What the Fed Did in 1998 and What is Different Now
August 13, 2007
This week in Outside the Box we take look at the how the Fed acted in the last debt crisis of 1998 and what they are likely to do this time. How will the Fed address the looming liquidity crisis stemming from the subprime debacle primarily, and from the abused Yen carry-trade, lax lending practices, and excess liquidity, generally? Asha Bangalore, Vice President and Economist at the Northern Trust Company, believes that given the actions taken by the European and Japanese banks in response to credit and liquidity concerns in the markets by an infusion of €200 Billion, and ¥600 Billion, respectively, the Fed will also take the customary action of cutting interest rates to assuage the market at the October 30-31 Fed meeting.
Your humble analyst believes that a rate cut will not likely occur on account of inflation concerns, and I thought you should read an opposing and well-reasoned view. As an aside this makes the CPI numbers which will be released this Wednesday very important and any difference from the expectations will have the tendency to move the markets significantly. If inflation comes in high as it did last month, the market will take that as a sign that the Fed will have less room to cut rates. Conversely, if inflation is lower than expected, you could see a real leap. As a reference, the previous CPI (MoM) was .2%, with economists estimating it coming in at .1%, CPI Ex. Food & Energy (MoM) was .2% with no estimated change forecasted.
Quarterly Review and Outlook: Second Quarter 2007
July 16, 2007
This week in Outside the Box, we take a closer look at the bond market and its underlying drivers. HMIC's Van Hoisington and Dr. Lacy Hunt anticipate lower inflationary pressures on account of faltering consumer spending and further deterioration in the housing market.
Hoisington Investment Management Company focuses on long-term investment strategies based on Economic Analysis. The firm is a registered investment advisor specializing in fixed income portfolios with over $3.5 billion under management for large institutional clients. Van R. Hoisington is the President and Chief Investment Officer and has produced an outstanding fifteen-year performance record. Dr. Lacy Hunt, an internationally known economist, joined the firm in 1996 adding depth and expertise with his in-depth research and analysis.
Today's article is from their Second Quarter Review and Outlook which I am delighted to present to you with their consent. While constructing their assessment for bonds, Van and Lacy walk through each building block, providing analysis on the predominant driving factors in the bond market and their respective implications.
So What Should We Worry About?
May 7, 2007
Today's Outside the Box is a very interesting piece written by Louis-Vincent Gave and the team at GaveKal entitled "Part 2: So What Should We Worry About?" His article is a follow up to an earlier one that he wrote on why he, and the rest of the GaveKal team, had been bullish on the markets a couple of months ago. This letter is to answer the question "what could go wrong" with their previous outlook in light of the recent market climate.
For those of you unfamiliar with GaveKal, the firm was started in the late 1990s in London by Charles Gave, Louis-Vincent Gave and Anatole Kaletsky. GaveKal is a research firm, focusing on macro economics and tactical asset allocation for institutional clients around the world. Louis-Vincent is the CEO of GaveKal where he contributes frequently to the research and was the main author of their books Our Brave New World and The End is Not Nigh.
Let me make a quick remark regarding the latter of his 2 books. The End is Not Nigh has just recently been released and I highly recommend it as a good read. It is a great example of a book that presents a positive view of not just the markets but of the developing world as well. You can purchase the book directly from their website (www.gavekal.com) or through Amazon.
I trust that you will enjoy this week's Outside the Box from the always thought-provoking Louis-Vincent Gave.
Quarterly Review and Outlook - Fourth Quarter 2006
January 8, 2007
On Friday, I wrote my annual forecast, "The Goldilocks Recession," on what investment themes I expect in the coming year. This week's Outside the Box will follow up on the subject with an excellent piece written by Van Hoisington and Dr. Lacy Hunt. In their fourth quarter review of 2006, they address how the current status of the bond market measures up against historical interest rates and inflation. From there, each of the six major sectors of the economy, Personal Consumption Expenditures (PCE), Residential Investment, Nonresidential Fixed Investment, Government Expenditures, Inventory Investment, and Net Exports, are covered specifically and analyzed to depict the trends for 2007.
This letter is one of the more in-depth and fundamentally heavy articles I've featured as it is chock-full of data, or what I like to call the "hard facts." Van Hoisington and Dr. Lacy Hunt have done a stellar job collecting a great deal of information and dissecting it to form some well-thought investment conclusions. For those of you unfamiliar with Hoisington Investment Management, the firm is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the company has over $3.5-billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies.
Each year presents its own set of both opportunities and risks for us investors. I trust that you will find value in this Outside the Box and use it to form your own independent investment conclusions.
Inflation, Bond Yields, And The Market
November 13, 2006
Today's "Outside the Box" will be a combination of 2 different writings. The 1st is an email that I received from Research Affiliates Chairman Rob Arnott in response to my letter last Friday, "Honey, I Created a Bubble." The 2nd is the latest article by the well-known fund manager, John Hussman. Upon reading both commentaries, I was struck by the similarity between the two. It behooves us to pay attention when two very intelligent gentlemen that both actively (and successfully!) manage billions of dollars are marching to the beat of the same drum.
For those of you who are unfamiliar with Rob and John, let me say that both have stellar credentials. Rob is Chairman of Research Affiliates where he manages a multi-billion fund for PIMCO. In addition, he is editor of the Financial Analysts Journal and creator of a new index fund concept. John is the President of Hussman Investment Trust where he manages the Hussman Strategic Total Return Fund - HSTRX and the Hussman Strategic Growth Fund - HSGFX.
