The one reason why gold’s sell-off doesn’t matter…
by SIMON BLACK on APRIL 15, 2013
April 15, 2013
Somewhere, Paul Krugman is smiling.
The Nobel Prize winning economist, whose brilliant ideas include:
spending your way out of recession
borrowing your way out of debt
conjuring unprecedented amounts of currency out of thin air without consequence
staging a false flag alien invasion of planet Earth
is perhaps most famous in certain circles for calling gold a “barbarous relic“. He also recently suggested that Europe’s failing euro monetary union is the modern day equivalent of the gold standard. I’m told he was completely sober when he said this.
Of course, Krugman is smiling right now because he thinks that he’s been proven right. Gold’s massive sell-off over the last few days has shaved over $200 from the metal’s nominal price… a steep move any way you look at it.
And as Krugman has been saying, ‘gold is not a safe investment.’ But that’s because he fails to understand the fundamental premise of gold.
Gold is, in fact, a terrible investment. It’s an even worse speculation. But let’s look at what those actually mean–
When you ‘invest’, you risk a portion of your savings, typically for several years, hoping for a nominal gain when denominated in paper currency. You buy for $1,000 and you sell for $2,000.
‘Speculating‘ involves taking much higher risk, often for shorter periods of time with a smaller percentage of your portfolio, hoping for outsized nominal gains when denominated in paper currency. You buy for $100 and you sell for $2,000. But you could easily lose everything.
Well, gold makes for a really bad speculation. Like almost any real asset, it can’t really go to zero. It’s physical. It’s real. It’s always going to be worth something. And for physical gold, there’s very little leverage available.
Gold makes for a bad investment too… because in either case, the price of gold tends to rise and fall over the long-term with inflation and inflation expectations. If it’s leading (or keeping pace with) inflation, then you can’t expect much of an inflation-adjusted return.
But these reasons for buying gold miss the point.
Gold is a proxy against the financial system. It’s a way to withdraw savings from a corrupt fiat currency and hold something that cannot be conjured out of thin air by a tiny banking elite. We don’t buy gold hoping to sell it down the road for even more paper currency.
This is the same reason why I’m buying so much agricultural property in South America… it’s controlled by nature, not by men. Plus, I get paid huge dividends by way of organic fruit.
If you look at the fundamentals briefly, gold had a major sell-off this morning in part because the Chinese reported poor economic data. In addition there was Friday’s pitiful consumer numbers in the Land of the Free.
- poor economic data still abounding from the US to China…
- massive, debilitating debt still accumulating…
- Europe still completely bust..
- Japan promising unprecedented money printing in an era already marked by unprecedented money printing…
… what will the general trend be? Will central bankers around the world continue printing money?
It certainly seems likely. If they stop printing, interest rates surge… and nearly every government in the developed word will go bankrupt. That’s a big incentive to bankers.
With this in mind, while the gold correction probably has quite some time to play out, the long-term trend is obvious.
http://www.sovereignman.com/finance/the … ter-11656/
Statistics: Posted by yoda — Mon Apr 15, 2013 12:47 pm
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Current Wisdom: U.S. Precipitation Changes and Climate Model Expectations—If It Doesn’t Fit, You Must Acquit
Patrick J. Michaels and Paul C. "Chip" Knappenberger
The Current Wisdom is a series of monthly articles in which Patrick J. Michaels, director of the Center for the Study of Science, reviews interesting items on global warming in the scientific literature that may not have received the media attention that they deserved, or have been misinterpreted in the popular press.
In this Current Wisdom we report further on our ongoing effort to prepare comments on the latest, greatest (or, more aptly, most recent, most indecent) edition of the government’s assessment of climate change impacts in the United States (if you are interested in submitting your own comments, you should hurry, because the public comment period closes on this Friday, April 12).
A disturbing yet ubiquitous aspect of the current draft National Climate Assessment (and for that matter, both earlier editions of the NCA) is the use of future projections of climate change before demonstrating that they work in the recent past, as greenhouse-gas concentrations have increased.
Discussions of future impacts from changes in precipitation resulting from human emissions of greenhouse gases are everywhere in the report and they are usually bad—increased droughts, floods, and longer dry spells, for example. The NCA folks weren’t quite so enthusiastic at generating many forecasts of salutary changes. Perhaps Dr. Pangloss is their spiritual adviser.
