Worth reading

Recommended reading, economic debates, predictions and opinions.
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Norbert Schlenker
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Worth reading

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_PK_
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Post by _PK_ »

Via Ibbotson Associates, here is a 1998 paper by Daniel Kahneman from the Journal of Portfolio Management -

Aspects of Investor Psychology
Daniel Kahneman, Ph.D.; Mark W. Riepe

Link is a PDF file.

http://www.ibbotson.com/download/resear ... hology.pdf
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Norbert Schlenker
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Post by Norbert Schlenker »

The issue is not whether the Fed should take the funds rate back to its neutral setting — or even into the restrictive zone if it wishes to cool the economy. That is imperative, in my view. The question is whether the Fed will engineer such a tightening. As much as I hate to say it, I do not think that this Fed has either the courage or the political will to pull off such a maneuver. The logic hinges on my belief that the Fed has thrown its full weight of support behind the Asset Economy — an economy that is built on a false foundation of unsustainably low real interest rates. Accordingly, I also believe that both the real economy and financial markets are hyper-sensitive to increases in positive real rates. Not only would that pose great risk to residential property markets and the refi bonanza that supports income-short American consumers, but it would take away the “candy” of the carry trade — possibly leading to a sharp widening of extremely low spreads in corporate bonds, high-yield securities, and/or even emerging-market debt. As we saw all too painfully in 1994-95, an unwinding of these carry trades from multi-year lows is not without serious consequences in the investor, speculator, and borrowing community.

In my view, systemic risk has built up dramatically during the low real interest rate regime of the past three years. A Fed that changes the rules of the game would have to confront that risk head on — not just in the in the form of a shell-shocked American consumer but also in the context of a potentially wrenching unwinding of carry trades that could well impart collateral damage on the US and other economies. This Fed is overly sensitive to political and market feedback and, in my view, not up to the time-honored independent role of being the tough guy and taking away that proverbial “punchbowl just when the party is getting good.” I fear at the first sign of weakness in the US economy or at the first hint of pyrotechnics in the financial markets, the Fed will flinch and abort its normalization campaign.

The bottom line could be a real shocker. I continue to believe that global imbalances will be vented one way or another. My hope is that this venting would take place through a combination of both currency and real interest rate adjustments. To the extent that the real rate adjustment is curtailed, the currency realignment would then have to pick up the slack. This underscores the distinct possibility of another sharp downleg in the dollar. The greenback could be expected to decline not just against Asian currencies (both yen and Chinese RMB) but also further against the euro as well — especially if Eric Chaney and I are right on the possibility of US-European productivity convergence. Most, including our own currency team, believe that the dollar has fallen enough. However, to the extent that the real interest rate adjustment is curtailed, the risk is that there could be a good deal more to come on the currency front.
Steve Roach, Morgan Stanley
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Post by Norbert Schlenker »

Buy bonds if you think the U.S. economy will slow. Buy bonds if you expect increased demand from pension funds and insurance companies to bolster prices. Buy bonds if you anticipate a decline in the supply of fixed-income securities.

But don't buy bonds on the assumption that the fixed-income market has become immune to what happens to economic growth and inflation, especially not at current yields. As the late gonzo journalist Hunter S. Thompson said in a November interview, ``If you're going to be crazy, you have to get paid for it or else you're going to be locked up.''
Mark Gilbert, Bloomberg
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Bylo Selhi
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Re: Worth reading

Post by Bylo Selhi »

Sorry Norbert. I made a bookmark of this when you first posted it and then later forgot where it came from and started another thread http://financialwebring.org/forum/viewtopic.php?t=109
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Post by yielder »

carry trades
Even the US consumer is doing this kind of thing. Short term consumption financed with long term borrowing through mortgage re-finance. And that gets unwound over a very long time. Pushing up short rates will slow down ARM borrowers. On the lender side, I think I'd only want to own ARMs if I were looking at MBS's. And even then, ARM defaults will start to rise so you have interest rate risk replaced by default risk.

