Economic Analysis

The Problem With Indexes

Thoughts from the Frontline

June 16, 2006

This week we look at index funds, and specifically at problems that certain types of capitalization weighted index funds have. It is intuitively obvious that capitalization-weighted indexes have a larger proportion of their assets in the larger stocks. (Capitalization-weighted means that larger stocks are given more "weight" or proportion of the index or fund.) But is this what a rational investor should actually want? I think the information we look at today will surprise many.

On...

The Perfect Value Investor

Outside the Box

June 12, 2006

With several of the market averages racking up significant declines, many are starting to wonder if this recent drawdown will present some value opportunities. My good friend James Montier has constructed an insightful study on the characteristics of value investing.

For those who are unacquainted with Mr. Montier, he serves as the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book...

Central Bankers of the World, Unite Again!

Thoughts from the Frontline

June 9, 2006

Is the Fed right to be worried about inflation, or is that so last quarter? What do musty old academic papers suggest about Fed policy? And can we translate that into something that gives us a clue as to why markets around the world are in seeming lockstep on their way to the exits? (Quick, guess which market has done the best in the last month. No peeking!) Whatever happened to the diversification of our portfolios? This week we look at a wide range of topics trying to get some insights...

Moral Hazards

Outside the Box

June 5, 2006

Any time a central bank speaks there are scores of investors lined up and waiting to listen. Each is interested in any number of tidbits that might have a plethora of implications affecting his positions and portfolio. Even after the long-winded speeches and discussions, that action does not stop as investors continue to try and anticipate the next set of policies.

My readers are well aware of how keen I find the writing to be of Paul McCulley, managing director of PIMCO. In his global central...

It’s All About the Data

Thoughts from the Frontline

June 2, 2006

The Fed tells us that whether or not they continue to hike short-term rates is now dependent upon the data. Since that has always been the case (I mean, has there ever been a time when they ignored the data?), what they are really saying is "We are not really sure what we are going to do at the next meeting, so we will look at the recent data and make up our minds at that point."

I actually find that rather hopeful. In the past, it has been typical for the Fed to just keep raising...

Breaking Point in Iraq

Outside the Box

May 29, 2006

As this letter is going out on Memorial Day, our thoughts are with our military that are stationed in harm's way around the world, and especially to those who over the years have sacrificed so that we can live in liberty. In keeping with that theme, last week, I read a very prescient essay by George Friedman of Stratfor.com. George is the closest thing to a private CIA that I know of. His firm does analysis and forecasts of world-wide political and economic trends, in both global and country...

The Problem with Stable Prices

Thoughts from the Frontline

May 26, 2006

Can you have too much of a good thing? And specifically, can targeting low inflation and stable prices create problems that are even larger than the ones a stable price policy is trying to avoid? Today we look at a very interesting set of ideas proposed by one William R. White of the Monetary and Economic Department of the Bank of International Settlements (BIS). The BIS can be understood to be a kind of a central banker's central bank. So when they talk about appropriate central bank...

Why Imbalances Matter

Outside the Box

May 22, 2006

Two weeks ago in my "Thoughts from the Frontline" E-letter I wrote about trade imbalances. I quoted a significant portion of a speech by Anatole Kaletsky from GaveKal. It was part of a debate he had with Stephen Roach. Last week's "Outside of the Box" contained some very insightful and timely remarks on the current market conditions by the well known economist Stephen Roach.

The team at GaveKal sent me Roach's side of the debate which addresses Anatole's point of view on the subject of trade...

A Foolish Conversation With John Mauldin

Thoughts from the Frontline

May 19, 2006

This week I am in La Jolla for my annual Strategic Investment Conference. It is packed, and of course I am quite busy, so not much time to write my regular e-letter. But a few weeks ago, Rich Smith from The Motley Fool did a fairly wide-ranging interview with me that just came out this week, and I thought he did an excellent job in putting together a coherent piece from what was a long conversation covering a lot of topics. So, let's see what Rich found interesting in my musings.

By...

Commodity Bubble and The Dollar Spin

Outside the Box

May 15, 2006

We are almost half way through the year and the markets are providing us with plenty of trends and issues which we must take into account. From 6 year market highs to the cooling of the housing market, from the energy bonanza to China's effects upon globalization, there is no shortage of topics of interest in the financial press. But as of late, I have been receiving several questions from my subscribers focusing special attention towards the recent commodity boom and the dollar with respect to...