What bubble- US markets keep surging (IFR)
BoE scraps Funding for Lending for mortgages to cool housing market (Telegraph) – Whether or not fortune will favour Carney or not is not the point: he has always seemed (to me) to be able to spot a problem in its appropriate context ahead of time, or at least before the crash. And if we switch to Canada, we have much the same problem in terms of capital misallocation, a point recently made by the IMF, and government support of the housing sector in Canada should take note. I feel that Carney is much more in his element in a UK framework, that is in a non sclerotic regime where the political will is actionable within a relevant time frame.
ETF Price Disadvantage? (PWL Capital)
The ETF Price Disadvantage (Steadyhand)
Blogs review: The secular stagnation hypothesis & Home-(Sweet Home)-Bias and other stories (Breugel Blog)
When are markets “rational”? (China Financial Markets) – I would agree, but at the back of my mind I also think that asset focussed portfolio demand for assets as opposed to cash tends to be back-loaded, for a number of reasons, towards the end of the economic and market cycle. It is not so much that the balance of investors change, but the balance of allocation (stock) and flows change, and we only need marginal changes in the demand for cash relative to other assets and/or consumption to see large price swings in risky assets. I think QE also boosts this aspect of portfolio dynamics, which is a large negative.
Market Advance Below Average In Return And Duration (Horan) – I would hate to base a valuation argument on the relative duration of the present bull market versus past ones. Underlying excess economic capacity (and hence potential non inflationary growth) is also reflective of the still significant structural domestic and global economic imbalances. I think markets are way above levels that you would need to accommodate risk going forward given these imbalances. In a long term growth story short term deviations from value, even significant ones, are not cataclysmic events, but I fear that this is not the paradigm. While moderate asset price increases in a low inflation, low interest economy with low growth would suggest a longer than average total upward trend, I would tend to argue that we have increasing instability – i.e. we have an accelerating and unstable equilibrium framework. In the event of a shock we would more likely get a move away from the trend than a re-establishment of it, which is something we had with most post war market movements.
Getting the Volcker Rule Done (Economix)
“Proprietary trading” is the business of betting, using the bank’s own funds, on the direction of markets. When these bets go well, traders and executives are very well paid through bonuses and other mechanisms. But when even a few mega-bets go badly (think mortgage-backed securities), there is a big potential downside risk to the economy, including damage to the bank’s ability to conduct all its ordinary activities (such as making loans to the non-financial sector). “
Sounds a bit like the retail promotion of financial leverage to consumers – the industry earns the commission but when the bets go badly the client suffers and there is little concern for the potential risks to the client (in this case the economy) when things go wrong.
Why did Pope Benedict XVI resign? (BBC)
Often seen as remote, its leadership is now canvassing the views of ordinary Catholics on hot-button issues such as contraception and gay marriage. Reform has come on the back of scandal.
What is the difference between reform of Canada’s retail financial services market place and the reform of the Catholic church? Not a lot it would seem: both seem to be initiated on the back of scandal, but at least the Catholic church now has palpable leadership.
Racing to the bottom (The Economist)
During the 1980s and 1990s, the labour-rights index fell precipitously (see the blue line below). The authors reckon this is down to competition for foreign direct investment.
Jeremy Siegel: Stocks Are the Most Stable Asset Class in the Long Run (CFA Institute Blog) – I would refer readers to John Hussman’s weekly commentaries. Adjusting for data in the BEA accounts ignores the fact that profit margins are well above average, and I would also question why adjustment has also not been made for structural economic imbalances. Besides, trailing historic P/Es are also in over valued territory (my opinion).
The five charts that explain business investment (FT’s Money Supply) – it is an area I have been meaning to review but have been sidelined on the topic of investment leverage. That said, one of the problems with GDP is that it is overly focussed at any one point in time on expenditure, as opposed to investment, and investment expenditure is key to both growth and expectations of growth. Weak investment with strong household consumption and recovery in asset focussed expenditure components, while welcome in part, do not dispense with concerns over long term growth rates. Weak investment, and the unrecorded depreciation of capital imply a mismatch between current market levels and the growth rate of cash flow. It is also, on a long term basis, a latent inflationary risk.
Permanent link to The Betrayers Banquet (Marginal Revolution)
Rakoff on financial crisis prosecutions (Prof. Jayanth R. Varma’s Financial Markets Blog) – a worthy read!
BOJ Beat- Question Is ‘When’ Not ‘If’ (Real Time Economics)
3 key facts about Japan’s deteriorating demographics (Sober Look)
The Market Hits All-Time High. So What? (Alliance Bernstein) – If I get a chance I might try and follow this up. As the article states, an all time high is not necessarily relevant unless valuation is, but I would hesitate to suggest that P/Es are not in towering territory given that a large chunk of the late 1990s have skewed this data considerably. 18.7 times trailing earnings is high, though not necessarily in the context of a pure relative numbers game. I think the market context is much deeper and broader.
“Our forecasts for potential capital markets returns are based on a Monte Carlo simulation of 10,000 potential scenarios, some very dire indeed. “
I always feel a bit of vertigo when I see the monte carlo defense though, as it all depends on the mean inputs and the standard deviations. If the expected average outcome is a good one people are not going to pay much attention to low probability low return events.