June 14, 2013
By Steve Blumenthal
This week, I discuss five relevant thoughts:
- Dallas Fed President Richard Fisher on “The Grand Experiment in Modern Monetarism”
- El-Erian on “What the Markets are Telling Us”
- John Mauldin on Japan
- AQR’s Cliff Asness showing the forward return outlook of 2.4%
- Uncle Len – one of the most influential people in my life passed from this world
Art Cashin – Dallas Fed President Richard Fisher (from Cashin’s Comments 6-11-13)
From Art, “Regular readers know that I am a big fan of Dallas Fed President Richard Fisher and of his speeches and presentations. Mr. Fisher steers clear of obscure technical language and arcana. His language and presentations are polished yet perfectly understandable to a broad audience.
In his speech delivered in Canada last week, he alluded to Shakespeare, not for a quote but for a device. Here’s how he set up his exercise:
If the Fed’s monetary policy were the stuff of Shakespearean drama with a prototypical five acts, one might say we are in the last scene of the third act of a play titled “The Grand Experiment in Modern Monetarism”. We will not know until the next two acts whether the play will end felicitously or otherwise.
Here is the CliffsNotes summary of the play thus far: The play opened with the great financial tempest of 2008–2009, during which it appeared the ship of the mighty American economy would flounder. A humble, once unassuming but suddenly daring captain named Ben Bernanke took firm control of the nation’s monetary helm in Act II, contriving innovative ways to keep the economy afloat by jury-rigging monetary policy and adopting radical maneuvers. These efforts succeeded in steering the ship of the economy away from the shoals of depression and deflation and into more tranquil waters.
Act III began with a recovering economy heading on a more promising course. However, the headway being made was substandard, hindered by the flotsam and jetsam of fiscal incompetence and rising fears of a new storm brewing in Europe. In an effort to propel the economy forward at a better clip, the FOMC commanded that unprecedented amounts of monetary fuel be provisioned for the financial system through large-scale asset purchases, colloquially known as QE2 and 3. These purchases pumped almost $1 trillion into bank reserves. As yet, however, the banks have for the most part not shoveled that fuel into their boilers, lending only a small fraction of it to job-creating businesses and hoarding the remainder. Other members of the financial fleet have been heartened by the turn of events, especially those who finance themselves through the issuance of stocks and bonds rather than through bank loans. Yet they, too, have been reluctant to transform their renewed means into robust job creation. Thus, the economy remains weaker than desired and the ship of the economy is making less-than-desired headway.
Mr. Fisher then sets the first scene of Act IV as one of discussion and introspection as the Captain and his crew (the FOMC) evaluate “the utility of…..navigational tactics and, perhaps, fine-tuning them if not altering the course”. Mr. Fisher then goes on to explore an open range of possibilities in the final two acts. Will the heroic Captain be replaced before the voyage is done? (A course Mr. Fisher openly disdains – and hardly a favorite device of Shakespeare.) He outlines more and varied possibilities, noting that their choices and outcomes will determine whether the play will ultimately be deemed a Comedy (success) or a Tragedy (failure). It was an intriguing exercise, indeed.”
We are moving closer to Act V. Here is the link to Mr. Fisher’s piece.
- My two cents: There are many moving parts (Japan, China, EU). The global system is highly complex and interconnected in ways unlike any period before. Information is nearly instant and money moves from border to border quickly. Trade matters as we compete and work together on the global stage. We are not the only ones printing in attempt to gain lift. Each move is seemingly justified based on our internal self interests making it very difficult to steer the ship. There will be bumps.
Volatility is on the rise, liquidity is getting tougher in certain places, and anxiety is on the rise, by Mohamed A. El-Erian
“This could well be just a blip. After all, we have had similar episodes in the last two years. Alternatively, it could be indicative of a deeper change; and, if it is (as I suspect), the related underlying shifts could be secularly beneficial or could well signal more volatile times ahead.
The answers to these questions are consequential. They speak to whether investors should expect the strong rally in risk assets to resume or whether markets face the possibility of a correction; and they have an important influence on the prospects for growth and jobs.
So let us take a look at some of the key issues, starting with Japan:” Here is the link to the full article.