NCA’s precipitation forecasts turn out to be uglier than Candide’s fair Cunegonde became. Do the models accurately simulate past changes that have been observed? If the answer is “no,” then the whole impact exercise is meaningless because the models provide no reliable information about what the future may bring.
The answer isn’t just “no.” It’s NO, NON, ONAY, NEIN.
Back in 2007, Xuebin Zhang and colleagues compared large-scale observations of precipitation changes with climate model emulations. They looked at the observed behavior within latitude bands in which the modeled precipitation changes were more or less of the same character.
While Zhang et al. (2007) concluded globally that they had detected an anthropogenic influence on the overall latitudinal patterns of precipitation trends (that is, the climate model trends were of the same sign as the observed trends), in the latitude band that includes the majority of the United States population a mismatch between model projections and precipitation trends was found (Figure 1). In that band, the climate models predicted a downward trend in precipitation, while observations show an upwards trend.
More recently, Beena Sarojini and colleagues (2012) examined the performance of a new (and supposedly improved) crop of climate models and found much the same as Zhang et al. (2007).
Sarojini et al. (2012) found little if any anthropogenic climate change signal in either the annual or seasonal observed precipitation trends in land areas in the latitude band which contains the majority of the U.S. (Figure 2). Instead they found that the natural influence on precipitation over land areas with observations in the 30 to 60N latitude band is indistinguishable from the natural+anthropogenic signal indicating that anthropogenic forcing has played no detectable role in the evolution of seasonal precipitation in this latitude band either in seasonal or annual totals.
Obviously, climate models whose hindcasts differ in sign from what is observed (Zhang et al., 2007), or which indicate that human influences are indistinguishable from natural changes (Sarojini et al., 2012) possess no skill in identifying a human-induced climate signal on observed precipitation across the U.S. and therefore should not be used to make future projections.
And while Zhang et al. (2007) and Sarojini et al. (2012) looked only at the match within latitude bands, just-published research by a team led by Debbie Polson ( 2013) showed more specific results.
Across the U.S., Polson et al. (2013) find that for most of the country during all seasons, that the sign of the observed precipitation changes (since 1950) differs from the sign of the climate model projected changes (Figure 3).
We are beginning to sound like a broken record here, but again, it is impossible to present reliable future projections for precipitations changes across the U.S. (seasonal or annual) from a collection of climate models which largely cannot even get the sign (much less the magnitude) of the observed changes correct.
Here is our recommendation to the NCA author team:
“Unless/until the GCMs can be demonstrated to accurately capture observed characteristics (spatial and temporal patterns and magnitudes) of precipitation changes across the U.S., all discussion from the NCA concerning future patterns of precipitation change should be removed.”
Or as the late Johnnie Cochran so simply put it, “if [the glove] doesn’t fit, you must acquit.”
Polson, D., G. Hegerl, X. Zhang, and T. Osborn, 2013. Causes of Robust Seasonal Land Precipitation Changes. Journal of Climate, doi:10.1175/JCLI-D-12-00474.1, in press.
Sarojini, B.B., et al., 2012. Fingerprints of changes in annual and seasonal precipitation from CMIP5 models over land and ocean. Geophysical Research Letters, 39, L21706, doi: 10.1029/2012GL053373.
Zhang, X., et al., 2007. Detection of human influence on twentieth-century precipitation trends, Nature, 448, 461–465, doi:10.1038/nature06025.
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I have long thought, as progressive blogger Anthony Cody discussed a couple of days ago, that libertarian types might form some sort of alliance with progressive educators against national curriculum standards. By and large progressives dislike the rigid standards and testing regimes that have been turning education into a clone assembly line, while libertarians want freedom, which is, of course, utterly incompatible with top-down standardization. But just because we have a common enemy will not necessarily make us policy friends.
As I’ve written before, it is pretty clear that many progressives don’t want educational freedom, they want local monopolies controlled by progressive educators who, often, eschew standards and testing not because all kids and families are different and standardization kills innovation, but because standardization curbs teacher power. Writes Cody:
While there are areas of agreement, there are some areas where progressives clearly part company with some conservatives. Progressives generally do not want public funds going to schools that promote religion. It seems reasonable to have a set of education standards that guides schools as to the focus of instruction at each grade and in each discipline. These standards should be developed by educators, in consultation with academic experts, and should reflect current scientific understanding. Democratic processes matter, so we support public schools overseen by elected school boards, and collective bargaining for teachers.
