QE and the Wealth Effect

By Claus Vistesen Events in Japan and Libya do not seem to have derailed the ongoing positive sentiment in the market. But they just might have alerted various Masters of the Universe that black holes (or was that swans?) are both invisible and unpredictable until they occur. It is precisely because of this that such

Confessions of an Investor

By Niels Jensen The Absolute Return Letter, April 2011 “When models turn on, brains turn off.” Til Schulman I have been thinking a great deal about risk over the past couple of years. The depth of the financial crisis took many of us by surprise. I made mistakes. I am sure you made mistakes. In

Human Complexity and the Strategic Games of Uncertainty

In a recent post I discuss the limitations of neoclassical economics and the strain of behavioral economics that remains tethered to it. I argue that they fail because the market is inhabited by people, heterogeneous and context-sensitive, who do not live up to the lofty assumptions of mathematical optimization and Aristotelian logic that underlie these approaches – and do not do so for good reasons.

The nature of complexity also is different in the economic realm from that in physical systems because it can stem from people gaming, from changing the rules and assumptions of the system. Ironically, “game theory” is not suited to addressing this source of complexity. But military theory is

The Seven Immutable Laws of Investing

In my previous missive I concluded that investors should stay true to the principles that have always guided (and should always guide) sensible investment, but I left readers hanging as to what I believe those principles might actually be. So, now, for the moment of truth, I present a set of principles that together form what I call The Seven Immutable Laws of Investing.

They are as follows:

Always insist on a margin of safety
This time is never different
Be patient and wait for the fat pitch
Be contrarian
Risk is the permanent loss of capital, never a number
Be leery of leverage
Never invest in something you don’t understand

Another conversation with Bridgewater Associates’ Ray Dalio

The last time Ray Dalio conducted a major interview, the global economy seemed to be headed toward a major depression. This was in February 2009 when Barron’s had a conversation with Bridgewater Associates’ Ray Dalio. For his part, Dalio saw the episode as part of a necessary restructuring process. He called it the D-Process. The

Context, Content and the Turing Test

By Rick Bookstaber In a recent post I laid the blame for the inadequacies of neoclassical economics and behavioral economics on the failure to take into account human context. By context I mean that humans make decisions that are colored by their assumptions, experience, agenda, and even their sense of foreboding. One way for economics

The Federal Reserve’s Quantitative Easing is Raising Inflation Expectations

The real question is whether the inflation that bondholders are expecting will actually lead to rate rises. Bond vigilantes can sell Treasuries in expectation of future rate hikes. (Remember, long rates are simply a chain of expected future short rates.) However, if the Fed remains on easy street for an extended period, what I call permanent zero, then eventually the vigilantes are going to have to say uncle. This is the tug of war now going on. You have serious asset and commodity price inflation that has begun to feed through into consumer price inflation – first in food and soon across the board. Central bankers like Ben Bernanke and Mervyn King are telling us this will pass. If it doesn’t, then they will be forced to either hike rates or accept stagflation. The bond market vigilantes are selling bonds in expectation that the central banks will hike. Who wins this battle

Cotton Hoarding in China Shows There is Serious Commodities Speculation

You have to watch this video to believe it. The speculation in the commodities market is well out of hand. Cotton futures are at a record high on speculation that demand in China will continue to increase, as China is the world’s largest importer of cotton. Add in the flooding in Australia and you have the makings of a rally driven by fundamentals but bolstered and amplified by speculation.

Bloomberg explains in the video below.

A more malign interpretation of increased consumer spending

By Marshall Auerback Yesterday, Ed wrote a good piece on consumer spending and the return of the economy to the status quo ante. I think it’s a little bit more malign than that. There has been a real positive change in the underpinnings of this economic recovery and it all derives from the “consumer conundrum”. 

Why are We ‘Irrational’: The Path from Neoclassical to Behavioral Economics 2.0

By Rick Bookstaber A few months ago I discussed the failing of econophysics, and more generally, the economic paradigm that treats people like computers and views economic dynamics like physics. The natural follow up question is, “What can you say that is constructive?” The answer is an emerging approach to behavioral economics. Over the past

Back to the global imbalances norm

Here is my mantra regarding so-called ‘unsustainable’ debt levels. I feel strongly about this topic so I’ll repeat it and show you a few statistics on consumer debt from the recent US government data: [P]oor quality growth can continue for very long indeed. And it is this fact which allows the narrative of easy money

Housing bad, Consumer confidence good… What gives?

The gist of the conversation we had on Business News Network on Tuesday was that the data coming out of the U.S. ahead of the President’s State of the Union address was conflicting. Housing was dreadful, but consumer confidence was up; what’s happening? Here’s my take: Technical recovery almost over. We are leaving the technical