ISTM, that the one of the biggest reasons for pushing up short rates continuously to some "normal" level, regardless of whether inflation exists, is to give room to cut if something snaps. With the exception possibly of the UK, central banks don't have much room to maneuver with short rates right now.

Mike
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Post by scomac »

Yielder wrote: With the exception possibly of the UK, central banks don't have much room to maneuver with short rates right now.
No surprise then that the average dividend yield of the FTSE 100 is materially higher than any other major equity index in the western world.

A red flag for investors in NA markets and particularily the income trust sector? Opinions?

Scott
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Post by Shakespeare »

A red flag for investors in NA markets and particularily the income trust sector?
I've been shouted down for voicing that opinion in the past.....
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Post by Brix »

Paul Krugman reviews The Coming Generational Storm by Laurence J. Kotlikoff and Scott Burns, an alarmist description of America's retirement/aging crisis.
How big is the demographic challenge? Pundits who want to sound serious love to contrast Social Security as it was in 1950, when sixteen workers were paying in for every retiree drawing benefits, with Social Security as it will be once the baby boomers have retired, with only two workers per retiree. But most of the transition from sixteen to two happened a long time ago. Since the mid-1970s there have been about three workers per retiree —and Social Security has been running a surplus. The real issue is what happens when three goes to two. How big a problem is that?

The answer is, medium-sized.
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Post by Norbert Schlenker »

[OT]Paul Krugman

I am not commenting here on Krugman's analysis of Kotlikoff and Burns. It is perfectly reasonable to argue that K&B is too alarmist.

However, I wouldn't take anything Krugman writes at face value either. He is the worst columnist the New York Times has ever given space to. While others have avowed viewpoints and one can discount what one reads because of that, Krugman pretends to be an objective economist when he is really a partisan hack of the Democratic Party.

A cottage industry has sprung up to debunk almost everything Krugman writes. It isn't too hard either. Virtually everything he puts on paper lies somewhere between veiled political diatribe and outright fabrication. For a central site that debunks Krugman repeatedly, with links to others that debunk repeatedly, try The Conspiracy to Keep You Poor and Stupid.[/OT]
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Post by Brix »

Norbert, there is a great deal of gratuitous Wisdom^H^H^H^H^H^H Soap Box in what you say. Google "donald.luskin stupid stupidest" etc. and you'll find a rich variety of answers to the question, "Who will debunk the debunkers?" It's all very entertaining: one can confirm and celebrate one's own political and philosophical prejudices almost ad infinitum.

Nonetheless the review is worth reading.
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Post by Norbert Schlenker »

Ah, I know it's doom and gloom but you might want to take a gander at this commentary, in particular this graph: Image.
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Post by _PK_ »

Hello Norbert -

Sometimes you amaze me. You link to a site about "keeping people poor and stupid" and commentary comes up from Donald Luskin -- he is a guy that can barely add 1 + 1.

You really need to give your head a shake.
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Post by Norbert Schlenker »

_PK_ wrote:Donald Luskin -- he is a guy that can barely add 1 + 1.
Are you arguing that Donald Luskin is an innumerate and partisan political hack but that Paul Krugman is not?
give your head a shake
In part, I rely on you for that. I appreciate your work in that regard. :D
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Post by _PK_ »

Krugman is partisan, but he is not innumerate.

Luskin's criticisms are consistently innane. Really, Norbert, I know you are a bright guy. I would think you would have better radar than this.

Here are just a couple of Luskin examples -

1) First a quote about using real vs nominal dollars -- "there is no unique virtue to inflation-adjusting — except that it makes all changes in income look worse, which well serves the liberal agenda of the Times’s economic reporting during an election year"

You use real data don't you Norbert?

2) Another Luskin quote "however mortgage rates and Treasury rates are determined, neither of them are interest rates... they are both nothing more than the yields of particular securities that reflect interest rates... as stocks, and... everything else... reflects interest rates.... Interest rates are an abstraction. "

Huh?

3) Here is a link to his company's website,
http://www.trendmacro.com/default2.asp

Explain to me how this isn't basic investment pornography?

