Bond and Gold Bubbles

David Malpass writes in WSJ today about the broad bond and gold bubbles. Think about this, Treasuries had the best month (of price gains-meaning yields falling) in over 3 years in the very month U.S. debt was downgraded. As Malpass points out, both gold and bonds have a "fear factor" component and this may account for a large portion of the current price movement.

An Unusual Economy?

Professor Sowell dispenses some wisdom on the economy and uncertainty. He quite correctly notes that the unknown costs of Obamacare are already sending chilling signals to businesses otherwise ready to hire.

State Finances

Barron's has a great cover article with a useful chart comparing the AAA and AA+ state finances. S.C. has the 5th highest Federal spending as a % of GDP at 24.9%. The range is 10.6% (Delaware) to 29.8% (Virginia). S.C. also is in the top handful in Medicaid spending as a % of outlays with 22%. The range here is even wider with Wyoming @ 7% and N.C. with 37%!

The Coming Fannie/Freddie Boondoggle

A brief, concise summary of a really bad idea . Maybe it won't actually happen but several trial balloons were sent last week so it looks likely. More intervention won't help housing finance.

Unintended Consequences (again)

Ezra Klein has an insightful piece about state Medicare cost containment . Just because we think bidding contracts saves money does not make it so.

A Formula for Growth

A sensible article on how to (partially) grow our way out of the fiscal mess in the U.S. Will take an about face in direction but he makes a plausible case. Good reading.

The Rescue that Missed Main Street

Gretchen Morgenson has a very good article in NYT today on the some of the slimy details of the 2008 crisis-era bailouts. The title aptly describes what follows per the new disclosures made public just last week. Late in the article she quotes Professor Edward Kane who says "bailing out firms indiscriminately hampered rather than promoted the economic recovery". That about sums it up.

The Broken Window Fallacy

Professor Art Carden has a great article simply explaining the Broken Window Fallacy . We will likely hear many who adhere to this fallacy spout their inaccurate conclusions in the days ahead as we enter the post Hurricane Irene period. 19th century philosopher/economics writer Frederic Bastiat wrote of this and the unintended consequences that follow this line of thinking.

The Power of Perspective

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Higher Inflation the Answer?

A good straightforward articleon why inflation won't cure our present problems. As he states, lack of confidence and uncertainty about government policies are the primary culprit.

Big Banks Undercapitalized?

So says seasoned observer Barry Ritholtz in this piece. He may well be right. The point he makes toward the end is particularly good. Banks may skate by for now but are they strong enough for the next downturn?

Sounds about Right

The markets may indeed be looking for too much from the Federal Reserve Chairman . No one can engineer the economy or the markets anymore-they simply are too large and too far flung. We should not expect this but I suspect many are hoping for another "sugar high". This article helps explain the issue.

3 Myths about Capitalism

Professor Jeff Miron of Harvard has an excellent 3 minute video on Capitalism. He explains what capitalism does (benefits consumers and rewards those who are productive) and what it doesn't do . His final point about capitalism being blamed for the 2008 financial crisis is worth an extra view. More likely that large subsidized risks created by government were responsible than unbridled capitalism (which as he explains we don't have anyhow given large government interventions ). Very well done indeed.

The VAT-in our future?

The oft mentioned Value Added Tax is the topic of this article today from the WSJ. While the VAT bears similarity to a national sales tax, the latter is a tax on consumption and the former a tax on output. In essence this taxes the producers . The history of the VAT suggests that it starts out as a very small % and increases over time. In most locales it replaces the income tax but we may see a VAT on top of ,not instead of, income tax. As the author indicates, likely a way to fuel ever larger government.

Impediments to Personal Wealth Creation

A very good read on the variety of impediments to creating wealth today. I got a kick out of the first parenthetical one which concerns "misreading" the stock market. We all know (right?) , that the markets cannot be read with any certitude anyway . As a colleague used to say "you have to be in (the market), to be in (to accrue the returns).

Sanguine Housing Stats

This AP piece summarizes a series of lousy housing stats . Through a variety of interventions by the government, housing prices have been artificially propped up and have not been able to find a true bottom. That likely would have occurred by now but the tinkering has prolonged the downward trend.

