oec2000

The question is how effective is the multiplier effect, especially given the likelihood that some portion of spending leaks out as payment for inputs that are imported. The problem I have with Koo's analysis is we don't know how the counterfactual would have played out. We do not know, for example, whether Japan would have fared better if they had simply let the forces of creative destruction work. The downturn would have been severe but it might have been followed by an equally sharp rebound. There have been cases of emerging market economies that have had to take tough IMF medicine (Latam and South East Asian countries in the 80s and 90s) in response to debt problems. I believe they experienced balance sheet recessions too. These countries were not afforded the luxury of stimulus spending; instead fiscal austerity was prescribed; yet they eventually recovered in relatively short order in some cases. If Richard Koo had discussed these other cases and explained how they fit into his theory, it would make his analysis much more compelling. As it is, his work stands on a sample of one - it sounds logical and plausible but it is far from proven imo. I have no problem with stimulus spending per se. It is fine if you are doing it from a position of fiscal strength (which is what Singapore and HK did in 1998); my concern is when you try to do it from a weakened position because of the unintended consequences that may develop.

That is exactly what the Japanese did and see what that got them - 200% debt to GDP. Let's not go down the same bridge, Mr Obama. This is the quandary facing the politicians in the US (and Europe). All the sensible projects that will provide future returns to the economy have too long time horizons (like most good investments) and will not benefit their election goals. The proposed Greek bailout reeks of the same bad logic. Say, they advance Greece the short term funding they need to tide them over for a few months and at the sam time ask existing bondholders to exchange their holdings into much longer dated holdings. Greece's structural problem remains (the debt is too much for the economy to bear) so yields on their bonds stay elevated. The private bondholders (lots of banks presumably) will then suffer losses on the new long dated bonds when they are marked to market yields. So, they still need to be bailed out to shore up their capital base - effectively resulting in two bailouts instead of one (if they simply allow Greece to deafault/restructure and then shore up the banks that take a hit). With overleveraged domestic economies, the West has limited options to stimulate domestic growth through stimulus. Export growth would be the solution - but who do you export to when everyone is trying to deleverage?

Thanks. Looks like I should revisit the book to get the insights you were able to cull. I sort of gave up one-third of the way into the book and after the markets recovered in 2009 it became sort of moot (mayeb not, as we are now seeing!).

Buffett for Treasury Secretary? It's a stretch but does anyone else feel that he is beginning to sound more and more interested in policy making these days?

You are probably referring to the instance I mentioned when Rosenberg pointed out that everytime that ECRI index hit a certain negative level a recession always ensued and he was questioning why ECRI refused to make the recession call. I believe Achuthan explained then that rather than using just one data point, they look for pronounced and pervasive signals to avoid false signals. This is a process that they have consistently employed for decades so it is not a case of them changing their argument to fit the facts. The fact is that Achuthan was right not to make that call and Rosenberg has developed something of a perma-bear reputation (which he is not). There is no guarantee that they will be right this time but their track record is certainly good enough to justify paying attention.

For the same reason Steve Jobs doesn't translate his track record of making outstanding consumer electronics into making outstanding cars? :) I'm guessing Achuthan makes a pretty good living from economic forecasting. I supect there is a good reason why people pay up for ECRI's forecasts when you can get them free from the likes of Goldman, Merrill and gang.

Green King, Thanks for your insight. It explains the disconnect one sees in China with exponential price increases in prime locations while at the same time you see many empty buildings that have been built in the middle of nowhere. (Anyone who has taken one of the heavily subsidized tours to Shanghai or Beijing would have noticed the hotels they put you in. Nice 4-star hotels but often in completely ridiculous locations.*) At first, I couldn't understand why these clearly uneconomic projects were built but your explanation about the incentives for local governments and their officials to build clarifies this. Guess the government-owned banks ultimately eat the losses. I suppose China is still some ways from being a fully market economy in certain sectors. Prem has also mentioned several times about his wariness about the excesses in China. Difficult to see how this ends without tears. Even in China, I don't think leaders can defy the laws of economic gravity indefinitely. oec * (For those who are interested, the tours are ridiculously cheap - $50 or $100 per person for a 1-week tour with accommodation in 4-star hotels and 3 meals a day all included! These prices are for Canadian residents; I have heard but have not confirmed that some torus are free for US residents!)

