Prieur’s readings (October 14, 2009)
This post provides links to a number of thought-provoking articles I have read over the past few days that you may also find of interest.
• Mike Shedlock (Mish’s Global Economic Trend Analysis): Is the stock market a leading indicator?, October 12, 2009.
The stock market is at best a coincident indicator, known only well after the fact. Furthermore, even as a coincident indicator, the stock market gives many false signals, making it totally useless for all practical purposes. The theory that the stock market is a reliable leading indicator is a myth easily shattered by simple observation of the facts.
• Caroline Baum (Bloomberg): Treasury bond rally fails asset-bubble test, October 13, 2009.
Bubble sightings are proliferating by the day, and with interest rates near zero, it’s not hard to understand why. Easy money leads to excess credit creation, which eventually produces inflation in goods and services prices or some type of asset bubble. Current nominees for bubble status include commodities, stocks and bonds: commodities, because a weak dollar stimulates demand for hard assets; stocks, because they’ve come so far so fast and earnings may not justify the prices; and Treasury bonds, because, I imagine, their absolute yields are low.
• Mark Hulbert (Barron’s): Climbing the golden wall of worry, October 8, 2009.
As gold trades at record highs, investor sentiment remains cautious. And that bodes well for continued price increases.
• Keith Fray, Peter Garnham, Steve Bernard and Cynthia O’Murchu (Financial Times): Currencies in context, October 12, 2009.
The spotlight has been thrown on the dollar in the past week as it fell to a 14-month low against a basket of currencies and analysts have raised concerns about the potential erosion of America’s reserve currency status. This interactive graphic shows the dollar in the context of the current major trends in the currencies market.
• John Plender (Financial Times): New investment shifts eastwards, October 13.
If there are winners from the financial crisis, many of them are, by common consent, in Asia. With the US economy punctured by Wall Street, China is widely perceived to be the global top dog designate. On this view, not only has the geopolitical balance shifted eastwards but portfolio flows will follow suit. Welcome to the new investment reality.
• Sudeep Reddy (The Wall Street Journal): Bernanke, 3rd most powerful man in Washington, October 13, 2009.
GQ magazine today put the central bank chief at No. 3 on its list of the 50 most powerful people in D.C. who aren’t named Obama or Biden. He comes in just after White House chief of staff Rahm Emanuel and Defense Secretary Robert Gates. But he’s ahead of Treasury Secretary Timothy Geithner and National Economic Council Director Larry Summers, who are tied for No. 7. (It’s only a couple of years since Bernanke was No. 23 on the GQ list, three spots behind Sen. Barack Obama of Illinois.)
• Paul Romer (Charter Cities): Skyhooks versus cranes: The Nobel prize for Elinor Ostrom, October 12, 2009.
Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding.
• Andy Ross Sorkin (The New York Times): Don’t fail, or reward success, October 12, 2009.
While Goldman may have the Midas touch, the rest of Wall Street never seems to be able to keep up. And the only way for rival firms to compete with Goldman is to take outsize risk. And, well, we’re familiar with how that story goes.
• Lucian Bebchuk and Holger Spamann (The New York Times): Reducing incentives for risk-taking, October 12, 2009.
It is now widely accepted that compensation structures in financial firms should be devised to avoid excessive incentives for risk-taking and that doing so requires tying executive compensation to long-term results and preventing cashing out of large amounts of compensation on the basis of short-term results. What long-term “results” are we talking about though? We propose that risk-taking incentives could be improved by tying executives’ pay not only to the long-term payoffs of shareholders but also to those of preferred shareholders, bondholders and taxpayers insuring depositors.
• Roger Bootle (Telegraph): Does banking contribute to the good of society? October 13, 2009.
In the latest extract from his new book, The Trouble with Markets, Roger Bootle examines the principles behind bankers’ pay.
• Greg Canavan (The Daily Reckoning): Roach and his bearish, pessimistic attitude, October 13, 2009.
In the world of finance, pessimism is seen as an affliction and pessimists are outcasts. Throughout the years of the great credit bubble, Morgan Stanley economist Stephen Roach was a naysayer and paid the price, socially at least.
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