More on Capital Investment

The mantra about companies unwillingness to invest and hire is now widely accepted but mostly untrue. This is a good article highlighting a handful of recent capital investments and mergers with some dividends thrown in as well. New hiring often is a very late sign of recovery and we probably are not there yet.

A Good Response to Buffett

Billionaire investor Warren Buffett made news last week penning a couple op-ed pieces calling for higher taxes on the wealthy. Today brings an well reasoned response from a former industry titan that likely has paid a handsome sum of taxes over the years. The personal pronoun "my" in the article heading is key- he created the income and it belongs to him first and the government claim for taxes flows from that. This is opposite of the common parlance where the government assumes all resources start out in their pocket .

Buy the Market for "Free"

Professor Jeremy Siegel and Jeremy Schwartz have an outstanding article today in the WSJ . The crux of the article concerns the negative real interest rate issue and how that likely plays out with bonds . This leads to the case for stocks using the dividend yields as a starting point. With dividends providing about the same return as a 10 year Treasury , you can currently buy the future growth and appreciation for "free" . This doesn't happen often.

The New Retirement Plan...Don't Retire

A good summary of an article on retirement planning re-visited. Note that those surveyed estimate a retirement need of $600k (likely far too low) BUT only 30% have more than $100k in retirement savings. Little or no savings= little or no retirement. Amazing how that works. The hyper-damaging fallacy of the huge intra-generational wealth transfer that has largely not happened , was the hoped for retirement plan of many older boomers reaching their mid 60's now.

Student Loans= Huge Economic Drag

There have been a flurry of articles lately on the pernicious growth in student loans. This is a good one from Atlantic . Growing at double digit percentages per year, the aggregate amount will soon top all mortgage and credit card debt combined. Colleges and universities have taken advantage (shall we shall manipulated) of the relative availability of student loan $ and keep pushing costs higher by multiples of the inflation rate. That will likely end soon. Graduates are mostly unemployed or underemployed and are having significant problems paying the out-sized debt. From a larger (macro) economic view this represents a drag on economic growth as household formation , house purchases, car purchases etc. are deferred.

Economics= Natural Law

Steve Moore of the WSJ penned a very good article on Americans and Economics yesterday. He makes some powerful points including how many of the current macroeconomic theories simply defy common sense. I would go further and say they violate natural law. That is, human nature is immutable and you can only manipulate or exploit the natural tendencies for so long.

Investing= Faith

Carl Richards and his Sharpie have done it again. Investing is essentially built on faith . There are no future facts. No one can prove that investing in stocks will work better than not investing in stocks. We only have the substantial weight of history to lead us .

The Truth about Actively Managed Mutual Funds

This is an excellent commentary on an article over the weekend in NYT on the futility of seeking to out-select stocks. Most mutual funds think they can do this but over and over and over it is proven they can't except by luck. Luck isn't predictive- costs are and the costs of active management reduce returns to investors.

Time to Panic? Just the Opposite

Love the title and content of this piece in WSJ today by Dave Kansas. Indeed, while the stock market is about 10% off recent highs, it is about 70% higher than the March 2009 lows. The answer to the constant media admonition of "what should you do today?" is a resounding "the same thing you did yesterday, which is invest for some purpose in the future".

Social Security Birthday

This date in 1935 marks the origin of Social Security. This is a summary of the history. I was interested to learn the first monthly beneficiary paid in $24.75 and received almost $23k during her lifetime. Perhaps that should have been a hint of things to come.

Investor Biases

Another good article in The Motley Fool on 3 of the most prevalent biases impacting many investors today. None of us can control the day to day market movements BUT we CAN control our behavior. How we react (or don't react) to the lemmings falling over one another. More long term strategy- purposeful portfolios and less emphasis on the short term tactics and products pushed by those whose interests often conflict with ours.

Don't Panic Word CLoud

Love this compilation of several advisors' "Don't Panic" letters this week as word clouds. While we are on the topic- there is really no way to model panic since it involves such extreme emotional intensity. As one money manager said earlier, "you need to decide if you are a trader or if you are an investor". Indeed.

