Friday, February 25, 2011

Dollar Not Even Started Against Non-reserve Currencies

Bernanke is not finished with his devaluation job until significant additional deterioration in USD on a broad basis.  With low rates and continued stability in the dollar, I can see how he can justify pursuing the bad monetary policies enabled by emerging market currency undervaluation and dollar reserves.

fed fred broad dollar

As I am assembling data on the country death spiral of lower domestic stock prices, higher bond rates, and >50% currency devaluation, I wonder how the dollar will survive an attack against itself or any other currency, since the first reaction of another currency attack will be to sell dollars in defense.

Thursday, February 24, 2011

If Things Are So Bad, then Why??

If things are so bad, then why are stocks only down as much as the safehavens (gold, bonds, and yen) are up over the last 5 days?  This is very strange to me.


Wednesday, February 16, 2011

Silver and Russell 2000

When I find a chart that looks like this, I always like to explore a little further.


I pull it into R and try to find anything worthwhile.  I do not find anything, except that I do not want to be trading both in the same direction and expect any diversification.  But we all know the whole world is correlated.

From TimelyPortfolio
From TimelyPortfolio



R code:



end<- format(Sys.Date(),"%Y-%m-%d") # yyyy-mm-dd

# Pull tckr index data from Yahoo! Finance
getSymbols(tckr, from=start, to=end)

#adjust for splits and dividends

#get daily return from prices to use PerformanceAnalytics


charts.RollingRegression(last(RetToAnalyze,"3 years")[,c(1,2),drop=F],last(RetToAnalyze,"5 years")[,3],legend.loc="topleft",width=20,main="Rolling 20-day Regression")
chart.RollingPerformance(RetToAnalyze,width=150,legend.loc="topleft",main="Rolling 150-day Performance")

Tuesday, February 15, 2011

CFA Society of Alabama Annual Forecast Dinner Highlights

This year’s CFA Society of Alabama Annual Forecast Dinner was a huge success with over 230 attendees and over 20 sponsors.  Thanks to all those who helped.

Dan Clifton from Strategas, Gina Martin Adams from Wells Fargo, and Carter Worth from Oppenheimer offered their opinions in a panel discussion on debt, emerging markets, demographics, and best ideas for 2011.  Their unique perspectives from their different approaches gave the audience a comprehensive view of the most important current financial topics.

Full audio recording

Fun with Fred—Data From St. Louis Fed

Rarely do I enjoy collecting and playing with data from the government because it is so tedious, but ease of graphing valuable data series provides a finance geek days of fun.  Labeling is the only weakness.  Here are some of the graphs that I found informative.  Also, the quantmod package for R offers a very good interface to the Fred data.

Fed Purchases of Treasuries and Mortgages with Rates and Money Funds

From TimelyPortfolio

Loan Loss Reserve/Total Loans by Bank Size. Largest banks are always hit the hardest.

From TimelyPortfolio

Jim Roger’s notion of Farmers in Ferraris (a long way to go). Red is farm/nonfarm income and green is Finance Payrolls/Total Payrolls.

From TimelyPortfolio

Also on this farm notion from the


Wednesday, February 9, 2011

Additional Analysis of AAII Survey vs ICI Equity Flows

I don’t want to belabor this, but I thought it might be helpful to associate the recent bullish inflow points to their corresponding place on the S&P 500 chart.  Below are the graphs.



Tuesday, February 8, 2011

Opinions Not Backed by Money Are Not That Believable--Updated and with R

As an update to, I have updated the revised data, added the past two months, and translated to R.

If the world really is overly bullish on stocks as some suggest, I would think money would flow visibly in that direction.  Reuven Brenner in Gambling and Speculation offers some reasons for gambling or risk-taking in pursuit of wealth improvement:  entertainment,  overconfidence, rational action given competent assessment of probability, and desperation or relative underperformance.

Entertainment can be eliminated in the case of investing, since entertainment prevails primarily when the stakes are low.

The other three reasons for risk-taking however would in the current environment of supposedly strong bullishness all very readily apply.  However, analysis of a chart that I have surprisingly not seen in the press, reveals an interesting result.  Mutual fund flows as measured by ICI show an exodus from equities precipitated by the financial panic of 2007-2008 but extended throughout the supposedly “bubble bull market” since March 2009 driven by lingering effects of fear due to the severity of the crisis.  When we compare the 2009-current period to the most recent bull markets of 1987 (start of the ICI series)-2000 and 2003-2007, equity mutual fund flows are markedly different and do not exhibit any real correlation to the often cited sentiment survey of the AAII- The American Association of Individual Investors.  The survey displays varying degrees of bullishness and bearishness, but opinion has not affected the outflow from equity mutual funds.  Whether the bullishness is justified by overconfidence or rational assessment of probability, it has not been strong enough to convince investors to pursue a potential opportunity to improve wealth.

