Prieur’s readings (August 11, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy. Please also add the links to any other thought-provoking articles you would like to share to the comments section.

• Paul Krugman (The New York Times): Averting the worst, August 9, 2009.
So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

• Niall Ferguson (Financial Times): A runaway deficit may soon test Obama’s luck, August 10, 2009.
Six months in, “Felix the Prez” still has the look of a lucky, two-term president. But that could change if voters become even more disenchanted with the legislative branch and start blaming the president for the looming fiscal train-wreck.

• Simon Johnson (The Baseline Scenario): How to blow a bubble, August 7, 2009.
All good bubble-blowing needs ideology.  Someone needs to persuade policymakers and the investing public that we are looking at a change in fundamentals, rather than an unsustainable and dangerous surge in the price of some assets. It used to be that the Federal Reserve was the bubble-maker-in-chief. In the Big Housing Boom/Bust, Alan Greenspan was ably assisted by Ben Bernanke – culminating in the latter’s argument to cut interest rates to zero in August 2003 and to state that interest rates would be held low for “a considerable period”. Now it seems the ideological initiative may be shifting towards Goldman Sachs.

• Martin Feldstein (The Wall Street Journal): How to save an “underwater” mortgage, August 8, 2009.
Borrowers should get relief now, and the banks should get a guarantee down the road.

• John Authers (Financial Times): Long view: bears will hold sway, August 7, 2009.
In the past five months, the world’s stock markets have gained more than 50%. Anyone who timed the rally right should now be feeling much happier. Others may at least have recouped a chunk of last year’s losses. The big question now is: where next? This rally is not unprecedented but history offers few comparisons.

• Jack Hough (SmartMoney): Why stocks are way too pricey, August 7, 2009.
Assuming the cold calculus of price/earnings ratios will soon win out over nerves in deciding the direction of shares, investors should consider what today’s P/E for the S&P 500 says about the future. Unfortunately, the numbers aren’t comforting.

• John Hussman (Hussman Funds): Post-crash dynamics, August 10, 2009.
When markets crashes are coupled with changes in the fundamentals that supported the preceding bubble – as we observed in the post-1929 market, the gold market of the 1980’s, and the post-1990 Japanese market, and currently observe in the deflation of the recent debt bubble – they typically do not recover quickly. Indeed, the hallmark of these post-crash markets is the very extended sideways adjustment that they experience, generally for many years.

• Paul Brodsky and Lee Quaintance (QB Partners): Trade of the century?, July 2009.
A fascinating report speculating that massive inflation in the United States will be required to restore solvency to the country’s banking system, that other countries will stop facilitating the export of US dollar inflation, that the “shadow” gold price is really approaching $6,000, and that to achieve the necessary inflation central banks will arrange a “managed devaluation” of the dollar bringing gold closer to its “shadow” price.

• John Taylor (Financial Times): Fed does not need more powers, August 9, 2009.
The Obama administration’s financial reform proposals would grant the Federal Reserve significant new powers. These powers – which fall under the rubric “systemic risk authority” – will have a negative impact on the conduct of monetary policy. The unintended consequence would be to increase not reduce systemic risk.

• Gretchen Morgenson and Don Van Natta (The New York Times): Paulson’s Calls to Goldman Tested Ethics, August 8, 2009.
Henry Paulson shaped policies that affected his former firm.

• Paul Maidment (Forbes): Reining in China’s lending boom, August 10, 2009.
Warnings that bubbles are swelling in China’s stock and property markets are becoming more common by the day. So the country’s central bankers are starting to drain off some of the liquidity bloating prices. The four big state-owned commercial banks cut their new lending by two-thirds in July from the previous month.

• Edmund Conway (Telegraph): UK risks a Japan-style lost decade, BoE will warn, August 9, 2009.
Britain has not yet shaken off the risk of slumping into a Japan-style “lost decade”, the Bank of England will this week indicate as it downgrades its growth forecasts, and casts deflation as a significant threat.

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