If memory serves me right, ECRI have an outstanding track record in calling turning points in the economy. No other economic forecasting outfit comes even close. Can someone with access to their service confirm this? He is not given to making fist pounding calls (and he unequivocally disagreed with Dave Rosenberg's double-dip call last year) but this is as close to it as I have ever seen from him: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/09/30/bloomberg_articlesLSC7L50UQVI9.DTL "The U.S. economy is tipping into a new recession," Achuthan, the group's chief operations officer in New York, said in a radio interview today on "Bloomberg Surveillance" with Tom Keene and Ken Prewitt. "You have wildfire among the leading indicators across the board. Non-financial services plunging, manufacturing plunging, exports plunging. That is such a deadly combination." "We at least have a couple of quarters of worsening economy in front of us," Achuthan said. "So if you think this is a bad economy, you haven't seen anything yet." On the program, he points out that his call is not dependent on a market dislocating event in Europe (which their models can't predict). He likened it to the recession call they made in 2008 before Lehman (which, again, they could not know would happen). The difference between the rail indicators and the ones Buffett quotes from BRK's businesses is that they are coincident indicators compared to ECRI's leading indicators. I believe he also mentioned that their Future Inflation Gauge was turning down for Europe - another bit of good news for FFH's defaltion bet.

For those interested in understanding China from a longer perspective, I recommend Charlie Rose's interviews with a few of China's business leaders on 28 Sep 2011. http://www.charlierose.com/schedule/ As usual, Charlie does an excellent job despite the challenge of language. I was surprised and impressed by the relative openness and candour of the interviewees; it's a sign of the growing confidence of China that establishment individuals are prepared to openly discuss their weaknesses and challenges. Their understanding of global issues is also quite deep and thoughtful - a glaring difference from the often mindless ideological chatter we get from the Washington crowd. If these individuals are representative of people in leadership roles in China today, they have clearly made a huge leap forward from the China of the 1990s. While they have their share of socioeconomic challenges, it seems that they will seek out pragmatic solutions that are not shackled by the sort of ideological baggage we see in the West. The other thing that struck me was the contrast between China and the US. On the one hand, you have an economic power that is gaining in ascendence, yet their leaders speak in measured, cautious and thoughtful tones; on the other hand, you have an economy that has serious long term challenges, yet their leaders deal in shrill and shallow soundbites, preferring to focus mainly on the next opinion poll or election.

Agree with you - the G&M does tend to be balanced and less hysterical. Chanos is virtually persona non grata on this board but his comments on China are worth paying attention to - no question of short and distort here imo. Would like to hear from members here who are more familiar with China (or better still live there) what thoughts they have on Chanos's remarks.

Strange that there would be no disclosure requirements for Porsche as they built up their position. Or, did they simply break the rules?

dwy000, Thanks again. Hope I did not miss it in your answer but I was more concerned about the collateral that you post with an institution that goes under. (I understand the limited exposure to institutions when they have to post collateral with you but do not do so promptly.) Let me try again with a more specific example. Let's say FFH enters into an equity index swap with Lehman, the swap moves against FFH, FFH posts collateral with LEH, then LEH goes bust. If at this point, FFH has $10m of collateral posted with LEH and no other positions to offset it with (so the $10m is net), what is FFH's position? Is it an unsecured creditor or does it have some priority claim over the $10m. My guess is that it is unsecured and it is therefore at risk. oec

These rates (except for the last 3 top ones) are pretty close to what Canadians used to pay around 2000 (rates were higher before and have come down since) when we were running down our debt burden. The economy was able to grow at a reasonable rate but we were helped by a weak C$ and a US economy on Greenspan steroids. The problem now is if Europe and the US try to increase taxes at the same time. I agree absolutely. Simple and elegant solution that has the added benefit of making many IRS/CRA employees redundant. There would be a depression in the tax accounting and legal professions but I don't think many will feel sad for them - so much completely unproductive spending is wasted in this area. We could mobilise some of the taxpayer savings generated from not having to pay tax professionals to reducing government debt. I wonder, though, how well it will work as an election platform no matter how much sense it makes.

And Kiefer Sutherland - he's the guy who gets the terrorists in the end! ;D

How did this guy get on this board? :o :o :o Can't believe I spent a few minutes watching the video!

