Returning to Risk (Part 3)

By | 2017-07-17T12:34:18+00:00 May 14th, 2014|Global Market Update|

Is anything risk-free? Practically-speaking, sure. Insured bank deposits and short-term Treasury obligations have little to no credit risk, and their maturities are so short that if interest rates rise, they’ll have very little price volatility. At least in the short term. But over the long-term, their real value can erode. Right now the Fed has rates near zero, while inflation is running around 1 ½ percent. A 10% loss in value isn’t a lot, but it isn’t nothing, either. But that’s just the US. [...]

Returning to Risk (Part 2)

By | 2014-05-13T09:39:40+00:00 May 13th, 2014|Global Market Update|

What is risk? Risk comes in two major flavors: short-term and long-term. With investments, short-term risk comes from the investments themselves—where they sit in the corporate capital structure. When a company generates cash, there are three different types of claims on that cash: senior claims (bonds), operating claims (real-estate), and residual claims (equity). The volatility of the cash-flow and the priority of the claim determine the likelihood of the investor getting his or her money back. But long-term risk comes from outside the investments—from [...]

Returning to Risk (Part 1)

By | 2017-07-17T12:34:18+00:00 May 12th, 2014|Global Market Update|

What is risk? In 1952 Harry Markowitz published a paper in the Journal of Finance that changed the world. He showed that by combining different assets the variance of the combined portfolio would be lower. His mathematical formula used the variance of asset prices around an average as a proxy for risk. It made sense at the time: the more asset prices jump around, the more nervous people get. Markowitz’s work was ground-breaking. Never before had risk been so clearly linked to return, nor [...]

Understanding our Money

By | 2017-07-17T12:34:18+00:00 May 9th, 2014|Global Market Update|

“You just don’t understand.” When your spouse or other close relation tells you this, pay attention. Chances are there’s something important going on. But if you’re evaluating an investment and the seller says this, grab your wallet. Either they’re pulling one over on you, or the investment idea is too complicated for its own good. Over the past decade dozens of companies have maintained that their business was too sophisticated for the average person to comprehend. Enron, WebVan, Lehman—they were all touted as a [...]

Yellen at Congress

By | 2014-05-08T10:04:57+00:00 May 8th, 2014|Global Market Update|

Where does the Fed Chair stand? In her confirmation testimony back in November Ms. Yellen was considered a monetary dove: interested in keeping rates low for a considerable period. This was consistent with the speeches and predictions she made as an Open Market Committee member. At her first press conference in March the new Fed Chair came off hawkish, stating that interest rates could start rising as early as March of 2015. Yesterday she testified before the bicameral Joint Economic Committee and she sounded [...]

Inflation Nation?

By | 2014-05-07T09:53:54+00:00 May 7th, 2014|Global Market Update|

The price of a mid-life crisis just went up. Mazda is releasing a 25th-anniversary edition of its Miata MX-5. The price: $32 thousand. Admittedly, the special-edition roadster is a far cry from the bare-bones model they brought out in 1989. It has leather seats, a hand-painted dash, and a power-retractable hard-top. Also, the car comes with a special-edition Swiss watch. But still, $32 thousand is a lot more than the initial sticker price of $14 thousand when the model debuted. Or maybe not. The [...]

Working Hard, or Hardly Working?

By | 2014-05-06T09:55:03+00:00 May 6th, 2014|Global Market Update|

Why is the labor force shrinking? That’s not exactly right: the labor force isn’t getting smaller, but as a percentage of the population, it is. The economy’s labor force participation rate had been rising steeply through the ‘60s, ‘70s, and ‘80s, rose more slowly in the ‘90s, and has been falling since 2000. Starting in ’08, it has been falling steeply. We now have the same percentage of our total population working as we had in the late ‘70s. Why? Part of it is [...]

China Dreams?

By | 2014-05-05T10:36:16+00:00 May 5th, 2014|Global Market Update|

Will China become a major market? China’s economy is huge. They are now the world’s second largest marketplace, at $8 trillion, about half the size of the US and 11% of the world. They’re a major player in trade, manufacturing, consumer goods, and large infrastructure projects. But their equity market is tiny. At $2 trillion, they’re 3% of the world’s equity markets—about the size of France. And their debt market is even smaller. Why the disconnect? Why would a world-class economy have such a [...]

CPI: The First Hundred Years

By | 2017-07-17T12:34:18+00:00 May 2nd, 2014|Global Market Update|

Happy Birthday, CPI! The Consumer Price Index turned 100 last year. While the CPI was first published in 1921, at that time they made data available going back to 1913. The Bureau of Labor Statistics has measured 100 years of price data through war and peace, boom and bust, lassez-faire and managed economies. Source: http://conversableeconomist.blogspot.com/ Over the past century there have been three major periods of high inflation: World War I, World War II, and the peacetime inflation of the late-‘70s and early-‘80s. Wartime [...]

Waiting for the Fed

By | 2014-05-01T09:55:38+00:00 May 1st, 2014|Global Market Update|

Is the Fed doing anything? Yesterday the Fed met, talked about the economy, had lunch, and issued an almost unchanged policy statement. What they have been doing, they will keep on doing. This is news? The Federal Reserve manages the money supply. They set short-term interest rates. They monitor the capital markets and help regulate the banking system. They’re a creation of Congress to help guide a $16 trillion economy through fair weather and foul. But sometimes their policies appear to be on auto-pilot, [...]