Economic Analysis

Understanding Stock Market Behavior

Thoughts from the Frontline

April 17, 2003

This week we will look at why and when stock markets go up and down over long periods of times, and how to use that knowledge to your advantage. We will examine how to find the next "New, New Thing" as we look at something called the Innovation Cycle.

I must confess that this week's letter is actually a chapter in my book-in-progress. It does contain some material from a letter I wrote a year or so ago, but I have added and edited it considerably. While it is a little longer than most weekly...

After Iraq: the Real World of Earnings

Thoughts from the Frontline

April 11, 2003

I wrote about a study last year that suggested corporate earnings in the US could not grow by more than the growth of GDP.

"Our median estimate of the growth rate of operating performance corresponds closely to the growth rate of gross domestic product over the sample period ....the growth in real income before extraordinary items is roughly 3.5% per year" (after inflation and dividends. Before them it is about 10%.) "This is consistent with the historical growth rate in real gross domestic...

The Plunge Protection Team

Thoughts from the Frontline

April 4, 2003

I have had so many letters of late asking me what I think of and/or know about the existent of the so-called Plunge Protection Team, that mysterious group of government officials who secretly prop up the stock market when it drops too much, that I am going to jump in where wiser minds would just leave the subject alone. It will offer a good opportunity for you to understand concepts of arbitrage and how the markets really work. Plus, if you can prove me wrong, I will show you how to get a quick...

Boneheads, Iraq and the Artificial Dollar

Thoughts from the Frontline

March 28, 2003

The past two weeks I have had so many people email me an article by one Geoffrey Heard of Melbourne, Australia that I am going to comment on his nonsense. Because it is so wrong and yet his arguments seem so seductive, it offers an excellent opportunity for us to learn how world currency transactions really affect the price of gold and oil and other commodities. Warning: I am taking off my gloves in this letter. This is one of the more boneheaded pieces of conspiratorial economic garbage that...

The Real Old Europe

Thoughts from the Frontline

March 21, 2003

This week, it is hard to sit down and think about anything other than Iraq, especially given the circumstances in which our troops and those of our allies and the citizens of Iraq find themselves. Our prayers are for all those and their families involved. Last week, I wrote that it was likely that the war would have begun before the next weekly letter. I hope that next week's letter finds the war is over.

Unintended Consequences:  Iraq, Pensions and Index Funds

Thoughts from the Frontline

March 15, 2003

Each week, I typically sit down at noon on Friday to write this letter. Quite often I stare at a blank screen pondering what to write about. Last week, and this week, my task has been to decide what NOT to write about. There is just so much that is worthy of our attention: pensions, indexing, Iraq, the drop in gold and the rise in stocks, international turmoil, the misleading headlines in the investment media and more. I have to leave the office without fail at 5:30 (kids come first), so...

Deflating Europe, Housing Bubbles and Greenspan’s Amnesia

Thoughts from the Frontline

March 7, 2003

I am writing this week's e-letter early, as tomorrow I travel to speak at an investment conference in Florida. As I review the articles and reports of the last few weeks, I am struck by the number of very interesting topics which deserve their own letter. There is truly a lot happening, so like the billiards player trying to make a difficult four bank shot, we will go from one side of the table to another and hope we end up making the shot, or at least making a point or two.

The Muddle Through Middle: Why Stocks Drop While the Economy Grows

Thoughts from the Frontline

February 28, 2003

In most issues of this weekly letter, I spend our time together looking at specific trees and various flora, commenting upon how they affect the overall economic forest. Today, it is time to drop back and look at the forest as a whole, given that we may be on the precipice of events that could change the very character of the forest in which we live.

I am going to do so as a way to frame what I think of as the rationale for my economic world-view. I believe we are in a Muddle Through Economy...

Healthcare, Oil Shocks and Deflation

Thoughts from the Frontline

February 21, 2003

This week we have seen a lot of conflicting stories on the economy: worries about an oil shock leading to a double dip recession and more deflation, a surprise increase in the Producer Price Index but only a slight increase in the Consumer Price Index. Unemployment claims went up, while retail sales were down while the Wall Street Journal says they went up. We examine what these could all mean this year, as my Muddle Through scenario faces some stiff winds. We also look at the long term...

Greenspan Fiddles and the French Dance

Thoughts from the Frontline

February 14, 2003

Sometimes it is the small things that lead to big changes. Today we briefly look at one paragraph in Greenspan's latest speech, then move on to Europe and Iraq. I want to suggest some small things that could lead to changes in global politics and the world economy just as significant as the fall of the Berlin Wall. My theme for 2003 was Surprise and Transition." I think we are getting ready for our first true surprise. Again, there is a lot to go over, so let's get started.