Monday, November 19, 2007

Recession Risk

John Hussman runs a mutual fund (Hussman Strategic Growth) that I own. He's an Economist by training and he's proven to be a very good fund manager. The best thing about John is that he publishes a weekly market commentary that explains his current take on the market and the economy as a whole.

In the last 18 months he's been pretty cautious due to high equity valuations. That said, his weekly columns are always quick to point out that his observations are not predictions and he's very good about disclosing the futility of short-term market forecasts.

Not anymore (emphasis added by me)...

In short, the financial markets are at a critical point. It's possible that investors will somehow adopt a fresh willingness to speculate, but my impression is that in the weeks ahead, investors will be forced to recognize that recession risk has tipped. That's not to say that this realization will produce one-way market movements. Seasonal factors tend to buoy the market a few trading days before holidays and a few days around the turn of each month, and as I noted last week, oversold conditions lend themselves to “periodic short squeezes and spectacular but short-lived rebounds” (which we observed on Wednesday before quickly eroding). So we will almost certainly observe advances driven by investors frantic to “buy the dip” and “catch the rebound.” Overall, however, the return/risk profile on both stocks and the economy as a whole appear increasingly lopsided toward bad outcomes.

As I emphasized last week, my intent here is not to encourage investors to depart from carefully considered investment strategies. The real issue is that investors tend to overestimate their ability to stick with large (often inappropriate) exposures to equities during significant market downturns. I hope to encourage investors to carefully consider their ability to withstand a standard, run-of-the-mill 30% bear market loss (which has historically occurred once every 5 years or so) without deviating from their investment plan. Investors who can't believe that that sort of decline is, in fact, standard and run-of-the-mill are probably already in trouble because they haven't bothered to look at the data. None of this requires that we forecast or necessarily expect such a decline. But investors emphatically should not rule out such a decline in considering their investment exposure.

Run away!

Sunday, November 18, 2007

Income Inequallity & Twisted Ankles

For example, the most frequent solution to income inequality, and the one advocated by Krugman in nearly every interview about his book, is higher taxes on those at the top of the income scale.

While this may give the appearance of lessening inequality, in actuality it does very little. Essentially, it is equivalent to twisting
the ankle of the fastest runner in the world in an attempt to make other runners faster. In no way does this make other runners faster.

Indeed. Read the whole article

Thursday, November 15, 2007

Africans join lobby for lower farm subsidies

More greedy corporate stooges shilling for free trade.

Africans join lobby for lower farm subsidies

When Good News is No News

Where has all the Iraq news gone? Hmm... could it be that the media has no interest in positive news from the front lines?

When Good News is No News

The Great Elite Back-Down

The Corner on National Review Online

It's us, buddy, the great unwashed. This is still a democracy we have here. Try to keep that in mind, eh?


Wednesday, November 14, 2007

The Skeptical Optimist: Deficit Watch thru Oct 2007

The Skeptical Optimist: Deficit Watch thru Oct 2007

The total 12-month deficit is a 1.2% of GDP and revenue is still growing at a faster pace than federal outlays (yes, my friends on the left, even including the GWOT).

Where's the huge deficits predicted by the Dems? Bush cut taxes, the economy has flourished and tax receipts are up. The Left often miss the fact that tax revenues are based on two factors... the tax rate and the tax base. Isn't it better to spend our time focused on the base?

Monday, November 12, 2007

Cash Flow, Credit Cards and Pay Day Loans

Cash flow is often the difference between solvency and bankruptcy for many businesses... especially small ones. You can have a great product, excited customers and even fantastic sales - but if the cash is leaving faster than it's coming in, most businesses either pack-up or go to a commercial bank for a line of credit. This line of credit allows them (for a cost) to smooth-out the differences between expenses and cash income. Very few businesses could survive without this assistance.

When we look at the smallest of businesses, the household, this same cash flow issue arises more often than most of us would prefer. For higher-income folks like me, we can simply use credit cards and cash savings. For those on the lower end of the income spectrum, however, credit cards and big savings accounts are a non-starters. What's left? Pay-day loans! Hooray! Yes... yes... I know... these high interest loans are one of the favorite punching-bags 'consumer-protection' advocates and journalists. I would argue, however, these negative feelings are misplaced.

Pay-day loans, much like credit cards, HELOCs and alcohol, are best used in moderation. Most critics point to two separate issues: 1) the high interest rates and 2) some borrowers who take multiple loans from multiple lenders and enter into a debt death-spiral. As for the interest rates, they are driven by the high risk nature of the loans. Having had several sub-prime loans default, I can personally testify to the likelihood of loss. Note to all my lefty readers: if you don't like the interest rate, I suggest you loan some money to folks living paycheck-to-paycheck and let me know how it turns out.

The second concern, the debt death spiral, is more of a comment on the poor level of financial education in the US than on the pay day loan folks. There are a whole host of personally destructive activities that negatively impact both the rich and the poor. A dynamic and free society carries with it both the freedom to succeed and the freedom to fail.

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