More on Japan – from John Mauldin’s Thoughts from the Frontline – Banzai! Banzai! Banzai!
Following on Fisher’s “The Grand Experiment in Modern Monetarism”, my good friend, John Mauldin, explains the core issues for Japan and how their issues impact us better than anyone I know. Personally, I am keeping a steady eye on the growing currency wars. Within the Banzai piece, John provides a link to a video webcast he did with Kyle Bass, David Rosenberg, Mohamed El-Erian and several other big names.
Years ago John wrote about sub-prime, CDOs and layers of structured derivative products when at that time it was on few radar screens. John provides us all with great content – for free.
AQR’s 2.40%. In another look at forward expected returns (GMO’s 7-year outlook, Research Affiliates 10-year outlook), the next chart is from AQR’s Cliff Asness where he outlines how difficult it will be to generate inflation-beating returns.
The chart was produced by Cliff Asness, the founder of AQR Capital Management in New York. It shows what the forecasted 10-year return, after inflation, would have been on a portfolio with 60% in equities and 40% in bonds at every point since the beginning of the last century. On this basis, the 10-year outlook has never been so gloomy…So long-term investors have few places to hide. Stocks look expensive relative to their own history, but less expensive than bonds – so there is no point in switching from stocks to bonds.
- My two cents: If current market valuation reflected PE in the 12- 15 range vs. 19.6 today LINK TO THE LAST TRADE SIGNALS (NDR Median PE based on actual reported earnings – not the hoped for overestimated Wall Street stuff) and dividend yields, inflation and interest rates were significantly higher than they are today, I would be less concerned about Japan, Europe and the financial and political dysfunction in the U.S. That just isn’t the case. Risk is elevated because valuations are elevated; therefore, stay focused on risk management and deepen your portfolio construction to include an overweight to tactical trading strategies and risk manage long-term focused equity exposure.
NY Times – Tracking the Euro Zone’s Crisis
Bookmark this site to track the developments in Europe. Here is the latest post: June 6 – Defying some calls for bolder action, the European Central Bank left its benchmark interest rate unchanged at 0.5 percent, even as it changed its economic forecast to a gloomier reading for the rest of the year. Mario Draghi, the President of the ECB, said the central bank now expected the region’s economy to shrink by 0.6 percent this year, worse than the 0.5 percent decline previously forecasted. The central bank expects growth in the Euro Zone of 1.1 percent next year — slightly higher than previous forecasts.
Lunch with Len
We lost a great one last week: Len Siegel. We sat at his kitchen table in 1990. Call me “Uncle Len”. I learned over the years that everyone called him Uncle Len. A client of mine from my Merrill Lynch days, he was one of the first to move his account to CMG when I set up my firm in 1992. Len passed over on June 5 or as I like to say, “graduated”.
Once a month for many years, our CMG team would jam into our conference room. It was Lunch with Len. Sitting at the head of the table, our honorary Chairman of the Board would lead the conversation. He would spoil us by bringing in hoagies and apple cake from the Ardmore Farmers Market (Philadelphia). He had a kind way of opening people up and making them feel special. While our sales team is naturally outgoing and conversation flows easily, he knew how to pull everyone into the conversation. Len, in his kind way could connect with everyone. “Magda, tell me about your boyfriend.” She’d blush and Len would share some piece of beautiful wisdom. “PJ, how’s Anna? Make some babies.” “Jason, what’s going on with your boys?” “Linda, I really like your Craig. Marry him.” “Andrew, what’s going on with your soccer team and baby Ben?” Oh, there were his famous dirty jokes – always told in good humor. To me, “how’s business?” He had a keen sense for how a business operates and would privately share his thoughts with me on my staff and client needs. Absolutely invaluable. A people person, always a smile and a kind word for everyone. He was everyone’s best friend. I remember reading “Tuesday’s with Morrie” years ago. For me, my family and the CMG staff, Len was our Morrie – an inspiration and gift to have in our lives. “I had a great run” he would always say about his life. May we all! I miss you my friend. Put the board together up there!
“Chairman of the Board – Uncle Len”
Have a great weekend,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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