4) Luskin repeatedly butchers charts and data analysis. A few quick examples -- he critized Krugman (and Summers) for an exchange rate prediction and then proceeded to show a chart that was exactly opposite of the actual data.

Another example that is even dumber. Luskin tried to show that middle class real incomes weren't being squeezed. So he took the average income of people earning 50K-75K in 2000 and compared it to the average income of people earning 50K-75K in 2002.

When it comes to Luskin, you wouldn't go far wrong if you just assume he is wrong. (Except , of course, on his investment predications. There he is right or wrong randomly -- otherwise he'd be a perfect reverse barometer.
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Post by Norbert Schlenker »

_PK_ wrote:Krugman is partisan, but he is not innumerate.
As I can't find a single still free Krugman column from the Times that uses numbers in any meaningful way, I'll put this aside for the moment. If I get a chance later today, I'll go through the Review that Brix linked and attempt to pick out obvious innumeracy there.
Luskin's criticisms are consistently innane.
Yes, yes, he's inane. I think I've even seen him live once on CNBC and he's even more inane speaking than in print. He is an investment pornographer. He has an unhealthy obsession with Paul Krugman.

How does any of this make Krugman not "an innumerate and partisan political hack"?

[Added two minutes later] I suppose you won't like this either, first because it's from one of the alarmists Krugman is trying to debunk, and second because it completely contradicts Krugman's endless rosy scenario recapitulation of why there is no Social Security problem that needs to be fixed.
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Post by _PK_ »

All of Krugmans columns (and some other stuff) are here

Knock yourself out

Oh BTW, I like Scott Burns and I'd be happy to discuss the merits of Bush' SS reform with you.
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Post by _PK_ »

Hi Norbert –

I read your Scott Burns link. I’ll certainly give Greenspan credit for chutzpah.

Greenspan’s basic concern is that government borrowing will cause interest rates to rise. Fair enough. Most reasonable people fear the same thing (and actually wonder why it hasn’t happened to a greater extent already.)

Here is a link to the CBO (see Table 1-1)

In 2004, the Bush administration ran a 574 billion on-budget deficit. However, because social security contributed positive cash flow of 68 billion, they only had to go to the debt market to the tune of one-half trillion. By 2008, the on-budget deficit is still estimated to be 546 billion. SS, though, will only be able to contribute 28 billion in cashflow.

So the basic premise is that because SS helps out 34 billion less than it did before (on a half trillion deficit) this is the trigger for interest rate increases.

Forget the tax cuts, war costs and biggest non-defense discretionary spending increases of any 1st term President since Carter, its SS’s fault.


Chutzpah.
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Post by ig17 »

"There is widespread willingness to discuss almost any aspect of Social Security reform affecting the inputs and outputs from the Social Security Trust Fund, including retirement age, calculation of the benefit structure, and range of the covered tax base for "contributions" to the Plan. However, nobody shows any interest in discussing reforms to the management of the Fund's investments. That the $1.5 trillion (and growing) fund backing the benefits is — and always has been — invested in a fashion that almost no other pension program would consider reasonable is apparently outside the realm of debate."
Don Cox, Social Insecurity and Personal Security [PDF, 320KB]
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Post by kenj »

Norbert Schlenker wrote:I am not commenting here on Krugman's analysis of Kotlikoff and Burns. It is perfectly reasonable to argue that K&B is too alarmist.
I'm curious as to how Laurence J. Kotlikoff and Scott Burns are too alarmist?

I'm almost finished reading The Coming Generational Storm and it has me very worried about my future. (I'm 35 years old) Higher taxes and inflation seems the likely outcome over the coming years if Kotlikoff's calculation of $51 trillion unfunded liabilities is accurate.

Kotlikoff's "menu of pain" in Chapter 2 talks about a 69% increase in federal income taxes, or a 95% increase in payroll taxes, or a 106% cut in federal purchases (which is impossible), or a 45% cut in Social Security and Medicare.