This doesn’t describe true community control of education, much less freedom. This is a system in which employees – especially teachers – have a huge political upper-hand. Teachers and their associations have greater motivation to be involved in education politics because their livelihoods are at stake, and are better able to organize than both parents, who have full-time jobs, and other citizens, who don’t even have the motivation of having a child in the schools. This is why teacher associations often dominate local school boards.
Note also that there would be standards in Cody’s ideal, but developed by “educators, in consultation with academic experts,” and designed “to reflect current scientific understanding.” So not only would citizens – who are supposed to ultimately control public schooling – apparently have no say in standards-setting, the standards would be based in “current scientific understanding,” as if there were scientific certainty about major educational issues. But there isn’t: From how best to teach reading, to what grade to cover Algebra, disagreements abound and the science is in dispute.
Finally, Cody offers the feel-good assumption that public schools are institutions that bring diverse people together and unite them. But as I often discuss – and we debated at Cato just last week – this doesn’t comport with the reality of public schooling, which was long based in homogeneous communities, systematically excluded out-groups, and today foments constant conflict. And frankly, the demand that those who want religion in their children’s education pay twice for schooling – once for government schools and again for the education they desire – is a gross violation of the basic American principal of equal treatment under the law.
All that said, it would be better to have local monopolies than state or federal. At least you could move to another monopolist if your present one were particularly horrible. But that would be cold comfort, because all government monopolies are heavily inclined toward curbing freedom, and toward serving the people who are supposed to serve the citizens.
I’ll be as happy as anyone if progressives start seriously challenging federally driven, national curriculum standards. But just because we share a common enemy won’t necessarily make us friends.
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Is libertarianism best understood as a doctrine committed to the maximization of freedom? In my last post, I presented a moral argument against this interpretation. In brief: the goal of maximizing freedom is compatible with violating the liberty of the few, so long as their loss of freedom is sufficiently compensated by the greater freedom of the many. This stands in stark contrast to the libertarian view of freedom, in which each individual’s liberty is seen as a (nearly) inviolable constraint on the way in which other individuals or groups may legitimately pursue their goals.
In this post, I want to present a different kind of argument against this “maximizing” interpretation of libertarianism. Not only is the goal of maximizing freedom an immoral one, for the reasons I have already articulated. It is, arguably, an incoherent one. When we think about it in a casual way, it’s easy to fool ourselves into thinking that we know what it means to maximize freedom. But this is an illusion that can be quickly dispelled by pursuing a few lines of thought more deeply.
We can begin by noticing that the idea of maximizing freedom will only make sense if we are able to compare different people, situations, or social systems in terms of the amount of freedom they have or allow, and to say whether one has more or less than another. Is this something we are able to do?
It’s easy to think of a few simple cases where we seem to be. Consider the abolition of slavery in the United States. Prior to abolition, slaves lacked (among other important freedoms) the freedom to control the own labor. After abolition, they possessed this freedom to a much greater degree. If anything could make a country more free, surely the liberation of some 12 percent of the population from the bonds of slavery is it. The United States without slavery certainly wasn’t maximizing freedom, but it at least came closer than it did with slavery.
This seems like an easy and obvious case. And it would be an easy an obvious one if all that the abolition of slavery involved was the granting of new freedoms for some members of the population. If the freedom of all non-slaves was unaffected by abolition, and the freedom of slaves was unambiguously increased, then we could confidently conclude that the freedom of society (i.e. the sum total of the freedom of all individuals in society) had increased.
This is not, however, what abolition actually did. Abolition did, of course, increase the freedom of slaves. But it also diminished the freedom of certain non-slaves. Specifically, it diminished the freedom of slave-owners.
