Remember Indiana Jones and the Last Crusade? When Indiana gets to the cave where the Grail is kept, he’s confronted with an array of choices. One brings life, the others are fatal. His only aid is his understanding of history and a little common sense. He did okay. His rival didn’t fare so well. That’s my theme for 2010: choose wisely. Confronted by volatile markets? Choose wisely. Finding unforeseen risks? Choose wisely. Facing various political or personal choices? Choose wisely. Our sources of wisdom [...]

The monetary base is exploding. So what? Traditionally, when the base grows, the monetary aggregates grow thereafter. Since inflation is a monetary phenomenon, the concern is that the cash will find a home in consumer goods, and inflation will rise. Is this realistic? Well no and yes. No, because the monetary base is really an artifact of the bank bailout, the Fed’s liquidity programs, and the interest that the Fed now pays on reserve balances. A year ago interbank lending dried up on credit [...]

Bull markets are usually built on three legs. How far have we come? The three legs of a bull market are valuation, growth, and retail purchases. They usually emerge in that order. Valuation comes when everyone thinks the world is ending. We had that last winter. At it’s bottom, the market was selling at an “earnings yield” of 10%. That is, for every $100 you put into the market, you could expect $10 in earnings. That was when Treasury Notes yielded less than 3%. [...]

“When sorrows come, they come not single spies but in battalions.” When Shakespeare wrote this he was reflecting how life seems to deal out trouble. Tiger Woods is the most recent observer of this. First it was a car accident. Then it was a marital fight. Then one, two and more of Tiger’s illicit madams spoke out in public. And the press just lapped it up. Woods’ response was a classic case of how not to handle a media mauling. The information was sparing, [...]

Is moral hazard at the root of our financial troubles? Many look at our recent financial crisis and say that the heart of the problem is moral hazard. That’s the problem you get when speculators get to keep the upside if things work out, but they offload any losses to the government. Deposit insurance is a typical example. Small depositors have no incentive to check on their bank’s solvency, because the Feds will step in if there’s a problem. Supposedly, this incents bankers to [...]

It’s been said that when countries become too indebted, they either default or inflate their way out of the problem. This is a real issue. The Federal Government ran a deficit equal to 10% of GDP last year. That’s the largest budget gap in the developed world. Only two years ago it was about 2% of the economy. For the past 40 years, the fiscal deficit has averaged about 2 ½ percent. And lest one is tempted to be partisan about this, let it [...]

Of all the questions a portfolio manager can ask, one of the most important is this: how much risk can you handle? Risk is usually defined as variance in prices. This is convenient, because it allows us to quantify it. Long-term bonds are more risky that short-term; junk bonds are more risky than investment-grade; stocks are more risky than junk bonds—because their prices move around more. But this misstates the issue. Lots of investors don’t worry about daily or monthly price changes. They want [...]

We’ll they’ve come down from the mountain. The Fed completed its two-day meeting this week, and they didn’t change policy. Yawn. The economy is weak, but it’s showing signs of life. So the Fed plans to let its extraordinary support expire on schedule. How remarkable! When the Fed planned to support the commercial banks or the money market funds or the mortgage market, they somehow knew when the program wouldn’t be needed any more. I for one am thoroughly unconvinced that the Fed and [...]

What do small European countries have in common with large US states? Both are in fiscal distress. Countries like Greece, Ireland, and Spain are facing significant budget gaps. Greece was downgraded, Spain’s outlook is negative. States like California, New York, and Illinois are also facing downgrades and are delaying payments and issuing scrip to conserve cash. None of these entities can issue their own currency. Oh yes, California’s scrip is a kind of currency, but it’s really an I.O.U. But because the legal tender [...]

A giant passed away last weekend. So many great and good people have passed on this year, it seems that it’s been one long funeral. The latest giant to “step up” was Paul Samuelson. He was the recipient of the Nobel Prize in Economics in 1970 for his work in developing the neoclassical synthesis in economics applying Keynesian theory to classical models using the mathematics of chemistry and thermodynamics. Samuelson was perhaps best known for his weekly columns in Newsweek, where for years he [...]