I'd love to hear from people far more knowledgeable in economics and finance than me such as Norbert Schlenker, _PK_, and others as to why I shouldn't worry?
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Post by _PK_ »

Hi ig17 -

Thanks for the Don Cox paper. He makes a few reasonable points, but he is wrong when he says "nobody shows any interest in discussing reforms to the management of the Fund's investments."

To give just one example, here is a quote from Brad DeLong, a Berkeley economist who worked for a while in the Clinton administration.

"The equity premium is an argument not for private accounts for individuals, but for the government to invest part of prefunded Trust Fund balances in equities. This is a risk that the government--not guys living on $1,000 a month Social Security checks--is best-placed to bear."

There is zero chance a Bush administration would move to a Canadian style CPP Investment Fund scheme. There is a far better chance Democrats would go that route.

Hi kenj - I notice you are from Japan. Are you an American working there?
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Post by kenj »

_PK_ wrote:Hi kenj - I notice you are from Japan. Are you an American working there?
Hi _PK_,

I'm a Canadian working in Japan as a self-employed English teacher. I've been here for a little more than 10 years now.
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Post by _PK_ »

Hi Kenj -

Laurence Kotlikoff is a good economist whose area of expertise is something called "generational accounting". Years ago, maybe even pre 2000 in the FundLibrary days, I linked to a paper he wrote called "An International Comparison of Generational Accounts". The abstract for the paper is here

Note that this paper is from 1998 and states -

"The world's leading industrial powers - the U.S., Japan, and Germany - all have severe imbalances in their generational policies. Unless currently living members of these countries pay more in net taxes or unless these countries cut their purchases of goods and services, future Americans, Japanese and Germans will face much higher rates of lifetime net taxation"

It goes on to say that "Canada appears to be essentially in generational balance"

Since that time Canada's finances have gotten better and the US's have gotten worse.
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Post by kenj »

_PK_, thanks for the quick response.

I read the abstract you linked. Thanks.

Well, I'm relieved to hear that, according to Kotlikoff, Canada is in generational balance.

I guess my next question is, if Japan, Germany and Italy with extreme generational imbalances and the U.S. with a severe generational imbalance really face higher net taxes and inflation in the future won't this have a severe and negative impact on all countries' economies, including Canada?

Will inflation from the U.S. spill over into Canada?
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Post by Brix »

For wider balance and (a 'rosier'?) context, here's Dean Baker's Amazon review of Kotlikoff and Burns, in which he tries to score some major points:
There are some very simple facts that readers of this book would probably never recognize.

1) The vast majority of the projected increases in government entitlement spending over the next 40 years are attributable to rising per person health care costs, not the aging of the population.

2) If the U.S. proves unable to contain the costs in its health care system, the economic impact will be devastating, even if we eliminated Medicare and Medicaid tomorrow.

3)If the U.S. cannot fix its health care system, then it would be easy to curtail spending on Medicare and Medicaid by simply contracting out for these services to the countries that have managed to control costs and still enjoy longer life expectancies than the United States (see "Medicare Choice Plus: The Answer to the Long-Term Deficit Problem" on the website of the Center for Economic and Policy Research).

4) If the U.S. does control its health care costs, then the increase in government spending on entitlements for the elderly over the next 40 years will be smaller (measured as a share of GDP) than it was over the last 40 years.

5) In forty years, our children will on average enjoy a level of after-tax hourly compensation that is more than twice as high as we receive today. This is not attributable to their brilliance and hard work, but rather will be the result of the public and private capital stock that we have passed down to them, as well as the state of technical knowledge..

All of these are simple facts that every economist recognizes. It is remarkable that a book could be published on generation inequality and never address these issues.
The reader might think these are wild claims. But just how wild are they? It seems highly unlikely that 'every economist', even when tied to a chair under a bare bulb and supplied with more detail, will accept #3. But if indeed Kotlikoff and Burns omit even to mention the others...

I'd be especially grateful to anyone who could provide or point to a soundly-argued demolition of the main thrust of Baker's criticism (rather than a drive-by denigration of Baker's credibility as an economist or a logic-chopping "fisking" of his thumbnail review).
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