This sounds like a shocking claim. But it shouldn’t be. If we understand freedom in the way that most libertarians do – if we understand it, as Rothbard did, as the “absence of molestation by other persons” – then it is actually quite obvious. Prior to abolition, slave-owners were able to do certain things to their slaves without fear of interference by other persons. They could force their slaves to work, physically restrain them, beat them, and so on, all without the law doing anything to stop them. After abolition, they could no longer engage in these activities without fear of legal intervention. Before abolition, the law allowed them to do certain things. After abolition, it didn’t. Their freedom had been reduced.
Now, obviously, I think it is a good thing that their freedom had been reduced in this way. The activities that slaveowners were no longer allowed to engage in were ones that violated the moral rights of their slaves. A just society will not allow its members this freedom, any more than it allows its members the freedom to kill each other, or steal from each other. But from the fact that the exercise of these freedoms is unjust it does not follow that they are not really freedom after all. If I could snap my fingers and make it the case that you were able to do whatever you wanted, just or not, without interference from others, you would be more free as a result. If I snapped my fingers again and thereby magically prohibited you from doing anything unjust, you would be less free. Freedom is one thing; justice is another. And very often what justice requires, in the case of slavery and in many other cases, is that certain freedoms be curtailed so that others might be enhanced.
I will explore the theme of conflicting freedoms in more detail in my next post. For now, the important thing to note is that if the abolition of slavery increased some people’s freedom, and reduced the freedom of others, then determining the net effect on freedom becomes considerably more difficult. For now we must determine whether the gains in freedom were greater than the losses. And it is just not at all clear how we are supposed to do that. Presumably, we would have to add up the freedoms gained by the slaves, subtract from that the freedoms lost by the slaveowners, and see if what we’re left with is a positive number. But how, precisely, is this to be done? What is the “unit” of freedom on which our operations of addition and subtraction are to be performed?
This last question is especially important, and challenging. To make it clearer, consider the following example from the philosopher Will Kymlicka’s critique of libertarianism. Suppose we want to compare the freedom of people in London with that of people in pre-1989 communist Albania. People in London have freedoms like the right to vote, the right to practice their religion, and other civil and democratic liberties. People in Albania, let us say, lack these freedoms. “On the other hand, Albania does not have many traffic lights, and those people who own cars face few if any legal restrictions on where or how they drive” (143). Kymlicka’s sense, which I share and I expect most of you do too, is that Albania’s lack of traffic regulations does not compensate for its lack of basic civil liberties. It is, on the whole, a less free society than London. But the question is: can we account for this judgment simply in terms of a quantitative judgment about the amount of freedom in Albania as compared to London?
How would such a quantitative judgment be made? Should we count up the individual, particular action-tokens that are forbidden in Albania and compare them with the action-tokens that are forbidden in London? If we discovered that, over the course of a year, red lights produce 18,623,545 instances of people being prevented from acting in the way they desire to act, whereas denial of the right to vote produces only 42,658 such instances, would that be sufficient to demonstrate that the red-lights are more freedom-restricting than the denial of political liberty? Or should we be counting not individual action-tokens but more general action-types, i.e. “the right to vote” versus “the right to drive through intersections as one wishes”? And whether we choose types or tokens, just how are we supposed to individuate actions in order to add them up? Is the right to marry the person of your choice one action? Or a shorthand way of describing an enormously large number of discrete actions?
However we decide to count up actions, the whole exercise seems largely to miss the point. For it assumes that what we care about when we care about liberty is (merely) the total number of actions allowed or prohibited. But why think that all freedoms are of equal value? Why should the freedom, say, to be governed by one’s own conscience in matters of religious belief count for no more than the freedom to count the blades of grass on one’s lawn? Why believe that all that matters in assessing the freedom of a country is the numerical quantity of freedom allowed, and not the substantive quality of that freedom?
Libertarians are right to believe that freedom matters. They might even be right to believe that it is the highest political value. But it is a mistake to think that these ideas, however true they might be, can be fleshed out in terms of a commitment to maximizing freedom. Morally, a commitment to maximizing freedom is inconsistent with libertarianism’s proper concern for individual rights. And conceptually, it is based on the incorrect assumption that freedom is the sort of thing that can usefully be measured, compared, added, and subtracted. In certain easy cases this may be possible. But the possibility that certain cherished freedoms can be gained only at the expense of other freedoms makes generalized comparison in terms of freedom alone difficult, if not impossible.
