Sunday, January 31, 2010

Austrian School of Economics, a Simple Description

We don't often hear about the Austrian School. More often, the voices of Keynesianism and Monetarism are heard. In today's world of the great recession, it is Keynesian theory that is in charge at the Fed, The Treasury and the President's Council of Economic Advisors. To observe Keynesian theory, we can look to current government policy. Monetarists are the people we hear being critical of Keynesian economic theory or existing policy. There are no voices for Austrian economic theory that are taken seriously. They are viewed as anti-establishment, independent, wrong and non-conforming. I would like to try to document some of what I have learned about the beliefs, and criticisms, of Austrian economics. Despite it’s avoidance of mainstream popularity, there is a well organized school of thought and a small number of practitioners who make a number of points that strike me as important. I see no benefit for allowing their ideas to be ostracized from my understanding of economics.

Thursday, January 28, 2010

The Case for Deflation - Discussion 1 With the Challenger

I really like the points Gary Schilling makes in his abbreviated 2010 Outlook posted previously here on FS. I am in general agreement. Curious George is not in agreement on some important issues. With all respect, I would like to respond to his challenges to Schilling for the purpose of clarifying my perspective. This is an issue that has been on the top of my list of difficult questions and I have put a lot of time into forming a position. Without having a position defined, I would be drifting in the direction of the last best argument I listened to. I can't accept that. I know Curious George has also made the effort. He recently sent a message which said in part "Nothing is more central to portfolio management than the inflation / deflation debate. We can't afford to get this wrong." He and I have, so far, arrived at different conclusions. There is no need to agree, but we do need to understand the difference in our positions to better understand the situation. In the end we'll be much better advisors. There is no clear right or wrong yet. History will reveal that. 

Tuesday, January 26, 2010

The Case for Deflation Described and Challenged

Curious George has offered another post for me to assemble. It is so interesting that I want to frame it as a debate between the primary author, Gary Schilling, and the debater, Curious George. Gary Schilling has posted a very good description of deflation that you can link to. The title of his post is 2010 Investment Strategies: Six Areas To Buy, 11 Areas To Sell. For anyone who wants to see what a deflationist outlook is, this is the spot. Curious George introduces Schilling and then challenges his beliefs. I'll use colors to distinguish the two, Schilling's beliefs in orange, Curious George's challenges in green.

Gary Shilling is a long-time Forbes prominent investment advisor and economist. He is mostly a stock market bear and deflationist. While there is much to agree with in his 2010 forecast, there is plenty to debate. Shilling is far more experienced and credentialed than I but he is not beyond questioning.

We see the 2010 investment climate dominated by weak economic growth here and abroad, led by U.S. consumer retrenchment. More government fiscal stimulus and continuing Fed policy ease are likely in this setting. So is low inflation or deflation.

Monday, January 25, 2010

Inflation is Dead!

The St Louis Fed has a non-scientific survey on its home page. I answered the survey question, choosing no inflation risk, and then the results were shown. Here is the question and the response summary as of now...

Which do you think is the top risk for reigniting inflation over the next several years?

   64% There is no inflation risk—it's dead and buried.

   13% The federal budget deficit continues to mushroom.

   11% The Fed waits too long to return the monetary supply to a pre-crisis level.

    7% There turns out to be less slack (smaller output gap) in the economy than many experts believe.

    5% Commodity prices balloon again as investors tire of low-yielding Treasury securities and shift their money into higher-yielding commodity contracts and other assets.

Number of Respondents: 754

Note to Curious George...I did not vote more than once. LOL

Sunday, January 24, 2010

China Economy Clocked at 107mph in an 80mph Zone

The China economy is now the third largest economy, ahead of Germany and seems like a lock to move ahead of the fragile economy of Japan soon. This growth is creating both risk and opportunity. The challenge is to recognize which one at the right time. I have found two sources of insight into the China economy. One is Andy Xie, an economist who has been a guest economist in the Finance and Economics section of Caijing, a popular periodical in China with an English version web site, until November. He has stopped writing there, reportedly as a result of being censored by the government, according to an Asia Daily report. Xie was educated at M. I. T. and was Morgan Stanley's Chief Economist for Asia Pacific from 1997 to 2006. The other expert is Gary Dorsch, a currency expert with institutional trading expertise for many years.

Some of Xie's 2009 articles are still timely and provoking. With the advantage of a little hindsight, we can see that his expectations have been accurate and his timing guesses have been early. I highly recommend taking a few minutes to read his article dated 8/5/2009 titled Andy Xie: China Counts Down to the Next Bubble Burst. He writes about the China economy, its bubbles and sensitivity to the dollar.

Thursday, January 21, 2010

Bond Funds Still Winning Favor

Strategic Insight recently posted their summary of mutual fund flows for December...

Bond funds saw flows moderating to $29 billion in December, but still ended up establishing an all-time record for the full year with an almost $400 billion net intake. In contrast, flows into equity funds remained subdued despite the ongoing global stock market revival due to investor ambivalence about its sustainability, and continuing low risk appetites overall. Within the equity fund area, the recent dichotomy between internationally-investing and US-focused programs persisted, with the former continuing to draw modest inflows (helped by investor interest in boosting emerging market allocations in their portfolios), and the latter suffering small net outflows. December saw international equity funds garnering $8 billion.

