Prieur’s readings (October 28, 2009)
This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.
• Joseph Stiglitz (The National Interest): Death cometh for the greenback, October 27, 2009.
Whichever path we take, like it or not, we will be moving away from current arrangements, the dollar-reserve system. There are only two questions: will the movement away be orderly or disorderly, and will America play a part in shaping the new system that will emerge?
• Doug Kass (TheStreet.com): Earnings likely to trend lower, October 27, 2009.
Underpromising and overdelivering is the oldest game in the investor relations handbook, as earnings expectations are often cagily crafted by corporate managements. In turn, many Wall Street analysts, emulating Ralph Wanger’s zebras, follow that company guidance in adopting a herd mentality that morphs into a Wall Street consensus.
• Patrick Rial (Bloomberg): S&P 500 overvalued by 40%, set to fall, Smithers, October 26, 2009.
The US Standard & Poor’s 500 Index is about 40% overvalued and headed for a drop as central banks pull back on securities purchases that pushed up asset prices, according to economist Andrew Smithers.
• Christopher Wood (The Wall Street Journal): Is the US economy turning Japanese? October 26, 2009.
With the US government stepping in to keep markets from clearing, today’s US economy in many ways resembles the post-bubble Japanese economy of the 1990s. Ultra-loose monetary policy and low demand for credit, combined with high unemployment and consumer deleveraging, could lead to a prolonged slump.
• Martin Wolf (Financial Times): How mistaken ideas helped to bring the economy down, October 27, 2009.
The era when central banks could target inflation and assume that what was happening in asset and credit markets was no concern of theirs is over. Not only can asset prices be valued; they have to be.
• John Kay (Financial Times): “Too big to fail is too dumb an idea to keep, October 27, 2009.
While regulators may be at fault in not having acted sufficiently vigorously, to say they caused the crisis is as ludicrous as saying that crime is caused by the indolence of the police.
• David Cho, Brady Dennis and Neil Irwin (The Washington Post): Bill in works to let US dissolve failing firms, October 27, 2009.
House Democrats and the Obama administration are preparing to introduce major legislation aimed at eliminating the devil’s choice the government faced last fall, when officials felt forced to decide between spending billions of dollars to rescue some of the nation’s most powerful financial firms or letting their failures sink the economy.
• Robert Reich (The Huffington Post): Breaking up the big banks, and why Congress won’t do it, October 28, 2009.
The Street obviously detests the notion that its behemoths should be broken up. That’s why the idea isn’t even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done. Whether it’s using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up – and soon.
• Simon Johnson and James Kwak (The Washington Post): The home-buyer tax credit: Throwing good money after bad, October 27, 2009.
Congress and the administration seem likely to extend the first-time-home-buyer tax credit. Senate Majority Leader Harry M. Reid wants to extend it through December 2010 but phase out the amount over time; Republican Senator Johnny Isakson, a former real estate agent, wants to extend it through June but double the income limit and make it available to all home buyers. This is a bad idea.
• Gary Fields (The Wall Street Journal): “Political uncertainty puts freeze on small businesses”, October 28, 2009.
The economy remains unsteady 22 months after the recession began, with banks restricting credit and consumers hunkering down. For small businesses, and many others across the country, there’s an additional dark cloud: uncertainty created by Washington’s bid to reorganize a wide swath of the US economy.
Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.