been reduced. As an outsider, Summers would have introduced an element of policy uncertainty about raising rates and reducing stimulus that an internal candidate wouldn’t have.

With Summers out, the most probable contender is internal. Janet Yellen, currently vice chairwoman of the Fed and previously the president of the Federal Reserve Bank of San Francisco, is a long-term Fed insider. As one of the Fed members perceived as most “dovish” on inflation—that is, one of the most tolerant of allowing inflation to increase—she’s thought to be most likely to continue the current policies and to leave stimulus measures in place for the longest. With its reaction, the market is saying that Yellen is a safe choice who’s unlikely to rock the boat, and who will continue the current policies, which the market is used to.

I’m not sure that’s the case, longer term, although I think the perception is probably correct in the short run. Yellen is perceived as dovish, and that has been true, but her policy preferences have been based on her prescient views on the weakness of the economy. She was one of the first senior Fed officials to recognize the pending housing crisis and was also way ahead of the curve on the slowness of the current recovery. I think it’s fair to say that her policy prescriptions, thought dovish at the time, have in fact been right on. When the recovery starts to gear up, I suspect she might be equally prescient in recognizing, and responding, to that.

She is not, however, the only candidate. Two other names have been floated: Donald Kohn, a former Federal Reserve vice chairman, and Timothy Geithner. Both have extensive central bank experience and excellent credentials, and both would be good candidates. As with Summers, however, they would introduce more uncertainty into the system merely by virtue of not being there right now, possibly driving rates up again as the market tries to assess what their candidacy would bring.

The interest rate and stock price reaction may be short lived, as other factors are certainly in play, with Syria being a key one. I also believe that the decline in rates is due, at least in part, to the market getting better at price discovery in the face of the impending taper in Federal Reserve stimulus to the bond market. Nonetheless, the fact that something like this can move rates and markets highlights the continuing importance of government actions to the economy.

I hope that the White House acts as quickly as possible to finalize its candidate, to remove at least that section of uncertainty from the market. And, once that candidate assumes the chairmanship, I hope the Fed also acts to remove itself from the economy as quickly as possible.

Today is Friday the 13th, an apt day, perhaps, to consider the five-year anniversary of the collapse of Lehman Brothers, the event that touched off the most recent financial crisis.

This is the third installment in a series on alternative asset classes and your portfolio. The first covered strategies that use liquid underlying assets like stocks and bonds, which are freely tradable. Yesterday, we talked about how illiquid asset classes can also fit into a portfolio, with some examples, but didn’t really delve into details. Today, I want to discuss real estate as an example of an asset class that can be used in both liquid and illiquid forms.

The liquid form is known as a real estate investment trust, or REIT for short. REITs are publicly traded and are essentially stocks in every way except for the underlying asset, which is a portfolio of commercial real estate buildings, mortgages, or both. Investopedia offers a pretty good definition of REITs.

Following on yesterday’s post, we’ll continue looking at various types of alternative strategies that you might consider using in your portfolio. Since “alternative” covers a multitude of sins, I thought it would be useful to offer a brief overview of some of the strategies that fall under that umbrella.

Yesterday, we talked about long-only strategies, which we define here at Commonwealth as “core financial strategies,” and compared them with what we consider “alternative financial strategies.” Both use liquid underlying investments—that is, investments that can be freely bought and sold. The liquidity of the underlying investments is one of the principal determinants of whether a strategy is suitable for use in a mutual fund, which is where many of the strategies I discussed are being deployed.

I’m headed down to New York this morning to speak at a conference about alternative investing strategies, and it occurred to me that many investors have heard a great deal about alternatives—and perhaps know some of the fundamentals—but haven’t really looked at the types of strategies involved, why they might work, and how they are supposed to add value. Today, I want to focus on strategies that use liquid underlying investments (that is, investments that can be easily bought and sold), as these are the strategies that most investors will run into.

Long-only strategies
This type of strategy isn’t an alternative, but rather the baseline against which alternatives are judged. The idea here is to buy things—stocks or bonds—that will go up in price. Success depends to some extent on the manager’s ability to identify undervalued things to buy, but also to a great extent on how the market as a whole does. Returns don’t come only from price appreciation—coupon payments or dividends also contribute—but the price has to appreciate as well.

My expectation, moving into September, was that all the economic issues that had been pretty much left alone during the summer would resurface. The debt ceiling, the situation in Europe, China—all would move back to the front pages.

Boy, was I wrong. Looking at today’s papers, I find no stories about economic problems on the front pages—none. The lead story is Syria, which makes sense. There’s also a story, in both the New York Times and the Wall Street Journal, with a retrospective of the financial crisis. Old news.