From TimelyPortfolio


If this bullishness through reasons 2 and 3 combined with the fourth reason of desperation has not driven money to opportunity, then fear dominates. If fear dominates, then opportunity will be squandered, and the increasing, but already record income/wealth disparity in the United States and dramatic underperformance of everyone’s savings disproportionately invested in bonds will incite even more desperation.  Eventually if for some reason 2 and 3 do not kick in first, this desperation will become so severe that it will force investors to take risk.  Its exact manifestation is unknown, but it will appear somewhere other than bonds.  Overconfident and desperate risk-taking causes bubbles and since we have not seen any real risk-taking, no bubbles currently exist in stocks.

Data from AAII- The American Association of Individual Investors and ICI:

For the R geeks:



#using ggplot example from
p <- ggplot(data=aaii_ici, aes(x = AAIIBULL-AAIIBEAR, y = runSum(aaii_ici[,4],3), colour = Range, shape = Range, label = Range))
p1 <- p + geom_point() + scale_y_continuous(limits = c(-200000, 200000),formatter=comma) + geom_hline(yintercept=0) + geom_vline(xintercept=0) + stat_smooth(method="lm", se=FALSE) + ylab("ICI Equity Rolling 3-mo Sum") + opts(title = "ICI Equity Flows by AAII Survey")

Why I Want Inflation?

Bernanke wants inflation for his reasons.  I want inflation for entirely different reasons even though it might be painful.

Inflation forces the world to rectify its imbalances.  Emerging Asia no longer will believe a 20-100% undervalued currency is good monetary policy.

Inflation forces leverage reduction.  Inflation increases interest rates and ends the infinite supply of money to overleveraged governments.  As a consumer, more debt means a lower credit rating which means a higher rate.  Higher rates are the built-in control mechanism to reckless borrowing behavior.

Inflation favors risk-taking.  Deflation favors risk-avoidance.  Risk-taking helps cure the tremendous misallocation of resources to “risk-less” bonds and gold in pursuit of real opportunity.

Inflation helps reduce dependence on limited scarce resources.  Higher prices on commodities make innovative renewable techniques attractive.

Unfortunately, “financial innovation” disrupted the higher prices that started in 2007-2008, so the world is 3 years behind.

30 minutes

Friday, February 4, 2011


Over the last couple of years as China and Emerging Asia have steadily directed their reserves to poor investments in bonds in the developed world, I have wondered when they would decide that investment in themselves and Africa would be more beneficial.  My reading on the African situation since decolonization in the 1960s has led me to conclude that its biggest issue was the lack of commitment from a stable source of capital.  This stable source of capital could very easily be long-term focused reserve funds of Asian nations.  If Asian reserve funds are willing to pursue bad investments for the long-term, it seems they should be very willing to pursue good investments despite short-term fluctuations.


Newsweek’s article How Africa is Becoming the New Asia offers two very interesting statistics in a great article:

China and India get all the headlines for their economic prowess, but there's another global growth story that is easily overlooked: Africa. In 2007 and 2008, southern Africa, the Great Lakes region of Kenya, Tanzania, and Uganda, and even the drought-stricken Horn of Africa had GDP growth rates on par with Asia's two powerhouses. Last year, in the depths of global recession, the continent clocked almost 2 percent growth, roughly equal to the rates in the Middle East, and outperforming everywhere else but India and China. This year and in 2011, Africa will grow by 4.8 percent—the highest rate of growth outside Asia, and higher than even the oft-buzzed-about economies of Brazil, Russia, Mexico, and Eastern Europe, according to newly revised IMF estimates. In fact, on a per capita basis, Africans are already richer than Indians, and a dozen African states have higher gross national income per capita than China.

A recent study by Oxford economist Paul Collier of all 954 publicly traded African companies operating between 2000 and 2007 found that their annual return on capital was on average 65 percent higher than those of similar firms in China, India, Vietnam, or Indonesia because labor costs are skyrocketing in Asia. Their median profit margin, 11 percent, was also higher than in Asia or South America.

Some other interesting graphs come from McKinsey's Lions on the Move


And this article in Forbes Asia Should Buy Into Africa's Growth finally gets to my point, stop buying mutually sacrificial developed bonds Asia and seek mutually beneficial investments in Africa.


2.5 hours

Thursday, February 3, 2011

Japan Intentional or Accidental Pursuit of Deflation

Japan’s intentional or accidental pursuit of deflation has caused an imbalance far greater than Bernanke’s pursuit of inflation.  Japanese policymakers have allowed Yen appreciation versus all other currencies.  It appears that they recognize a couple of things:

1) Higher interest rates and inflation represent a much bigger risk to their credit risk, deficit funding, and aging population than deflation.

2) Developed markets are saturated by Japanese goods, and further Yen appreciation does not cripple those exports.

However, by recognizing these two items, they are allowing their competition and potential growth engine in the emerging markets to completely take advantage of them.  Hyundai and Samsung in Korea have a 30-50% price advantage over their Japanese competition.

