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What We’re Reading 5-18-12

Young Research — Fri, 18 May 2012 13:49:03 +0000

Recession added debt, drained families’ savings, Christine Dugas, USA Today

Time to Admit Defeat Greece Can No Longer Delay Euro Zone Exit, Der Spiegel

Iranians Have Democratic Values, Yuval Porat, The Wall Street Journal

African child mortality, The best story in development, The Economist

A DVR Ad Eraser Causes Tremors at TV Upfronts, Brian Stelter, The New York Times

The Commodities Whale

Jeremy Jones — Thu, 17 May 2012 13:32:05 +0000

In a recent IMF working paper, author Shaun K. Roache provides readers with some valuable insight on China’s role in world commodity markets. It is no secret that China is a whale in the commodities space, but Mr. Roache helps readers understand just how much of an outlier China’s commodities consumption is when compared to the historical record. The title of the paper is China’s Impact on World Commodity Markets.

2.1. Long-term structural trends

China is a large consumer of a broad range of primary commodities. As a percent of global production, China’s consumption during 2010 accounted for about 20 percent of non-renewable energy resources, 23 percent of major agricultural crops, and 40 percent of base metals. These market shares have increased sharply since 2000, mainly reflecting China’s rapid economic growth. History has shown that as countries become richer, their commodity consumption rises at an increasing rate before eventually stabilizing at much higher levels. This is often described as the S-curve.

But this cannot explain all of the increase in China’s commodity consumption. China’s commodity intensity of demand has been growing particularly fast and is now unusually high. Intensity is sometimes measured by commodity consumption per capita and this is shown, alongside real GDP per capita, for China and five other G-20 economies since 1980 for energy and 1960 for metals in Figure 2. Moving along the line in a northeast/ east direction traces the evolution of commodity intensity forward through time, from the first year in the sample to 2009. Based on this small sample of countries, China’s energy consumption is shown to be relatively high given its stage of economic development. For example, China consumes about 35 percent more than Korea and twice the level of Brazil at comparable income levels. The difference is even larger for base metals, where China consumes significantly more than Korea and Brazil at the same income.

China’s unusually fast growing commodity intensity likely reflects the rapid expansion in the tradable export sector and large-scale fixed asset investment—particularly since 2000 (Yu, 2011). Both activities are commodity intensive. For example, Ye (2008) estimates that just over ½ of China’s copper usage is accounted for by infrastructure investment and construction, with ⅓ accounted for by consumer and industrial goods. It is beyond the scope of this paper to assess the root causes of China’s structure of economic growth and the high commodity intensity that results, but previous studies have highlighted the role of structural factors and domestic policy distortions (IMF, 2011a).

Stocks for the Long-Run

Jeremy Jones — Wed, 16 May 2012 14:12:59 +0000

Jeremy Siegel, the famous Wharton School finance professor coined the phrase “stocks for the long-run” with his identically titled 1994 best seller, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-term Investment Strategies. In the book, professor Siegel looks back at up to two centuries of financial market history to support his claim that stocks are the most profitable long-term investments. And indeed his conclusion has been true.

But the good professor failed to adequately warn investors that the long run can be a really long time. Check out my stock market charts on Spain, Italy, and Greece.

Spanish stock prices are no higher than they were 13 years ago. That is a long time to forego capital gains, but in comparison to the performance of Italian and Greek stocks, the Spanish stock market looks like a winner. Italian stock prices are no higher than they were in 1986—that’s 26 years without a capital gain. And Greek stocks don’t look much better. The MSCI Greece index has done a round-trip over the last two decades. How do you think an Italian investor who retired in the late 1980s would have fared with a portfolio invested entirely in stocks?

Siegel may be right about the long run profitability of stocks, but the famous British economist John Maynard Keynes warned us long ago that “In the long run, we are all dead.”

Diversification and balance (as in bonds) remain vital to your short and long run investment success.