Wednesday, January 20, 2010

Is the Stock Market Topping ?

This question is sometimes on my mind. How long before another turn of the market to a new cycle, currently to a new bear market cycle, a continuation of a secular (broad) bear market that began in 2000. Are there signals I can use to help me be alert to a looming change? Today on Financial Sense I read a very good description of the kind of simple indicator that can be easily employed. The article is written by, yep, Chris Puplava. (Are you reading Financial Here is a link to Market Tops Are a Process, Not an Event.

Monday, January 18, 2010

A Pair of 2010 Outlooks From Different Perspectives

Leading economic indicators are numerous and important tools for analysis of economic trends. I understand their importance and will create a scheme to monitor some of them while I learn more about their applications. In exploring the site of the Economic Cycle Research Institute (ECRI), I discovered a video clip from December 31, 2009 of a CNBC interview of Lakshman Achuthan from ECRI and Patricia Chadwick from Ravensgate. Here is a link to the CNBC Video, the title is Market Task Force. They are making 2010 outlooks coming from two different perspectives, empirical economic indicators (ECRI) and fundamental analysis with an emotional reality factor (Ravensgate). Despite these different approaches, they may arrive at the same place.

Wednesday, January 13, 2010

How do the Right and the Left Differ?

This post is from the blog of Greg Mankiw, professor of economics at Harvard. It is the conclusion of one classroom lecture he presented, on December 12, 2007.

In today's lecture, I have discussed a number of reasons that right-leaning and left-leaning economists differ in their policy views, even though they share an intellectual framework for analysis. Here is a summary.

  • The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.

Monday, January 11, 2010

All eyes on the Fed in 2010

If there is a common thread through the numerous outlooks I have read, it is that there is widespread optimism for investor's in 2010. It is cautious optimism, without doubt. Many experts are, in one way or another, agreeing that the stock, commodity and bond markets are not functioning as they are designed to, but they are functioning, and they are rewarding risk taking. What that might mean is that the functioning of the markets is being administered to a desired outcome, despite the will of free market forces. That is what it means to me.
Who might be the administrator of the markets and what is the desired outcome? Let me see if I can find an answer, using his own words.

Sunday, January 10, 2010

Cognitive Dissonance Strikes Again!

Curious George offers this rare guest post. (Thanks! I hope there will be more.)

We all want to believe the data we receive is good, sound information from a thoughtful and honest process. Good data is so important to making good decisions. Consider the recent reporting of December 2009 retail sales.

The Sydney Morning Herald reports December US retail sales up 2.9%. Reuters estimates US retail sales for December up 1.3-2.0%.  Yahoo reports a 2.8% increase. All my searches for retail sales reported increases for December 2009. So, if retail sales are up, then what about sales tax revenue. It should be up too, right? Nope, it’s down.

Saturday, January 9, 2010

Invest in political favor. It is really cheap!

This post is simply me capturing a thought from Bill Gross, from his January Investment Outlook. I have followed his message for years and always have to wade through his letter to get to his insightful message. On the way to his insight this month, I read the following paragraph that is pretty astonishing for being so much in the bulls eye, considering the source and the amount of political influence he wields. I don't think there is any room for questions. He says it well.

"What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion

Friday, January 8, 2010

The have's and the have not's

The Bureau of Labor Statistics (BLS) released their results for December's unemployment survey. These numbers will be revised a couple of times still. They get data from "household" surveys and from "establishment" surveys. The household survey is where we learn about the people who want to work and are not able to find employment. Here are some comments on the current conditions...

From the BLS
Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

Wednesday, January 6, 2010

Value's are back to "wacko-land"

Danielle Park, a money manager and blogger in Toronto, is writing today on her perspective of the valuations of the stock, commodity and real estate markets. She calls the situation "wacko-land". Her opinion is usually a reflection of her very disciplined, value based decision making, and keeping her emotions out of the mix. I find her voice to be refreshing when many others are shouting rants. She begins today's article describing the markets in this way...

Stock, commodity and real estate prices (in many areas) are quite simply back to wacko-land coming into 2010. Government stimulus has provided injection-fuelling directly to asset prices. The stated goal was to re-inflate demand and the economy, but the actual result has been to re-inflate global asset bubbles that are just as unsustainable and economically menacing now as they were before.

Monday, January 4, 2010

Economic Condition Review 2010 Q1

At the beginning of the quarter I plan to update my economic observations report, to share with interested readers. The following charts are linked from the St Louis Federal Reserve. They help me to document facts that I consider informative when completing my economic analysis. In the end, I believe that my knowledge is more complete and I am better informed, than if I relied on Wall Street/mainstream sources, to provide useful and thoughtful recommendations. I do this quarterly.

Net money supply has increased. View the current five year charts for M1 and M2 below. I am using these money supply measures knowing there are several others, which in my opinion make the same point. However, some analyst's are very opinionated about the use of one measure over another. If anyone has an opinion different than mine, I welcome your comment about this.
Click on charts for larger view