Sunday, November 26, 2006
Gift Guide
The Miami Herald published the annual Dave Barry Christmas gift guide today. Barry no longer writes a regular column for the Herald, but we still get him a few times a year. The gift guide is a favorite in our household. Click on the title and prepare to laugh.
US vs World Markets
US investors sometimes are guilty of myopia when it comes to investing. That is a bad thing as there are many opportunities outside the US, but international/global funds are now attracting most of the new inflows to mutual funds. This is classic performance chasing by individual investors. Investing in international markets can reduce the volatility of your portfolio if those foreign markets are not correlated to US market performance (which most developed markets are), but investing by looking at last year's returns is usually a bad idea. In looking at the latest issue of the Economist over the weekend, something in their Economic and Financial Indicator section caught my eye.
In this list, the S&P 500 has outperformed only the Japanese market this year. And of course, Japan was up big last year.
Looking at emerging markets doesn't help much.
On this list, the S&P 500 underperformed all markets except Pakistan, South Korea (and presumably North Korea),Taiwan, Colombia, Egypt, Saudi Arabia, and Turkey.
I would not be surprised if this performance does not repeat next year. The market always seems to act in ways that frustrate the largest group of investors. With individuals throwing money at international and global funds, it seems like time to be a little myopic.
In this list, the S&P 500 has outperformed only the Japanese market this year. And of course, Japan was up big last year.
Looking at emerging markets doesn't help much.
On this list, the S&P 500 underperformed all markets except Pakistan, South Korea (and presumably North Korea),Taiwan, Colombia, Egypt, Saudi Arabia, and Turkey.
I would not be surprised if this performance does not repeat next year. The market always seems to act in ways that frustrate the largest group of investors. With individuals throwing money at international and global funds, it seems like time to be a little myopic.
Friday, November 10, 2006
Economic Nationalism
In a post yesterday, I worried that the anti trade wing of the Republican party would find allies in the Democrats who now control Congress. I'm not the only one worried. The title of this post links to a story in Slate, "The Lou Dobbs Democrats":
Greg Mankiw also touches on the subject:
Those of you who want to delve into some deep thoughts on free trade might read this essay.
Most of those who reclaimed Republican seats ran hard against free trade, globalization, and any sort of moderate immigration policy. That these Democrats won makes it likely that others will take up their reactionary call. Some of the newcomers may even be foolish enough to try to govern on the basis of their misguided theory.
Greg Mankiw also touches on the subject:
Some of my best friends are Democrats. They often like to think that their party is good for international trade...
Those of you who want to delve into some deep thoughts on free trade might read this essay.
Dear Democratic Congress...Don't Even Think About It!
Dollar Declines After Reuters Says China May Diversify Reserves
By Daniel Kruger and Min Zeng
Nov. 9 (Bloomberg) -- The dollar fell to the lowest against the euro in more than two months after Reuters reported People's Bank of China Governor Zhou Xiaochuan said he has a ``clear'' plan to diversify the country's foreign-exchange reserves.
Is it coincidence that the Governor of the People's Bank of China chose yeseterday, the day after the Democratic takeover of Congress, to make this statement? I don't think so; it was just a couple of months ago that Sen. Charles Schumer (D-NY) and Sen. Lindsay Graham (R-SC) introduced a bill to impose a 27.5% tariff on Chinese goods if the Chinese weren't more accomodating in revaluing the Chinese currency upward agains the dollar. This was a shot across the bow of the new Democratic controlled Congress; pass the tariff bill and the Chinese will accelerate the "diversification" of their reserves, which are primarily US Dollar denominated Treasury Notes. The result was plain for everyone to see; gold shot up $18/oz and the dollar fell against most currencies.
The dollar traded at $1.2836 per euro at 2:06 p.m. in New York from $1.2757 yesterday. The U.S. currency touched $1.2848, the lowest since $1.2875 on Sept. 5. The U.S. currency traded at 117.91 yen from 117.84. The dollar earlier reached 118.59 yen....Gold rose after the announcement by the Chinese central bank's governor. Futures for December delivery increased $18.50, or 3 percent, to $636.80 an ounce on the Comex division of the New York Mercantile Exchange. A close at that price would mark the biggest gain for a most-active contract since June 30.
In a post yesterday, I said that anti-trade legislation is the greatest threat to the economy as a result of the Democratic takeover. This should be a reminder to everyone that our current prosperity rests almost solely on the continuation of the globalization process, which is characterized by trade liberalization. With reserves of $1 trillion, primarily invested in US Treasury Notes, the Chinese ability to punish the US for restricting trade is plain to see.
This also demonstrates why we believe that holding a position in commodities is not just a nice way to diversify your portfolio, but a necessary safeguard against the economic illiteracy of politicians. If populists in Congress succeed in imposing trade restrictions on China, the result will be much worse than the knee jerk reaction yesterday - and the best way to protect your assets is to own commodities, particularly gold.
Wednesday, November 08, 2006
Rumsfeld Resigns
Donald Rumsfeld resigned as Secretary of Defense today. He will be replaced by Robert Gates, current President of Texas A&M and a former CIA Director under the first President Bush. Too bad its not Bill Gates.
Election Effects
Yesterday's mid term election produced a mostly expected result. Market participants anticipated the change of control in the House. Senate control is still up in the air with the Virginia and Montana races still undecided - and recounts widely expected. I think it is likely that both those races will eventually go to the Democratic side as well.