Bond Risk

E.J. Smith — Tue, 15 May 2012 12:00:19 +0000

Insurance companies manage risk—their own risk. When it comes to insuring new-issue muni bonds, the only game in town is Assured Guaranty Ltd. They’re staring down the barrel of a ratings downgrade by Moody’s Investors Service. Risky muni-bond investing is about to get riskier.

Check out The Wall Street Journal’s For Muni Bonds, Less Assurance:

The last remaining insurer of new municipal-bond issues is bracing for a fall that could bring its industry to a new low—and possibly increase borrowing costs for some small local governments.

Moody’s Investors Service warned in late March that it might cut bond-insurer Assured Guaranty Ltd.’s AGO +0.08% credit rating to the single-A range from the current Aa3, which is three notches below the highest rating of triple-A.

VIDEO: Time to Break Up Big Banks?

Young Research — Mon, 14 May 2012 13:32:58 +0000

CNBC: Regulators should encourage big banks to restructure themselves, says Sheila Bair, Pew Charitable Trusts and former FDIC chair, explaining why she sees the U.S. banking system as “vulnerable.”

Young Research’s Retirement Compounders

Dick Young — Mon, 14 May 2012 12:00:58 +0000

Retirement Compounders Portfolio is comprised of 32 dividend and income-paying securities from around the world. A well-diversified, 32-stock portfolio can give you over 90% of the diversification of owning every stock, for example on the NYSE.

VIDEO: Marc Faber on U.S. Equities, Economy, Euro Zone

Young Research — Fri, 11 May 2012 14:11:31 +0000

May 10 (Bloomberg) — Marc Faber, publisher of the Gloom, Boom & Doom report, talks about U.S. stocks and economy. Faber, speaking with Betty Liu on Bloomberg Television’s “In the Loop,” also discusses his view on the euro and the euro zone. (Source: Bloomberg)

VIDEO: Lakshman Achuthan on Renewed U.S. Recession Call

Young Research — Fri, 11 May 2012 14:05:23 +0000

May 9 (Bloomberg) — Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute, talks about his renewed call for the U.S. to enter another recession this year. Achuthan speaks with Tom Keene on Bloomberg Television’s “Surveillance Midday.” (Source: Bloomberg)

What We’re Reading 5-11-12

Young Research — Fri, 11 May 2012 13:51:02 +0000

Of Course 70% Tax Rates Are Counterproductive, Alan Reynolds, The Wall Street Journal

Estimize, an Earnings Crowd That Beats the Street, Ira Boudway, Businessweek

Stimulus Spending Keeps Failing, Robert J. Barro, The Wall Street Journal

It’s too late for Germany to save the euro, Jeremy Warner, The Telegraph

Income Investors Beware: This Asset Class is a Guaranteed Loser

Jeremy Jones — Thu, 10 May 2012 13:28:44 +0000

Yesterday, Bloomberg reported that the U.S. Treasury sold $24 billion of 10-year notes at a record low auction yield. The bonds were sold at a yield of 1.85% which is lower than the 1.9% yield on 10-year notes sold in January. What investor would willingly lend the federal government money for ten years at a 1.85% interest rate? Aren’t these folks aware that this is the same federal government that has racked up trillion dollar deficits for three consecutive years and promises at least one more year of the same?

On a fundamental basis, long treasury bonds are one of the world’s most overvalued asset classes. After adjusting for inflation, 10-year treasuries are a guaranteed money loser. In other words, investors buying long treasuries today are paying to lend the government money. Sound like a smart investment strategy to you?

At Young Research we are avoiding long treasuries and we advise the same for you. A mere 20 basis point increase in interest rates would wipe out an entire year’s worth of income from a 10-year treasury note. And if interest rates rose by 1%, ten year treasury notes would lose the equivalent of four years of interest income. Investors reaching for yield in long bonds are setting their portfolios up for a serious maiming. Keep your bond maturities short.

YoungResearch

What We’re Reading 5-18-12

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