...which seems like a tautology, of course.
Here we are in an environment with massive corporate earnings, a (still)favorable cost of capital, a humming, vibrant economy (which on a structural level, SarbOx notwhithstanding, is still the most adaptative in the world), and yet there are many prognosticators out there who believe that the current global conditions (massive political instability) will continue AT THE SAME RATE THEY HAVE BEEN DETERIORATING.
"Ceterus Paribus"...but that never happens, does it?
These are the same people who think the housing market will drop by 80%, but will never say the stock market will continue its historically near-certain 10% gain year on year.
It is all so reminiscent of the movie "The Third Man" wher Orson Wells states (I am paraphrasing) that "200 year of constant internecine and intra-country strife produced the rennaiscance...and 200 years of constant peace in Switzerland produced the cookoo clock".
Monday, August 28, 2006
Wednesday, August 23, 2006
Uncertainty, uncertainty, Oh my!!
As I have stated many times on this site, I am bullish on equities for the remainder of the year. We should see continued "volatility" until October, at which point the upward surge should be pronounced.
The usual hackademic suspects have emerged from the bear caves and proclaimed the end of the world. The old "economists have predicted 9 out of the last 5 recessions" comes to mind...
http://tinyurl.com/ef9uf
Stagflation is another meme making the "WHAT IS THE SINGULAR CAUSE OF THE COMING COLLAPSE" rounds.
The usual hackademic suspects have emerged from the bear caves and proclaimed the end of the world. The old "economists have predicted 9 out of the last 5 recessions" comes to mind...
http://tinyurl.com/ef9uf
Stagflation is another meme making the "WHAT IS THE SINGULAR CAUSE OF THE COMING COLLAPSE" rounds.
Monday, July 03, 2006
The gold bugs are back...
...and they still cling on to their precious cherub. A friend emailed me a recent "argument" from a gold bug. Its interesting to note that these arguments of monetary Ragnarok have not changed much since 1973...and if one followed the advice to stay away from the U.S. Dollar (and assets denominated therein), one would have to at least privately fulminate on the massive opportunity cost lost.
Anyway, my response:
Its amusing to see this type of thinking, so ingrained in economic thought. Causalities are NOT transitive nor are they so simplistic. First off, this guy does not understand the dynamics of fiat money, and the fact that the U.S.$$ is the reserve currency of the universe. Foreign goods "financing" us? Rubbish. The opposite of the current account is the capital account, which the world needs to be positive as the U.S. $ denominated assets are the world's chief source of collateral, in addition to serving as the denominating currency of all important commodities.
Furthermore, If one defines inflation as "too much money chasing too few goods, imagine what the inflationary pressures would be like had China, India, et al. NOT provided us with the goods they have over the last decade. The challenge is to match the "real" assets with the growth in currency. If the world switched to gold for its currency, there would be massive deflation. Gold limits human ingeuity, it is indeed a "barbarous relic" as Keynes said - it worked in Agrarian times when humans had limited factors of production, but now, would anyone stil maintain that growth is limited by physical property and/or rents from land???
As Alan Greenspan once said:
"Well, I wouldn't say that the pay-as-you-go benefits are insecure, in the sense that there's nothing to prevent the federal government from creating as much money as it wants and paying it to
somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase."
That is the whole ballgame.
Anyway, my response:
Its amusing to see this type of thinking, so ingrained in economic thought. Causalities are NOT transitive nor are they so simplistic. First off, this guy does not understand the dynamics of fiat money, and the fact that the U.S.$$ is the reserve currency of the universe. Foreign goods "financing" us? Rubbish. The opposite of the current account is the capital account, which the world needs to be positive as the U.S. $ denominated assets are the world's chief source of collateral, in addition to serving as the denominating currency of all important commodities.
Furthermore, If one defines inflation as "too much money chasing too few goods, imagine what the inflationary pressures would be like had China, India, et al. NOT provided us with the goods they have over the last decade. The challenge is to match the "real" assets with the growth in currency. If the world switched to gold for its currency, there would be massive deflation. Gold limits human ingeuity, it is indeed a "barbarous relic" as Keynes said - it worked in Agrarian times when humans had limited factors of production, but now, would anyone stil maintain that growth is limited by physical property and/or rents from land???
As Alan Greenspan once said:
"Well, I wouldn't say that the pay-as-you-go benefits are insecure, in the sense that there's nothing to prevent the federal government from creating as much money as it wants and paying it to
somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase."
That is the whole ballgame.
Thursday, June 15, 2006
You may now release your seatbelts...
An incredible couple of weeks.
As Yoda would say "Much to learn the Fed still has" regarding its ability to jaw-bone (its only real power...the discount rate is not really as important as it once was) and "manage expectations", whatever that means.
The volatility was palpable. On every utterance of BB or one of his merry men (no disrespect to Janice Yellen), the markets would obligingly trail up or down, depending on some form of tea leaf reading concoction of whether or not the remarks were bullish or bearish...and, of course, all the financial publications went along their merry way in reporting direct causalities from a single remark or the rally of a single stock.
The dollar has made some nice gains, much to the chagrin of all the "experts" who so dearly love their graphs and equations that make conclusions based on linear models...this leads to that which leads to the other thing...so much hogwash and one would think someone in those positions would have read Von Mises by now and refused to EVER say the dreaded words "all conditions remaining the same, we should see further declines"
Not to say the skies are blue, as we will likely experience some choppyness...but I expect a safe landing come december. The statistics are good, Liquidity improves, and I have never seen more coordination between the Central Banks of the industrialized nations.
As Yoda would say "Much to learn the Fed still has" regarding its ability to jaw-bone (its only real power...the discount rate is not really as important as it once was) and "manage expectations", whatever that means.
