Jobs Programs

By | 2014-09-05T19:17:12+00:00 May 31st, 2010|Global Market Update|

Milton Friedman once visited a developing country where they were building a canal. He remarked to his host how surprised he was that the workers only had shovels. For a large excavation project, heavy earth-moving equipment would be typical. “You don’t understand,” his host noted. “This is a jobs program.” “If it’s a jobs program,” Dr. Freidman replied, “why don’t they use spoons?” The illogic of being deliberately inefficient is clear when it’s as egregious as digging a canal with a shovel. The wasted [...]

Diversify, Diversify

By | 2014-09-05T19:16:30+00:00 May 28th, 2010|Global Market Update|

We live in risky times. Banks fail. Governments fail. How to we deal with this? One way to manage risk is to control it. That is, if you have a business, know your customers, know your suppliers, and know your employees. Continually update your systems and procedures. Then, if disaster strikes, you’ll have a recovery plan in place to minimize the damage. But sometimes this doesn’t stop an errant oil rig from creating billions of dollars worth of damage. Is there another way? That [...]

Carpe Diem

By | 2014-09-05T19:16:01+00:00 May 26th, 2010|Global Market Update|

Yesterday I discussed seizing the opportunities that a risky world presents. What do I mean by that? I’ve discussed before how rebalancing a portfolio regularly adds value because of mean reversion. Mean reversion is just a fancy way of saying that markets don’t go up or down forever. Improving markets inevitably attract competitors. The increased competition lowers margins and restricts profits. Deteriorating markets inevitably force weak companies out. This creates opportunities for stronger players to improve their earnings. What goes up comes down, and [...]

Equal Opportunity

By | 2014-09-05T19:06:05+00:00 May 25th, 2010|Global Market Update|

For people who think failure is a product of either government or the markets, the past few years can support either view. The sub-prime debacle was a failure of markets; the BP disaster was a failure of regulators. From 2004 to 2007, expansion of lending to sub-prime borrowers combined with innovative securitizations feeding additional return to yield-starved investors fed a real-estate bubble whose subsequent collapse threatened the globe’s financial infrastructure. The government’s response will slow the flow of credit through the economy. From 2004 [...]

Succeeding at Failure

By | 2014-09-05T19:15:22+00:00 May 23rd, 2010|Global Market Update|

Americans are great at going broke. This may seem like a strange kind of success story. After all, no one goes into business expecting to fail. But at its heart, bankruptcy gives people a fresh start. The US abolished debtor’s prisons in 1833. For the next 60 years, the judicial system erected a common-law bankruptcy system until 1898 when Congress systematized this via the bankruptcy code. Bankruptcy in America has been a way for businesses that are viable to restructure their finances and keep [...]

Studying Success

By | 2014-09-05T19:14:39+00:00 May 20th, 2010|Global Market Update|

What else has been going right? In the midst of a market correction, it helps to understand what we do well. Sure, like everyone else, I’m concerned that the current correction could spiral out of control and turn into a rout. But the US economy has been getting stronger, companies have been hiring new workers, and consumers have been making up for lost time. So what’s going well? One clear success has been the American research university. Whether public or private, American universities are [...]

Manufacturing Health

By | 2014-09-11T15:30:05+00:00 May 19th, 2010|Global Market Update|

If you want to know what the economy will do in the near future, look at the leading indicators. One well-established factor is the average hours worked per employee. Before companies hire new workers, they tend to have their existing employees work more hours. Similarly, before they lay people off, they tend to reduce hours people put in Well, buried inside the latest employment report is the average hours worked by industry. It’s an obscure but important indicator of what’s going on in the [...]

Book ‘Em

By | 2014-09-05T19:02:28+00:00 May 18th, 2010|Global Market Update|

The Justice Department has indicted some major players in the municipal finance business. I’d call that looking for snow at the North Pole. The Muni bond market totals $2.4 trillion, and covers everything from AAA bonds from the State of Maryland to speculative debt from housing projects in New York. Allegedly some major players paid kickbacks to an advisory firm in order to rig bids on billions of dollars in deals. The corruption was so commonplace that people discussed it openly on phone lines [...]

Ratings Kool-Aid

By | 2014-09-05T19:01:11+00:00 May 17th, 2010|Global Market Update|

Why did the ratings agencies do such a bad job? The standard answer is that their business model is flawed. Ratings agencies assess credit risk and are paid for their services by the issuers. Aren’t they conflicted? Not really. The ratings agencies started out with a subscription model where the users paid, but switched to issuer-pays in the ‘70s, when photocopiers made it impossible for them to protect their reports. But there has been no upward drift in ratings since then. The number of [...]

The Crash of 2:45

By | 2017-07-17T12:35:19+00:00 May 14th, 2010|Global Market Update|

When a lot of snow falls on a steep slope, things can get scary. If the wind blows just right, the snow forms a deep hardpack and the crystal connections break down. A fracture in this crust can then spread and a slab can dislodge, displacing other slabs and starting a chain-reaction. A slide’s destructive power is truly awe inspiring. During a storm, most people stay out of avalanche terrain. But even in fine weather pockets of instability can form, and a stray hiker [...]