This insight has important implications for libertarianism in general, but especially for a correct understanding of the relationship between liberty and property. And so it is to this topic that I will turn in my next post.
View full post on Libertarianism.org
Why doesn’t Germany Trust The US To Store Its Gold?
TO WATCH THIS CNBC INTERVIEW GO TO:
let’s talk about our market mystery, because this is a question that’s been plaguing our traders all day here. look at that. the german bank is bringing home its gold, saying, quote, by 2020, the bank intends to store half of germany’s gold reserves in its own vaults in germany. the question is, why is germany moving gold out of the united states? big question. why don’t they trust us anymore? guy? well, lower manhattan, actually. couple things. this was out yesterday and i wasn’t here yesterday so i want to — you’ve been thinking about it. when it came out and the conspiracy theorists, i get all that. this is a huge story in my opinion, that is not a huge story now, but will be a huge story. why is that? because you have to ask yourself, why would germany decide to do this? what do they see that the rest of us don’t see that requires them to physically move this gold out of lower manhattan and obviously in paris, as well, back to their borders? and i think that’s really the question you have to ask. and the answer is, it can’t be anything good. and if you think this is the first time, it’s not. because the wacko down in venezuela did it a couple of years ago because people dismissed it — because he’s a wacko. right. if germany is going to be the last, they’re not. people will line up and do this. you talk about runs on banks? this could be exactly that. if everybody wants their metal back at once, you better hope, a, that it’s there and b, we’re able to do it. and i’m telling you, the act itself is not bullish gold necessarily — wait a minute. i have a question. question. go ahead. germany owns this physical gold, so, why is there any risk that is everybody is pulling their gold out that it won’t be there. give the exact answer. when i worked at drexel berner, 1990, and you’re going to say, you’re a real back job — i was going to say, you’re old. we don’t have time. drove the gold of central banks. it was their gold, but we had it. when the bankruptcy hit, everything was frozen. though it was their gold, they had no access to it. beeks can speak to this, as well. so, it’s a lot better to have it in your possession than to have it in your possession in somebody else’s vaults. the gold market is a little weird. if you buy a share of stock, it’s yours, it’s in your account. that’s not the way it is with gold. there’s not necessarily a serial number on every gold bar that says your name. is there maybe not enough gold in the bank? yeah, potentially. you sound like a real conspiracy theorist. well, gold is lent out every single day through the london bullion market. it’s lent everywhere. so, if you have everybody trying to come after it at onetime, just look at what happened with mf global. a lot of people involved in that, warehouse receipts. took awhile to get that back, so, you need to be concerned. i think the bigger picture is, why is germany doing this now. exactly. they’ve had it here for 40-some odd years. why today? maybe they have their own vault. germany’s got 10% of the world’s gold reserves and to men, i don’t think this is going to be a catalyst to other people. i certainly don’t think why it’s that big of a deal to give germany their gold when it’s not backed against anything. so, this is the reason why people — this is why gold is the thing people want to hold. there’s nothing backing gold. there’s mortgages. they don’t have to worry about the soviets, which is why they moved it here in the first place. let’s think about why they moved it here in the first place. you don’t think it’s a big deal and you do — the netherlands, actually, have said they want their gold back, too. mystery. for now, it will remain a market mystery. we need to come up with more
Statistics: Posted by DIGGER DAN — Sun Jan 20, 2013 11:02 pm
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Andrew J. Coulson
Head Start, the flagship federal education program for low-income preschoolers, doesn’t work. That is the conclusion of yet another high quality, large-scale randomized experiment commissioned by the Department of Health and Human Services, which runs the program.
Like an earlier study that found no lasting benefit to Head Start by the end of the 1st grade, this new study confirms no lasting benefit by the end of the 3rd grade—after an investment of 47 years and about $200 billion.
Education Secretary Arne Duncan recently warned that going over the “fiscal cliff” would result in cuts to programs like Head Start. It would, in other words, cut federal education programs that don’t work—which is actually what Barack Obama promised to do on the campaign trail back in 2008. Remember when he said “I want to go through the federal budget line by line, programs that don’t work, we cut”? Apparently, neither does he.
