Karn: Credit and Credibility

Friday, July 17th, 2009

In a fascinating e-book, Credit and credibility, Richard Karn, author of the Emerging Trends Report, is now offering his assessment of today’s financial turmoil and what he considers to be the five most pressing issues the global economy will face in the years ahead. The critical issues explored include:

Chapter 1: Pay no attention to the man behind the curtain! discusses fiat currency, the financial excesses and abuse it engenders, interventionist policy response to perpetuate it, and the role of the US dollar going forward;

Chapter 2: Nobody’s right when everybody’s wrong develops our contention that all fiat currencies today have become derivatives of the US dollar;

Chapter 3: May you live in interesting times explores the extent to which emerging markets can decouple from “consumer” economies and the role of China as the litmus test for the thesis;

Chapter 4: The report of my death was an exaggeration details our contention the world has had its fill of “financial innovation”, and the only way the US economy will recover will be through its traditional strengths in agriculture, manufacturing, invention, and hard work; and

Chapter 5: Passing laws, just because offers our assessment of the anthropogenic global warming debate and pending legislation.

The first two chapters of the highly-informative study are now available online. Click the following links to access the material: Chaper 1 and Chapter 2.

The remaining chapters will also be posted on this site as they become available.

Source: Emerging Trends Report

Tags: Anthropogenic Global Warming, Critical Issues, E Book, Emerging Markets, Exaggeration, Excesses, Fiat Currencies, Fiat Currency, Financial Innovation, Financial Turmoil, Global Economy, Informative Study, Litmus Test, Man Behind The Curtain, May You Live In Interesting Times, oil, Policy Response, Richard Karn, Target, Thesis Chapter, Traditional Strengths, Trends Report
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Roubini: Setting the Record Straight

Friday, July 17th, 2009

The following is a statement from Dr. Nouriel Roubini, chairman of RGE Monitor and professor at New York University’s Stern School of Business, on the US economic outlook:

“It has been widely reported today [Thursday] that I have stated that the recession will be over ‘this year’ and that I have ‘improved’ my economic outlook. Despite those reports - however - my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.

“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If as I predicted the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.

“Indeed, last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow V-shaped 8 months long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19^th month of a severe recession; so the V is out of the window and we are in a deep U-shaped recession. If that recession were to be over by year end - as I have consistently predicted - it would have lasted 24 months and thus been three times longer than the previous two and five times deeper - in terms of cumulative GDP contraction - than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year.

“I have also consistently argued - including in my remarks today - that while the consensus predicts that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.

“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year: on one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long term interest rates (because of concerns about medium term fiscal sustainability and because of an increase in expected inflation) and thus would lead to a crowding out of private demand.

“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector; and now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.

“Also, as I fleshed out in detail in recent remarks the labor market is still very weak: I predict a peak unemployment rate of close to 11% in 2010. Such large unemployment rate will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.

“So, yes there is light at the end of the tunnel for the US and the global economy; but as I have consistently argued the recession will continue through the end of the year, and the recovery will be weak and at risk of a double dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting.”

Source: RGE Monitor, July 16, 2009.

Tags: 19 Months, Consensus, Contraction, Economic Growth, Economic Outlook, Economy, GDP, New York University, Nouriel Roubini, Occasions, Recession, RGE Monitor, School Of Business, Stern School Of Business, Three Times, Year End
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Robert Arnott: Too far too fast?

Friday, July 17th, 2009

In his latest newsletter, Robert Arnott, founder of Research Affiliates, and innovator of FTSE-RAFI(tm)Fundamental Indices, asks the question “Too far too fast?,” and provides a comprehensive analysis of the market and his outlook. Here is an excerpt:

The tremendous comeback in financial assets that began in March and extended through the second quarter of 2009 has proved a welcome relief to investors of all types, a blessed batch of showers for our drought-ridden portfolios. The classic 60/40 stock (S&P 500 Index) and bond (BarCap Aggregate) mix advanced 10.2%, experiencing its third best quarter since 1988. As we predicted coming into 2009, in a broadly diversified GTAA context, some of the most dislocated credit categories from last fall-high-yield, emerging market bonds, convertibles, and bank loans- were some of the biggest winners in the fi rst six months of 2009 as all four dramatically outperformed mainstream stocks and bonds.

Undoubtedly, most portfolios are still well underwater (60/40 is still down 21% from its October 2007 high) and likely have many years of catch up. But the respite has allowed investors to assess their portfolios and begin to make asset allocation decisions with an eye toward the future. A thorough exercise of asset class valuations reveals that many once beleaguered asset classes may have come too far, too fast in this recent rally. Accordingly, now is likely a time to take profi ts and to resume our cautious vigilance of 2008.

Read the whole newsletter here.

Hat tip: Investment Postcards

Tags: Asset Allocation Decisions, Asset Classes, Asset Valuations, Bank Loans, Convertibles, Credit Categories, Emerging Market Bonds, Emerging Markets, Fi Rst, Financial Assets, Ftse Rafi, Hat Tip, high yield, Innovator, Portfolios, Research Affiliates, Respite, Robert Arnott, Stocks And Bonds, Valuations, Vigilance, Welcome Relief
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Charlie Munger: Man on the Money with Buffett

Friday, July 17th, 2009

Charlie Munger has always been described simply as Warren Buffett’s business partner. Buffett however is the son of several investing fathers, mentors, according to a profile/interview with Munger in FT. This enlightening interview sheds light on perhaps the most successful business partnership in history. Here is an excerpt:

Over the years, generations of investors, chief executives and journalists have wondered why Mr Munger has stayed happily in the background for almost half a century as Mr Buffett forged a reputation as the world’s greatest stock-picker.

“Warren is peculiar, and I’m peculiar,” says Mr Munger, who is also Berkshire’s vice-chairman. “We’ve got our own peculiar operating model. Nobody else operates the same way or stays in the game in a major corporation as long as we have, so we’ve got a different model. And we like it that way.”

Working 1,500 miles apart – Mr Buffett remains in his hometown of Omaha, Nebraska – the two “intellectual pals” have built up a stellar record by sticking to the basic principles of value investing: they buy companies in industries they understand, with managers they trust, at cut-rate prices. “We think all intelligent investing is value investing,” he says. “What the hell could it be if it wasn’t value?”

While Mr Buffett’s mentor, the economist Benjamin Graham, is considered the father of value investing, it is Mr Munger who is credited with helping Mr Buffett evolve beyond buying stocks for no other reason than that they were cheap.

Read the complete article here.

Tags: Benjamin Graham, Berkshire, Business Partner, Business Partnership, Buying Stocks, Charlie Munger, Chief Executives, Economist, Excerpt, Half A Century, Man On The Money, Mentors, Mr Buffett, Omaha Nebraska, Pals, Stellar Record, Stock Picker, Successful Business, Vice Chairman, Warren Buffett
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