In their commentaries below, both Rob and John take a look at what inflation and bond yields mean for the market. I strongly recommend that you read each piece thoroughly and hope that you will find them to be "outside the box."
The Invisible Hand’s Impressive Work
August 7, 2006
Tomorrow the Fed will be announcing whether they will continue to raise rates or not and many investors seem to think that a pause is a highly probably outcome. Controlling inflation has been the reason for prior rate hikes and I believe it to remain the key variable. With this in mind, I thought that it would be a good idea to share with you the new GaveKal piece by Louis-Vincent Gave.
As my long term readers know, GaveKal produces some thought-provoking and highly intelligent research on the markets from a global perspective. Louis writes about how profit margins, income disparity and global economics are shaping the current inflationary environment. But he does not stop there, Louis further describes how these market forces are all affected by none other than Adam Smith's old "Invisible Hand."
I found this article to be exceptionally interesting, and, given the fact that the Fed is meeting tomorrow, a timely read as well. I think you will find it to be an "Outside of the Box" point of view.
The New Inflation and Lessons for Greenspan’s Replacement
October 24, 2005
For the last two weeks in my regular Thoughts from the Frontlines, we have been looking at inflation. In keeping with that theme, we turn to today's note from Stephen Roach, Chief Economist of Morgan Stanley, who talks about the nature of what he calls the New Inflation. I think this is one of the more important insights Roach has had among a career with many of them. We close with a few paragraphs on Alan Greenspan from Martin Wolf, who writes for the Financial Times in the US version of the London business daily. Wolf is a jewel of a writer and makes a subscription to the FT worth it all by himself. The Financial Times is now delivered daily in many cities. You can find out more by going to http://news.ft.com/home/us.
These two articles offer us different views of the inflation, asset targeting and the critical role of central banks. They do help us think Outside the Box.
And I should note, I have been writing for some time that I thought Bush would nominate Ben Bernanke as the new Chairman of the Federal Reserve Bank. Now, we will see a lot of people critical of nominating a man who talked about dropping money from helicopters, but let me suggest to critics that they go back and really read that speech and some of his more recent ones. He did not really propose dropping money. It was tongue in cheek.
Bernanke writes and speaks in very clear terms, and I hope this fosters an era of a more transparent Fed. Which, I should note, Bernanke has argued for. I hope he does not adopt of policy speaking in opaque terms such that non one understands what he is really saying. I think a more open, transparent, collegial Fed board, with a very defined mission, would be good for the markets, rather than the guessing we all have to do now.
Omitted Variables
August 22, 2005
This week's letter is from John P. Hussman, Ph.D., President of Hussman Investment Trust. His firm is one of the few that has employed hedging techniques, similar to the hedge fund world, in a mutual fund structure. John is also one of the really, really, really smart guys in the running money business. John manages the Hussman Strategic Total Return Fund - HSTRX and the Hussman Strategic Growth Fund - HSGFX.
Hussman's Weekly Market Commentary on August 22, 2005 takes a look at the relationship between stock market valuations, interest rates and inflation. He takes a look at what has happened to this relationship in the past and fills in the "omitted variables" other market cheerleaders seem to leave out.
This is a very short piece, but it is an important analysis of market valuations and why some people (including the Fed) might not be seeing statistical relationships the right way.
Inflation is Always and Everywhere a Monetary Phenomenon
February 7, 2005
A few weeks ago, I posted a letter by Dr. Gary shilling on why he thinks there is deflation in our future. For another look at the inflation-deflation debate, this week's letter is by Myles Zyblock, who is Chief Institutional Strategist & Director of Capital Markets Research at the Royal Bank of Canada. Myles takes a look at why we have not seen a big increase in inflation even though the Fed has added vast amounts of monetary liquidity since the late 1990's. Milton Friedman's equation of exchange says that inflation is produced by money supply and the velocity of money. This report looks at a reason the velocity of money may have stayed low and theorizes that it will not last.
Is inflation knocking at the door and if so what are the implications for investments? Let's take a look in this edition of Outside the Box.
Is Inflation Truly a Threat?
September 13, 2004
Welcome to the inaugural edition of "Outside the Box." Each week, I read hundreds of articles, reports, books, newsletters, etc. Each week, I and my staff will bring you one essay which we think is worthy of your time. The only requirement is that the article should make us think, and perhaps challenge our assumptions. The subject matter will be quite varied and will come from many sources. There will be no requirement that I agree with the writer or the thinking, just that it offer thoughtful analysis which challenge our minds.
The first essay will come to us from my good friend, Gary Shilling, who has been enlightening me with his financial and economic commentary for many years. This letter will certainly be "Outside the Box" for many of you, as it will challenge some basic assumptions you have about the inflation/deflation debate.
Many readers of my weekly "Thoughts From the Frontline" write in to point out that they believe the Consumer Price Index (CPI) reported by the government understate the true inflation rate. Gary agrees that the CPI might not reflect the true inflation rate, but claims that the CPI is overstated rather than understated. The argument and data that follows might not change your views, but it will give you an alternate way to think about the CPI. And if Gary is right, that means long term rates may be coming down over time. It also has significant implications for Fed policy and our own investment portfolios.
So lets get ready to think "Outside the Box".