Japan’s desperate attempt to avoid their inevitable collapse from higher rates and inflation is speeding their collapse caused by emerging market competition.  The markets eventually will impose the adjustment to the Japanese situation.  At least Bernanke recognizes the imbalance caused by undervalued Asian currencies and knows that inflation is the only mechanism to force Asian emerging nations to allow their currencies to appreciate to normal valuation even if it means hard decisions for the US eventually.

Lower interest rates encourage imbalances, while higher interest rates force the changes necessary to correct these imbalances.

Since the absolute worst of the Asian collapse in 1997, is Japan better off than the emerging Asian nations?


Since 2007, is Japan better off than the emerging Asian nations?


As a point of reference, here is OECD’s calculation of Purchasing Power Parity for the Korea versus Japan 184, which means the Korean Won is undervalued versus the Japanese Yen by 84%.  The Economist’s Big Mac Index shows undervaluation of Asian currencies versus the Yen to be 40-50%.

The Japanese decision has been treated unkindly in the equity markets



For the r geeks here is the code:


#get asian currency data from the FED FRED data series
getSymbols("DEXKOUS",src="FRED") #load Korea
getSymbols("DEXMAUS",src="FRED") #load Malaysia
getSymbols("DEXSIUS",src="FRED") #load Singapore
getSymbols("DEXTAUS",src="FRED") #load Taiwan
getSymbols("DEXCHUS",src="FRED") #load China
getSymbols("DEXJPUS",src="FRED") #load Japan


#do dailyReturn so that I can use pretty PerformanceAnalytics charts
#division puts currencies in Japanese yen from US dollar

#label columns for graph legends

chart.CumReturns(asianreturn,ylim=c(-0.4,0.4),legend.loc="topright",main="Asian Currencies in Japanese Yen",ylab="",period.areas=list(c("Sep 97","Dec 97"),c("Jun 04","Nov 06"),c("Dec 07","Mar 09")),period.color="gray",event.lines=c("Dec 97","Nov 06","Mar 09"),event.labels=c("Asian Tiger Collapse","Carry Trade","Financial Crisis"),event.color="black")
mtext("Source: Federal Reserve FRED",side=1,adj=0)

chart.Drawdown(asianreturn['2006-11-30::',],legend.loc="right",main="Asian Currencies in Japanese Yen",ylab="Drawdown Since Financial Crisis")
mtext("Source: Federal Reserve FRED",side=1,adj=0)



3.5 hours

Tuesday, February 1, 2011

Bonds Caused the Damage but Bond Holders Thrived

Bonds caused the damage that led to the Financial Crisis in 2008, but through all the bailouts bondholders thrived.  Their punishment although delayed seems like it is nearing.

Supplement to Yen Post with Warren Buffet Quote

I’m not as big a fan of Warren Buffett as most, but I thought his comments from his 1987 annual report fit item 2 on my yen post.

“We continue to have an aversion to long-term bonds (and may be making a serious mistake by not disliking medium-term bonds as well). Bonds are no better than the currency in which they are denominated…”

Japan is the most leveraged of all the developed nations and their most reliable debtor their own aging citizens have entered the spending phase.  For their currency and their bonds to be attractive to other debtors, their rates need to be competitive with the United States and Germany, and their currency need to be appropriately valued.

If you do not like Japanese bonds, neither should you like Japanese yen.

Japanese Yen and US Treasuries

In the chart below, the close relationship of the Japanese Yen and US 10 Year Treasuries from 1993 to 2008 is clear.  However, the highly correlated instruments have moved opposite since the 2008 financial crisis. 


I am struggling with what this means, and how I might benefit from the changed relationship.  I have imagined some of the reasons, but I’m still missing something. So far, my list:

1) Emerging market countries have diversified their reserves and bought more Japanese Yen, but this does not show up on IMF Reserves.


2) Yen and Treasuries are both now viewed as “safe” and “riskless”, so they are pursued as insurance similar to gold.  However, these only work simultaneously in a deflationary environment.  If inflation appears (I think it is here), but others clearly disagree, does the Yen get hurt with US Treasuries?


The credit default market clearly does not consider the Yen as riskless since Japan carries a higher default probability on its sovereign debt.


3) Momentum investors are buying the Japanese Yen as the best performing reserve currency simply following a trend model.  However in the multi-trillion currency market, I do not think this influence would be strong enough to force this imbalance.

4) Maybe the Japanese Yen is the only thing in Japan that actually goes up, so the Japanese Yen is the place in Japan to make money.


It appears that these reasons do not offer adequate explanation for the continued Yen rise, so I need to do more work and be a little more creative figuring this out.  Please let me know if you have any good explanations.

After this thought exercise, I still believe that the situation is tenuous and certainly cannot find any good reasons to own the Japanese Yen.


2.5 hours