Fascilitating Financial Health

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Mr. Markets

A funny and all too true "interview" with Mr. Markets in Forbes. Lots of good there . Enjoy!

What Doesn't Work

Steve Malanga has a good article on our inability to cut anything from the federal budget including programs that clearly don't meet their original objectives. He is an expert primarily on state and local government finance and the same mostly applies to those levels of government as well.

What Now?

Stock markets throughout the world were rocked on Monday, reacting to the downgrade of sovereign debt of the U.S. by Standard and Poors. A step back for a broader perspective seems in order.

First, the downgrade of our debt is a reflection of the disturbing fiscal trends in the U.S. and is not an economic event per se. Second, this is not September 2008. With all our faults, the financial system is stronger now . Third, remember that the U.S. equity market is up almost 70% from the March 2009 low.

We like things to make sense-to square- with our version of reality. Sometimes they don't. No one knows what will happen today or next week. If we are investing for purposes years into the future then we should act accordingly. We are far more concerned with long term financial planning outcomes than short term investment returns.

Markets do what they do...they fluctuate. Sometimes they overshoot but in the end they are driven by the profits and prospects of the underlying companies. The grand majority of firms have beaten their profit estimates recently despite the tepid economic environment. These factors will have far more to do with stock returns next year and the year after that than our present turmoil.

Remain focused on your longer term objectives and less on the minute to minute gyrations of the markets or the political pundits. Thinking that you can get out of the market and then back in at the "right time" is the amplification of our media drenched mindset. Trying to to this is a fools game. Remember, you haven't "lost" anything until and unless you actually sell. If you have been in since the March 09 bottom you have profited nicely. There will be more ahead.

Good Advice From Professor Malkiel

Professor Burton Malkiel wrote a timely piece this weekend on the investor response to the market tumult. He rightly says no one can predict what may happen today or this week but despite the headwinds higher stock prices are likely in the future. Late in the piece he says "no one has ever become rich by being a long term bear on the fortunes of the U.S." Indeed.

Capitalism and the Welfare State

A good perspective from across the pond . Europe has been trying (with little success) for almost 50 years to engineer a giant transfer of wealth . We have been moving in that direction as well and now it has reached a crucial tipping point. The author makes some excellent points and as she says "we can't go on as we were".

Great Chart Tells the Tale

Saw this excellent graph detailing spending as % of GDP. Sometimes pictures (charts/graphs) tell the story better than words. We can either shrink the numerator or grow the denominator.

The Essence of the Problem

A very simple and clear depiction of the recent debt deal. A deal that claims to "cut" but actually increases the debt by $7 trillion over 10 years . No big surprise by the S&P downgrade given the unwillingness of the political class to square their policies with basic economics.

Chill and Be Thankful for Volatility

Good advice from The Motley Fool. After a big down day with wave upon wave of selling it is appropriate to remind ourselves that this very volatility is why the premium long term returns exist.

Good Perspective on Markets

A salient piece for the rough market seas today. He is right- wide majority of firms besting earnings estimates so ultimately that will filter into prices. Investing is by definition different than speculation (which is a very low odds game). Ignore the noise and stay focused on the purpose for the portfolio.

Out Year Fantasies

Bill Gross has some salient thoughts on how to really make progress towards avoiding financial calamity and it has nothing to do with what is taking place in D.C. today. Out year fantasies versus current year realities. The extrapolation of future liabilities is truly staggering.

Compound Interest

Sharpie penmaster Carl Richards has a great visual on the ravaging impact of compound interest in the context of the federal debt as well as our our personal debt. I love the quote late in the piece about interest never sleeping. Debt restrains flexibility on every level. Today is the long awaited day the government hits the debt limit . The hard decisions we are failing to make today will likely be revisited upon us in larger ,more distasteful form in the not too distant future.

Home Ownership Rates

A good break from the debt stuff with a great chart on the decline in home ownership rates since 2004. Shows how difficult it is for government policy to project longer term outcomes.