Prieur’s readings (April 26, 2010)
This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.
• John Hussman (Hussman Funds): Looking back, looking forward, April 26, 2010.
As of last week, our most comprehensive measure of market valuation reached a price-to-normalized earnings multiple of 19.1, exceeding the peaks of August 1987 (18.6) and December 1973 (18.3). Outside of the valuations achieved during the late 1990’s bubble and the approach to the 2007 market peak, the only other historical observation exceeding the current level of valuation was the extreme of 20.1 reached just prior to the 1929 crash. The corollary to this level of rich valuation is that our projection for 10-year total returns for the S&P 500 is now just 5.3% annually.
• Andy Xie (Caing.com): Wrangling with the wild bulls, April 21, 2010.
A double digit–growth rate and a howling one-third increase in property investment. Recent statistics, though far from accurate, unambiguously show an overheating Chinese economy as well as a speculative bubble. Consumption inflation is also likely to head towards double digits soon, even though official statistics still portray low inflation. Some sort of crisis may already be inevitable. But, by delaying remedial action, trouble, when it arrives, will only be bigger.
• The New York Times: Greece and who’s next? April 23, 2010.
As Greece careened ever close to default this week, frightened investors also rushed to dump bonds from financially troubled Portugal, Spain and Ireland. But while the markets increasingly see this as a euro zone crisis, many European leaders are in denial. Unless the European Union and the International Monetary Fund back up Greece, it could default on its debts. And the roughly $40 billion bailout promised – grudgingly – by Brussels with an additional $15 billion to $20 billion from the International Monetary Fund is unlikely to be enough.
• Mark Hulbert (MarketWatch): The euro’s demise, April 23, 2010.
John Dessauer caught a lot of flak two years ago for predicting that “the dollar would rise again”. Subsequent events have proven him right, and the U.S. dollar index is 12% higher today than it was when he made that prediction. Furthermore, the reasons Dessauer gave have also proved prescient – such as his forecast that the “euro is not a sustainable currency”. All this prompted me to check in with him this week to see what he is forecasting. He told me that, like before, he is bullish on the dollar for the shorter term.
• The Economist: No exit, April 22, 2010.
America’s GDP is growing, employment is finally expanding and the stockmarket is buoyant. Yet one thing has not changed: the Federal Reserve’s monetary pedal remains firmly pressed to the floor. For more than a year it has kept its short-term interest-rate target near zero while pledging to keep it there for an “extended period”. It has also bought $1.7 trillion of long-term bonds, primarily mortgage-backed securities (MBS), to keep long-term interest rates down. That is unsettling some inside the Fed, fuelling speculation it will soon signal an exit from that ultra-easy monetary policy, perhaps even by altering its “extended period” commitment when its next two-day policy meeting wraps up on April 28th.
• Gretchen Morgenson and Louise Story (The New York Times): Rating agency data aided Wall Street in deals, April 23, 2010.
One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good. One answer is that Wall Street was given access to the formulas behind those magic ratings – and hired away some of the very people who had devised them. In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees.
• James Grant (The Washington Post): The best financial reform? Let the bankers fail, April 23, 2010.
The trouble with Wall Street isn’t that too many bankers get rich in the booms. The trouble, rather, is that too few get poor – really, suitably poor – in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits. Happily, there’s a ready-made and time-tested solution.
• Simon Johnson (Bloomberg): Big bank breakup time gets boost from Goldman, April 23, 2010.
Much of the discussion around the Securities and Exchange Commission case against Goldman Sachs Group Inc. has focused on the legal issues. To the extent there has been analysis of the political dimensions, the focus has been mostly on how this may affect the fate of Senator Christopher Dodd’s financial overhaul bill. These issues are interesting, but we shouldn’t lose track of the broader economic and political context for this case.
• Jason Zweig (The Wall Street Journal): Full disclosure – most risks hide in plain sight, April 24, 2010.
Without full and proper disclosure, investors can’t make an informed decision. Even with full and proper disclosure, however, many investors still can’t make an informed decision. That is the unspoken irony at the heart of the Securities and Exchange Commission’s lawsuit against Goldman Sachs. Don’t get me wrong. One of the most fundamental tenets of financial regulation is that forewarned is forearmed. Without good disclosure, the markets can’t function.
• Paul Krugman (The New York Times): Don’t cry for Wall Street, April 22, 2010.
On Thursday, President Obama went to Manhattan, where he urged an audience drawn largely from Wall Street to back financial reform. “I believe,” he declared, “that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector.” Well, I wish he hadn’t said that – and not just because he really needs, as a political matter, to take a populist stance, to put some public distance between himself and the bankers. The fact is that Mr. Obama should be trying to do what’s right for the country – full stop. If doing so hurts the bankers, that’s O.K.
• John Carney (The Daily Beast): What Goldman’s “victim” knew, April 23, 2010.
The SEC says Goldman duped a German bank. But John Carney uncovers documents that suggest these alleged victims of the scheme should have known what they were getting. The SEC may have shot itself in the foot when it made a failed German bank a key part of its fraud case against Goldman Sachs.
• The Economist: Greedy until proven guilty, April 22, 2010.
When Goldman Sachs went public in 1999 its prospectus began: “Our clients’ interests always come first. Our experience shows that if we serve our clients well, our own success will follow. Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore.” Only the most naive investor read that as a commitment to do-goodery rather than calculated self-interest.
• George Soros (Financial Times): America must face up to the dangers of derivatives, April 22, 2010.
The US Securities and Exchange Commission’s civil suit against Goldman Sachs will be vigorously contested by the defendant. It is interesting to speculate which side will win; but we will not know the result for months. Irrespective of the eventual outcome, however, the case has far-reaching implications for the financial reform legislation Congress is considering.
• John Authers (Financial Times): Why bets on synthetic CDOs must be banned, April 23, 2010.
• Bill Powell (CNN Money): Searching for China’s Henry Ford, April 23, 2010.
The Beijing Auto Show opens this weekend, and as you’d expect, carmakers from far and near have flocked in. China is their oasis: a market growing relentlessly at a time when the world’s richest economies are just now staggering back to their feet. China, in case you need to be reminded, is not the market of the future anymore. It’s the market of the present – and probably will be forever.
Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.