The volatility was palpable. On every utterance of BB or one of his merry men (no disrespect to Janice Yellen), the markets would obligingly trail up or down, depending on some form of tea leaf reading concoction of whether or not the remarks were bullish or bearish...and, of course, all the financial publications went along their merry way in reporting direct causalities from a single remark or the rally of a single stock.
The dollar has made some nice gains, much to the chagrin of all the "experts" who so dearly love their graphs and equations that make conclusions based on linear models...this leads to that which leads to the other thing...so much hogwash and one would think someone in those positions would have read Von Mises by now and refused to EVER say the dreaded words "all conditions remaining the same, we should see further declines"
Not to say the skies are blue, as we will likely experience some choppyness...but I expect a safe landing come december. The statistics are good, Liquidity improves, and I have never seen more coordination between the Central Banks of the industrialized nations.
Tuesday, May 30, 2006
Hark! The cause of all our volatility!
I am always amused by financial columnists who ascribe such iron-clad causality to up or down markets. Today the market (a conglomeration of millions of participants each with variate wants, desires, needs for hedging, etc.) according to the AP was:
"Higher oil prices and sliding consumer confidence sent stocks plunging Tuesday as a weak sales report from Wal-Mart Stores Inc. raised concerns about discretionary spending. The Dow Jones industrial skidded almost 185 points."
"Ex post hoc, ergo propter hoc" can only be repeated so many times...
Anyway, the volatility continues. Hank Paulson today was appointed in what appears to be a blatant attempt to increase "brand U.S.A." and the good old american $. The dollar has been "declining" (against the Euro anyway) which reflects just how bad some think the prospects for U.S. stocks are...but again, it only takes one global scare for the herd to pile into U.S. $ denominated assets...
This "correction" (the dumbest term in finance...do declining prices "correct" a "wrong" market? that would imply knowledge of "true" asset values, which is what the market does continuously anyway. Stupid choice of word.) will last for a bit then I expect the S&P to rebound for the remainder of the year.
Wednesday, May 24, 2006
The short version of Beta...
...being the worst way to measure "risk".
Beta is the standard deviation of returns. Standard deviation requires a distribution to be meaningful. A normal distribution is used. Capital market probability distributions are no-where near "normal" (i.e., mean, mode, median are equal). The crash of 87 was more than 13 standard deviations away from the mean of a normal distribution. The probability of a NINE standard deviation move is .0000000000000000000001049. A 13 standard deviation is three times that size, and I don't want to type in any more zeros. Add to that the fact that volatility is volatile and you have to be VERY careful about making any conclusion or decision based on "beta".
Speaking of volatility, there are academic bubbles right along with market bubbles. The two often develop in parallel. The market goes up for awhile, and the risk managers all start high-fiveing each other while counting their bonuses from their superior performance. They give lectures at Universities to MBA students and give the impression that they have built an iron-clad way to shield themselves (but never their clients!) from any adverse exposure.
It will be interesting to see who are the losers here. I don't anticipate the largest players being hurt...they are too close to the information flow (Goldman Saches fired its technical analysts some time ago...why employ people who analyze price movements ex post when you know the biggest trades ex ante???). I expect some long/short and global macro hedge funds to suffer, along with all the fools who came late to the party.
Beta is the standard deviation of returns. Standard deviation requires a distribution to be meaningful. A normal distribution is used. Capital market probability distributions are no-where near "normal" (i.e., mean, mode, median are equal). The crash of 87 was more than 13 standard deviations away from the mean of a normal distribution. The probability of a NINE standard deviation move is .0000000000000000000001049. A 13 standard deviation is three times that size, and I don't want to type in any more zeros. Add to that the fact that volatility is volatile and you have to be VERY careful about making any conclusion or decision based on "beta".
Speaking of volatility, there are academic bubbles right along with market bubbles. The two often develop in parallel. The market goes up for awhile, and the risk managers all start high-fiveing each other while counting their bonuses from their superior performance. They give lectures at Universities to MBA students and give the impression that they have built an iron-clad way to shield themselves (but never their clients!) from any adverse exposure.
It will be interesting to see who are the losers here. I don't anticipate the largest players being hurt...they are too close to the information flow (Goldman Saches fired its technical analysts some time ago...why employ people who analyze price movements ex post when you know the biggest trades ex ante???). I expect some long/short and global macro hedge funds to suffer, along with all the fools who came late to the party.
Saturday, May 20, 2006
Explosive...
...volatility this week. Commodites were thoroughly trounced, stocks plummeted, and it appears most of the players have re-established their appetities in bonds.
This was the primary reason for my belief that the U.S. $ is not going to substantially depreciate. When volatility increases (as measured by the VIX) by 50% in one week, people sailing those turbulent seas seek a safe harbor. The safe harbor is government debt denominated in U.S. $.
As I stated in the previous post, I thought the markets would decrease significantly in the summer from an unanticipated rate hike or some other catalyst. Still, I think that now is the time to buy stocks, fully informed of the performance of stocks in an evironment of increasing interest rates.
Of course, the probablity I will be wrong in this assesessment is currently very high and asymptotically increasing to 1...
This was the primary reason for my belief that the U.S. $ is not going to substantially depreciate. When volatility increases (as measured by the VIX) by 50% in one week, people sailing those turbulent seas seek a safe harbor. The safe harbor is government debt denominated in U.S. $.
As I stated in the previous post, I thought the markets would decrease significantly in the summer from an unanticipated rate hike or some other catalyst. Still, I think that now is the time to buy stocks, fully informed of the performance of stocks in an evironment of increasing interest rates.
Of course, the probablity I will be wrong in this assesessment is currently very high and asymptotically increasing to 1...
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