What does this mean for us as investors? As I've stated numerous times, I don't think it makes a lot of difference - at least in the short term. While new Speaker Pelosi has promised greater civility and compromise, I don't expect much to be accomplished in the two years remaining until the next presidential election. Compromise is not in any politician's nature and no matter the words spoken on election night, a Democratic majority in Congress will make little difference in the legislative outcomes.
Prior to the election there were a number of issues that could affect the market and despite a change of control in Congress, the issues remain the same:
1. The expiration of various tax cuts in 2008 and 2010. The current Congress, despite Republican control, was not able to extend the tax cuts. The likelihood of extension is now even more remote. Most important to the markets are the dividend and capital gains cuts which expire in 2010. That was always going to be an issue in the 2008 election and nothing has changed.
2. Minimum wage increase. Minimum wage legislation is likely to pass the House and probably the Senate as well. Bush will likely veto, but there is no guarantee on that since he has yet to veto anything of any importance. I have stated before and still believe the economic impact is minimal. Indexing the minimum wage to inflation would make the legislation worse, but that will probably be resisted.
3. Anti Trade sentiment. There has always been a segment of the Republican party that is anti trade (see Pat Buchanan) and Democrats have been basically anti trade (they call it fair trade, but that is just rhetoric with no basis in economic fact) with the exception of the early Clinton years. This is probably the worst outcome of the election. Free trade (read globalization), by increasing the flow of low cost manufactured goods primarily from Asia, has allowed the Fed to pursue a less aggressive monetary policy by holding down consumer inflation. Were Congress to enact legislation that limits trade, especially from Asia, the result will be higher inflation and likely higher interest rates.
4. Demonizing of corporate scapegoats. The Pharmaceutical and Oil companies should start staffing up the legal departments now. The wind fall profits tax on oil companies - as bad an idea as has ever been tried - is likely back on the table. Hopefully, someone in Congress will be adult enough to point out that this has been tried before and failed miserably. Republicans and Democrats will both be looking to blame someone for their own failures on energy and health care policy. I don't expect any legislation to pass over a veto and therefore this is probably just headline risk.
5. Budget Deficit. I actually don't think the current deficit (or total national debt) is anything to worry about, but politicians sure want to make it an issue. Our national debt, at about 60% of GDP, is among the lowest in the developed world. It's less than Germany, France, Canada, Italy and Japan for example. Would I like to see a lower deficit? Of course I would and I feel certain that any normal person could eliminate the deficit over a long weekend, but don't expect any Congress to seriously address current or future spending. One fear I've expressed here before is that with Democrats in control it will just mean an even worse deficit as they add more domestic spending while the defense spending has to continue (no, I don't expect Democrats to get us out of Iraq).
The bottom line is that little has changed, at least for investors, since yesterday. The change in control of Congress should not change anyone's investment plans and should have little impact on the economy as a whole. Our investment thesis is unchanged.
What does this mean for us as investors? As I've stated numerous times, I don't think it makes a lot of difference - at least in the short term. While new Speaker Pelosi has promised greater civility and compromise, I don't expect much to be accomplished in the two years remaining until the next presidential election. Compromise is not in any politician's nature and no matter the words spoken on election night, a Democratic majority in Congress will make little difference in the legislative outcomes.
Prior to the election there were a number of issues that could affect the market and despite a change of control in Congress, the issues remain the same:
1. The expiration of various tax cuts in 2008 and 2010. The current Congress, despite Republican control, was not able to extend the tax cuts. The likelihood of extension is now even more remote. Most important to the markets are the dividend and capital gains cuts which expire in 2010. That was always going to be an issue in the 2008 election and nothing has changed.
2. Minimum wage increase. Minimum wage legislation is likely to pass the House and probably the Senate as well. Bush will likely veto, but there is no guarantee on that since he has yet to veto anything of any importance. I have stated before and still believe the economic impact is minimal. Indexing the minimum wage to inflation would make the legislation worse, but that will probably be resisted.
3. Anti Trade sentiment. There has always been a segment of the Republican party that is anti trade (see Pat Buchanan) and Democrats have been basically anti trade (they call it fair trade, but that is just rhetoric with no basis in economic fact) with the exception of the early Clinton years. This is probably the worst outcome of the election. Free trade (read globalization), by increasing the flow of low cost manufactured goods primarily from Asia, has allowed the Fed to pursue a less aggressive monetary policy by holding down consumer inflation. Were Congress to enact legislation that limits trade, especially from Asia, the result will be higher inflation and likely higher interest rates.
4. Demonizing of corporate scapegoats. The Pharmaceutical and Oil companies should start staffing up the legal departments now. The wind fall profits tax on oil companies - as bad an idea as has ever been tried - is likely back on the table. Hopefully, someone in Congress will be adult enough to point out that this has been tried before and failed miserably. Republicans and Democrats will both be looking to blame someone for their own failures on energy and health care policy. I don't expect any legislation to pass over a veto and therefore this is probably just headline risk.
5. Budget Deficit. I actually don't think the current deficit (or total national debt) is anything to worry about, but politicians sure want to make it an issue. Our national debt, at about 60% of GDP, is among the lowest in the developed world. It's less than Germany, France, Canada, Italy and Japan for example. Would I like to see a lower deficit? Of course I would and I feel certain that any normal person could eliminate the deficit over a long weekend, but don't expect any Congress to seriously address current or future spending. One fear I've expressed here before is that with Democrats in control it will just mean an even worse deficit as they add more domestic spending while the defense spending has to continue (no, I don't expect Democrats to get us out of Iraq).
The bottom line is that little has changed, at least for investors, since yesterday. The change in control of Congress should not change anyone's investment plans and should have little impact on the economy as a whole. Our investment thesis is unchanged.
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