A Threat to Global Economic and Financial Stability
January 29, 2010 There is an emerging real-estate bubble in China. Ultra-loose monetary policy in the U.S. and an over-the-top stimulus plan in China, coupled with a pegged yuan, have created optimal bubble conditions. BusinessWeek reports that in Beijing's Chaoyang district, a typical 1,000-square-foot apartment sells for 80X the income of the average resident. Sound troubling? The Chinese leadership is concerned. Monetary policy is being tightened, and the government is reimposing a tax on home sales. A hard landing for the Chinese real-estate market is a real risk to global economic and … [Read more...]
A Guide to 2010 Investment Returns
In 2010, the monetary policies of the world's three largest central banks are likely to play a big role in the performance of global equity markets. The vast majority of the world's wealth—close to 80%, by some estimates—is concentrated in the U.S., Japan, and the euro area. My chart shows that the GDP-weighted risk-free rate in these three economies is only 0.14%. A 0.14% T-bill rate would not be a concern if the global economy were still in free fall, but it isn't. The global economy bottomed in the second quarter of 2009. The IMF projects that the global economy will grow by 4% in 2010. … [Read more...]
The World’s Most Profitable Trade
January 15, 2010 In 2009, one investor earned more than the combined profits of Exxon Mobil, Microsoft, and Wal-Mart by employing a common Wall Street trading strategy-the carry trade. The carry trade is a strategy where an investor borrows money at a low rate and invests the proceeds at a higher rate. To make substantial profits from the carry trade, you have to use gobs of leverage. The investor I am talking about used leverage of more than 40 to 1-enough to make even Goldman Sachs blush. What investor in his right mind would use leverage of 40 to 1 so soon after the worst credit crisis in … [Read more...]
Pull Your Head Out of the Sand
In a recent speech to the American Economic Association, Fed Chairman Bernanke offered his explanation of the causes of the housing bubble. Mr. Bernanke contends that easy money in the early years of this decade did not cause or even significantly contribute to the housing bubble. He also contends that the housing bubble was caused by a global savings glut and the growth in non-traditional mortgage products-option ARMs, Alt-A mortgages, and negative amortization loans. Mr. Bernanke ran through simulations and mortgage statistics, and he even broke out fancy equations. His explanation was very … [Read more...]
Harry Reid’s Resignation?
January 8, 2010 While today it appears probable that Senate majority leader Harry Reid (D-NV) will be defeated in his 2010 bid for reelection, an increasing number of Americans must in fact want to see Senator Reid resign. The Senate health-care bill transfers massive regulatory power to the federal government, erects massive federal controls over private health insurance, dictates the content of insurance benefits packages, reduces many seniors’ access to Medicare benefits and services, provides federal funding for abortion, and increases the Medicare payroll tax for individuals making … [Read more...]
Boost Employment – Guaranteed
December 11, 2009 Did you catch President Obama’s jobs speech this week? Is this guy kidding? He wants a do-over of the stimulus. Of course, you can understand his motivation. The Obama-fronted Radical Progressive Movement (RPM) promised Americans that a massive fiscal stimulus was the last, best way to ignite economic growth. The president’s own economic team projected that a mere $800-billion stimulus was all that was needed to prevent unemployment from rising above 8.5%. Today, the unemployment rate stands at 10%, not counting the millions of discouraged and underemployed workers. The … [Read more...]
The Economic Dream Team
An unemployment rate of 10% has put the administration and its allies in Congress on the defensive. The president's $787-billion stimulus was supposed to stem job losses and keep unemployment from reaching double digits. Predictably, there has been little or no benefit from the poorly designed stimulus. So back to the drawing board we go. The administration is proposing a second stimulus plan. Does this plan have any chance at success? It's doubtful. The problem here is that President Obama and his inner circle of economic advisors are short on relevant private-sector experience. The … [Read more...]
A Canary in the Coal Mine?
The Citigroup Economic Surprise Index (CESI) accurately forecasted a 60%-plus rally in the stock market in early 2009. The CESI is an indicator designed to measure whether economic data is coming in better or worse than the average analyst’s expectations. A rising index indicates that economic data is coming in better than expected, whereas a falling index indicates that economic data is coming in worse than expected. The theory is that the consensus expectations for economic data are priced into the market. So then, when new economic data turns out to be better than the market’s expectations, … [Read more...]
The Irrational Mr. Mishkin
November 13, 2009 In the November 9 Financial Times, Frederic Mishkin, a former Federal Reserve governor, proved that the Fed has learned absolutely nothing from its Greenspan-era forays into dangerously low interest rates. Mr. Mishkin claims in the title of his editorial that “Not all bubbles present a risk to the economy.” I’m not sure which word Mr. Mishkin is misunderstanding: “bubbles,” “risk,” or “economy.” Mishkin goes on to make a lame distinction between what he calls “credit boom bubbles,” like the one that led to the current worldwide recession, and a more benign variety that he … [Read more...]