Why Diversification Isn't Working

Joseph Calhoun - November 26, 2013

That's the question posed by Howard Gold in this MarketWatch article:

Don't put all your eggs in one basket.

The truth behind that cliché is that some investments zig when others zag, so by diversifying you reduce your potential losses and lower your risk. That's why Nobel Prize-winning economist Harry Markowitz called diversification the only free lunch. read more »

Are Americans Becoming Jerks?

Joseph Calhoun - November 20, 2013

Are Americans becoming jerks? That's the conclusion of one Christopher Flavelle in this Bloomberg piece:

New Gallup poll numbers show Americans increasingly dispute the idea that government has a responsibility to make sure everybody can get health insurance. It's tempting to see that as an indictment against Obamacare, but it might just mean more Americans are becoming jerks.Starting in 2007, the portion of Americans who said the government should guarantee every person enough to eat and a place to sleep started falling, from 69 percent to 59 percent last year. People who said the government should help the needy, even if it means going deeper into debt, fell from 54 percent to 43 percent over the same period.

... read more »

How To Really Cut Finance Down To Size

Joseph Calhoun - November 19, 2013

I posted a link earlier to an article by Matt Yglesias, Cutting Finance Down To Size, which references an article by John Quiggin who argues that Wall Street Isn't Worth It. Yglesias uses this quote as a lead in:

The only remaining option is to separate these markets entirely from the socially useful parts of the financial system, then let them fail. Publicly guaranteed banks should be banned from engaging in all but the most basic financial transactions, such as issuing loans and bonds and accepting deposits. In particular, banks should be prohibited from doing any business with institutions engaged in speculative finance such as trade in derivatives. Such institutions should be required to raise all their funds directly from investors, on a "buyer beware" basis, and should never be bailed out, directly or indirectly, when they get into trouble.

Why did Yglesias choose this passage to cite? He skips the most interesting part of Quiggin's article. Quiggin, quite elegantly connects the dots between the end of Bretton Woods and the rise of finance: read more »

Department Of Duh

Joseph Calhoun - October 29, 2013

Bruce Bartlett reports on a new study of the corporate income tax:

While economists still believe that the bulk of corporate income taxes is paid by the owners of capital, in recent years they have come to believe that workers ultimately pay much of the tax in the form of lower wages. This results from lower capital investment due to a higher cost of capital, which reduces productivity and hence wages, and because capital investment moves to other countries where corporate income taxes are lower.

I think this falls in the No Shit Sherlock category but I guess some people out there still think there is some evil entity known as a corporation from which the tax is extracted. Corporate taxes can only come from one of three groups of people: Shareholders, customers or workers. That's it. We know management will find a way to shift it off of shareholders (who will have to pay taxes on their dividends in any case). And we know that in a globalized market where every country on the planet save Japan has a lower corporate tax rate, that it won't be customers. That leaves workers to pick up the tab. Duh. read more »

See You Again In Three Months

Joseph Calhoun - October 17, 2013

So it appears a deal has been brokered to end the government shutdown and raise the debt ceiling. This latest patch will only get us to mid January though and if you think the President and House Republicans are going to arrive at a grand bargain that sets fiscal policy on a sane path in that time, I've got a bridge for sale you might be interested in. 

The stock market loved the deal although it is hard to see why. The only thing I can come up with is that three more months of budget wrangling means QE goes on and in the math of Wall Street that means higher stock prices. QE and more budget negotiations won't produce more economic growth or better earnings but for some reason the stock jocks have decided that QE will keep stocks going up for as long as it persists. So far they've been right but I do wonder at what point the actual fundamentals will have an impact. And on that front, I don't see much good coming down the pike.

The problems the US economy faces are not ones that monetary policy can heal. Monetary policy cannot turn President Obama's sow's ear economic policies into a silk purse. To be fair, the Republicans don't have much of a plan either, preferring to spend their time demonizing the President's health care plan which appears to be imploding on its own anyway.  read more »

No Strategy Works All The Time

David Merkel - September 23, 2013

One of the constants in investing is that investment theories are disbelieved, prosper, bloom, overshoot, die, and repeat. So is the only constant change? That's not my view.

There are valid theories on investing, and they work on average. If you pursue them consistently, you will do well. If you pursue them after failure, you can do better still.

How many times have you seen articles on investing entitled "The Death of ____." (fill in the blank) Strategies trend. There is an underlying kernel of validity; it makes economic sense, and has worked in the past. But any strategy can be overplayed, even my favorite strategy, value investing. My style of value investing tries to adjust for that, but it is not perfect there. (And to tell the truth, September has been a bad month for me, though 2013 has been a very good year.) read more »

Dividends Say US Out Of Recession

Ironman - September 12, 2013

According to the number of publicly-traded U.S. companies announcing cuts to their dividends, as of August 2013, the private sector of the U.S. economy has now fully exited the period of microrecession that it first entered in July 2012.

This new data confirms our call last month that the U.S. economy was exiting the recessionary conditions that had bogged it down since the third quarter of 2012.

Not uncoincidentally, this period of time also coincides with the Fed's latest quantitative easing programs. If not for the Fed's QE efforts, the U.S. economy would have experienced a full-fledged recession, rather than the more limited microrecession that it did. read more »

The Magic Of Shrinking The Slowest

Jeffrey Snider - September 10, 2013

The Japanese revised GDP accounts for the 2013 4-6 period has gone pretty much the way of the export-import data. It reveals not only the lack of depth in understanding the numbers on the part of the media (and most economists), it is actually a useful example of some of the primary flaws in the expenditure approach itself.

The Wall Street Journal outlined the mainstream view,

"Following a revised solid 4.1% rise in the January-March quarter, the second-quarter GDP data make it clear that Japan's economy is now leading global growth, outshining the U.S. and the euro zone, picking up the slack left by slowing emerging economies. read more »

22 of 32 Economists Are Wrong

Joseph Calhoun - September 5, 2013

Bloomberg conducted a survey recently about whether Shinzo Abe should postpone the planned sales tax increase and what impact it would have if he did. The results?

Japanese shares could plunge 10 percent or more if Prime Minister Shinzo Abe fails to carry through on a plan to raise a sales tax in April.

Postponing an increase would have a large and negative impact on Japan's financial markets, said 22 of 32 economists in a Bloomberg News survey. JPMorgan Chase & Co. Senior Economist Masamichi Adachi said a delay could push stocks down 10 percent, wiping out $418 billion in market capitalization, while UBS AG Economist Daiju Aoki predicted a sell-off as steep as 12 percent in the Nikkei 225 Stock Average. read more »

S&P 500: Schrodinger's Cat 3/4 Dead

Ironman - September 4, 2013

Last week, the stock market gave 52% odds that the Fed would commit to tapering off its purchases of U.S. government-issued securities by the end of the third quarter of 2013. In just a week's time, the probability of that happening have increased to be somewhere between 62% and 78%.

We know that's the case because that's how much the gap between the expectations for dividends associated with the first quarter of 2014, the point in the future where investors had fully fixed their forward-looking focus as recently as mid-June 2013, and the expectations associated with the third quarter of 2013, which is where investors expecting an earlier end to the Fed's QE program would focus, has closed.

The reason we're now indicating a range of potential odds for this likelihood is due to the different information being communicated by our primary sources of data for the dividends that will be paid out in future quarters. read more »

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