Prieur’s readings (February 1, 2009)
This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.
• John Authers (Financial Mail): Investors have no new reasons to be fearful, January 30, 2010.
Last year’s rebound was, most likely, a bear market bounce. The central hypothesis remains intact. On balance of probabilities, the rally since March has been a (very big) rally within a bear market, and the downward move is a (not so big) correction to that rally. There is no new reason to fear we will revisit the worst lows of 2009, but every reason to believe that stocks are still fundamentally mired in a bear market.
• John Hussman (Hussman Funds): Reported earnings versus “owner earnings”, February 1, 2010.
If you keep one thing in mind during the current earnings season, it should be that operating earnings significantly overestimate what Warren Buffett would refer to as “owner earnings” – the actual amounts that are paid out or retained for the benefit of shareholders. Again, stocks are nothing but a claim to the long-term stream of cash flows that will actually be delivered to investors over time. Everything else is hype, smoke and mirrors.
• Patrick Jenkins and Gillian Tett (Financial Times): Bankers try to fight off wave of controls, January 31, 2010.
Bankers at the World Economic Forum in Davos were fighting furiously last week to fend off a wave of controls on sectors ranging from bonuses to proprietary trading and derivatives. Whether the banks could claim victory for their lobbying at Davos remains unclear, partly because the financial industry is fighting on many fronts.
• Stephen Gandel (Time): Did foreigners cause America’s financial crisis? January 15, 2010.
Much of the fault of the financial crisis has been heaped on Wall Streeters, unscrupulous mortgage lenders and weak regulators. But in a new research paper, economist Ricardo Caballero says there is another major group of contributors to America’s monetary mess who are not getting the blame they deserve: foreigners. “There is no doubt that the pressure on the US financial system [that led to the financial crisis] came from abroad,” says Caballero, who is the head of MIT’s economics department. “Foreign investors created a demand for assets that was difficult for the US financial sector to produce. All they wanted were safe assets, and [their ensuing purchases] made the US unsafe.”
• Floyd Norris (The New York Times): In the packaging of loans, a bust with precedent, January 28, 2010.
Real estate securitization was one of the great innovations in finance in the last quarter-century. In an unprecedented way, it allowed vast sums of money to go into the real estate market from people who traditionally did not take part in it. But the people making the loans did not need to worry if they would be repaid, and in the end the entire edifice collapsed. Now, with the securitization market nearly dead, getting that market going again is vital to providing Americans with mortgage loans. Securitization may need to be reformed a little, but it remains critically important to a well-functioning economy.
• Paul Volcker (The New York Times): How to reform our financial system, January 30, 2010.
I am well aware that there are interested parties that long to return to “business as usual”, even while retaining the comfort of remaining within the confines of the official safety net. They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks. In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly. I’ve been there – as regulator, as central banker, as commercial bank official and director – for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain – most notably in the fair weather that inevitably precedes the storm. The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure – failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.
• Clive Crook (Financial Times): America can square its fiscal circle, January 31, 2010.
The question to ask voters is not whether they want guaranteed health insurance, which they do, and higher taxes, which they do not. It is whether they are willing to pay higher taxes for guaranteed health insurance.
• Colin Barr (Fortune): Goldman’s not going anywhere, January 28, 2010.
Does anyone really believe a little populist outcry will make Goldman Sachs crawl under a rock? The New York investment firm has come under attack as the backlash against bank bailouts builds. Long associated with uncanny trading profits, huge bonuses and political connections, Goldman lately has become the face of Wall Street venality.
• Wolfgang Münchau (Financial Times): What the eurozone must do if it is to survive, January 31, 2010.
While the Greek government is at least beginning to recognise the need for reform, perhaps too late, Spain’s political establishment remains in denial.
• Katherine Griffiths, Miles Costello Patrick Hosking (Times Online): Davos: A tug from Zug as financiers plot UK exodus, January 29, 2010.
Senior financiers are using top-level meetings in Davos to warn that the hostile tax regime in Britain will persuade many bankers to move to Switzerland. Several Swiss cantons have been marketing themselves in London, with Zug – the tiny canton where individuals can pay about 10 per cent in income tax – one of the most active.
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