Another great post, dwy000. Thanks for sharing your knowledge. Like to ask you another question. Can you elaborate on the risks that an institution is subject to if the counterparty providing it with the hedge fails? So, say, Bank A has entered into a swap with a client and decides to hedge its position by entering into an offsetting swap with Bank B. Assuming that Bank A has had to post collateral with B over time because of the position moving against it. Not a problem yet at this point since A's client would also be posting collateral with A. But, say now B goes into liquidation. What happens to the collateral that A has posted with B? Does it become available to settle the claims of all of B's creditors? And, what can A do to maintain its hedge? Can it unilaterally cancel the hedge with B and institute another hedge with someone else? What if the new hedge now costs more (I understand it may not be significant for swaps but it could be for option type hedges)?

dwy000, Great explanation that puts things in perpective! It seems logical that the risk of another AIG is significantly reduced today because of AIG 2008. But, it is human nature to want to fight the last war. oec

I don't think the problem is a lack of solutions. There is enough brainpower in Washington DC to arrive at workable solutions. The problem is that the system does not reward (in fact, it penalises) people who come up with the truly good long term fixes - because good fixes for the economy are usually bad ideas for getting elected. It's exactly what we are seeing in Europe today. And, it is exactly the same actions (policies that pander to the voters) that got into the current mess we are in. The problem is self-interest and wrong incentives - what is needed are solutions to these.

It's the perfect crime where the victims don't even realize they have been robbed! It's a shame that people also don't realize that the nation is shortchanged because low interest rates discourage savings and investment at the expense of consumption.

The best part is when people who say you can't value gold claim that it is overvalued. ??? I have felt for a while now that the unusual economic conditions we are going through justify a more prudent approach including finding things that will protect you if the shit hits the fan while still looking for value - a two pronged approach. So, I have held small positions in cheap gold miners from when gold was about 800. Positions were too small to move the meter on my overall portfolio return but I see them more as cheap puts on Armaggedon. More recently, when silver started to look interesting, I wanted to get some exposure but felt uncomfortable getting into a crowded trade so bought some SLV 25 puts as protection to allow me to scale into SLV or cheap silver miners if there should be a pullback in silver. For a while it looked like I had missed the boat but things are looking up right now! Paid 3 for the 2013 puts. Hopefully this will compensate for the pasting I've taken on YLO this year! The purpose of my post is not to point out how smart my trade was - luck had much to do with it - but to advance the view that we can retain our core value investing discipline without putting blinkers on to what other smart people are saying and doing. And, if circumstances arise which are exceptional, we should pay attention and try to protect ourselves or better still take advantage of them rather than adopt an evangelical view that we will do value investing and nothing else. People like Watsa, Klarman, Burry use this approach quite successfully and no one would accuse them of not being value investors. Even Buffett has done things that do not fall purely into the value mould. We do ourselves a disservice when we close or limit our minds to ideas that do not fit within a fixed model. It may not be a good analogy but this is how religious zealotry works. I am not advocating that we willy-nilly adopt macro based approaches to investing. However, I believe there is something to be gained by allowing our value decisions to be informed by exceptional circumstances. It is instructive to look at cases when a dogged approach has hurt value investors - Bill Miller and Canadian mutual fund company, AIC, are examples. Berkowitz is a smart guy but he could become victim to his concentration on financials because of his reliance on non- permanent capital. It's a quiet Saturday morning so I thought I would start a firestorm. ;D

Read this after learning of it at the AGM. Have to say I found it heavy going and really hard to get anything useful about investing or economics from it. A lot of data but not too much analysis - that's my take fwiw. People interested in a detailed history of how things unfolded in the 1930s may get more out of it than I did.

A good book for anyone interested to understand Japan's lost decades. Also relevant today because of parallels to the current US and Euro situation and certainly explains why Bernanke's huffing and puffing is not working. His arguments appear compelling but could not bring myself to be fully comfortable with his analysis because of his obvious bias (in trying to push his thesis) which is based on a sample of one (Japan). This is more a reflection of my shortcomings as an economist (which I am not) - I just did not feel competent enough to critically evaluate his thesis. It does seem that FFH and Lacy Hunt are big believers as is apparent from their actions - deflation bet and lengthening bond durations.

Gold acted the same during the 2008 meltdown so this should not be surprising. A commonly given explanation is that people sell what they can (i.e. stuff you own that hasn't been hammered) when they get margin calls. Sounds plausible enough but who really knows.

Yah I agree. Let's just crash and get it over with. Be careful what you wish for? ;D

Haven't read exactly what he said but balanced budgets do not create any net stimulus. Keynes, aka the guy who wrote the book on stimulus spending, advocated running deficits to counter recessions. If Shiller's thesis made any sense, the US could instantly solve its problem by raising $5t in taxes and spending it all on stimulus - that would be one heck of a free lunch. For a country like the US that consistently runs trade deficits, stimulus spending that is aimed at increasing consumer spending invariably results in leakages (due to money flowing out for imports) and does not provide good value. Until the politicians figure out how to spend money more productively, it seems a bad idea to tax and spend more. Because of the election cycle and the focus on short term stimulus, there is little hope that they will make the right decisions on spending.