Prieur’s readings (December 3, 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.

• David Leonhardt (The New York Times): Stocks start looking dear again, December 1, 2009.
Over the last few years, I’ve come to know and trust a version of the price-earnings ratio preferred by the economists Robert Shiller and John Campbell. It is based on an average of the past 10 years’ worth of corporate earnings, rather than just the past year (or a forecast of the next year’s earnings). The 10-year p-e ratio tells you much more about long-term returns than short-term returns. But it’s hard to get too excited about what stock prices may do anytime soon.

• Stanley Bing (Fortune): Fourth-quarter yearnings, December 2, 2009.
Could we have less talk about gloom and about doom in 2010? And more about, say, Carla Bruni?

• Paul Krugman (The New York Times): Double dip warning, December 1, 2009.
I’ve never been fully committed to the notion that we’re going to have a “double dip” – that the economy will slide back into recession. But it has been clear for a while that it’s a serious possibility, for two reasons. First, a large part of the growth we’ve had has been driven by the stimulus – but the stimulus has already had its maximum impact on the growth of GDP, will hit its maximum impact on the level of GDP in the middle of next year, and then will begin to fade out. Second, the rise in manufacturing production is to a large extent an inventory bounce – and this, too, will fade out in the quarters ahead.

• Michael Brush (MSN Money): Corporate America’s huge piles of cash, December 1, 2009.
After throttling down for a depression that didn’t happen, companies are sitting on billions in excess money. The likely result: A spending spree that could get the economy rolling.

• Caroline Baum (Bloomberg): Roubini’s bubbles float on flimsy credit source, December 2, 2009.
Zero percent interest rates started it. A weak dollar fueled it. Speculators fanned it. And famed forecasters see it everywhere they look. There’s only one problem with the claims that the dollar carry trade – borrowing dollars cheaply to invest in higher-yielding assets abroad – is inflating bubbles across the globe: There is no visible credit expansion, at least in the US, to support them.

• Jon Hilsenrath (The Wall Street Journal): Fed debates new role – bubble fighter, December 2, 2009.
Not so long ago, Federal Reserve officials were confident they knew what to do when they saw bubbles building in prices of stocks, houses or other assets: Nothing. Now, as Fed Chairman Ben Bernanke faces a confirmation hearing Thursday on a second four-year term, he and others at the central bank are rethinking the hands-off approach they’ve followed over the past decade. On the heels of a burst housing-and-credit bubble, Mr. Bernanke now calls financial booms “perhaps the most difficult problem for monetary policy this decade”.

• Niall Ferguson and Laurence Kotlikoff (Financial Times): How to take moral hazard out of banking, December 2, 2009.
Limited purpose banks would process securities and sell them to mutual funds. They would not be permitted to borrow to invest.

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