Perhaps that’s one reason the DHHS decided to sit on this report for four years after data collection was completed, and sneak it onto the Web on the Friday before Christmas without so much as a statement. The “most transparent government in history” is transparently uninterested in anything except political expediency. Doesn’t care about your kids. Doesn’t care about your money. Just. Doesn’t. Care.
Hat tip to professor Jay Greene for uncovering the release of this study, and for promising to search out the names of the government officials responsible for burying as long as possible the proof of their own failures.
View full post on Cato @ Liberty
By Tad DeHaven
House freshman Allen West (R-FL) – a tea party and Fox News favorite – finally conceded defeat to his Democratic opponent on Tuesday. According to a Politico article, “The congressman’s unexpected loss left his advisers, donors and legion of tea party fans searching for answers.”
Here’s one answer: West’s hypocritical votes in favor of federal programs that inappropriately subsidize local concerns apparently didn’t buy him goodwill from voters. I’m referring to West’s votes earlier this year to save the Community Development Block Grant program and the Economic Development Administration, which I previously discussed:
On West’s congressional website, he states that “As your Congressman, I will curb out of control Government spending.” He also says that “we need to challenge the status quo in Washington and stop the floodgates of government spending” and that he will “carry the torch of conservative, small government principles with me to Washington.” West, however, voted to save the CDBG program and he also voted back in May to save the Economic Development Administration, which is another parochial slush fund. In April, he accused Democrats of being communists. That’s pretty rich given that he proceeded to vote to protect programs that engage in central planning.
Those who understand and appreciate the need for a return to the fiscal federalism of our constitutional roots should not mourn West’s electoral demise. Indeed, supporters of limited government need to start taking a deeper look at the politicians that they embrace.
View full post on Cato @ Liberty
What Romney just told his major donors is not clear.
There is no tape as there was of the infamous 47% remarks, when he said that 47% of the voters wouldn’t vote for him because they were dependent on government largesse. In this case, he seems to have said that Hispanics and young people in particular got “gifts” from President Obama that brought them over to his side. The remarks at least skirt the 47% argument even if they don’t repeat it.
Romney later apologized for the 47% comment and said that it was ” all wrong.” It was all wrong. Let’s imagine for a moment that instead of saying that 47% were unlikely to vote for him because of dependence on the government, he had instead said that President Obama was trying to buy votes. That would not have embarrassed him if it had come out. And it would have put the blame where it belongs, with the politicians, not the voters. Voters do not have a direct say in these programs. And once they are enacted into law, they will use them just as Romney uses business and charitable deductions for himself.
What were the big “gifts” that Romney allegedly cited as giving Obama his winning edge? Romney said that young people were swayed by the president’s keeping student loan rates low and by allowing them via Obamacare to stay on their parents insurance policy until age 26. He said that lower income people were swayed by the hope of getting free medical care.
But the truth in all this is really quite different. The federal government borrows money at negligible rates and then re-lends it to students at much higher rates. The profit is booked in the federal accounts as “deficit reduction.” So the students, who will inherit all the accumulated deficits, have to pay much higher than necessary student loan rates to help reduce the deficit. Why didn’t Romney mention this scam?
As for Obamacare, it requires young people to buy health insurance they don’t need so that older people, who on average have 47 times as much money as the young, can pay less for their insurance. This was practically declaring war on the young, yet Romney said nothing about that. The free medical care for lower income people will cost many of them their jobs. The hourly cost of Obamacare for a minimum wage worker with a family is estimated to be $5.50, almost as much as the minimum wage itself. Many employers will fire workers rather than pay it. And Obamacare will also produce fewer full time workers because the mandate penalty does not apply for part time workers. Why didn’t Romney point that out?
For much of the last two weeks of the election, Romney seemed to be trying to keep an imagined lead by avoiding controversial statements. Did his polling really tell him to avoid any of this?
The voters are not the problem. They are often confused, but they are also our only hope for the future. In recent decades, elite leaders such as Obama, Romney, and Bernanke have taken this country down the wrong road, and more elitist condescension we don’t need.
View full post on AgainstCronyCapitalism.org
Why the “Fed Model” Doesn’t Work
By Anna W – June 9th, 2012, 12:00PM
In this weekend’s Barron’s, Mike Santoli has a very simple criticism of the (so called) Fed Model for determining if equities are cheap or expensive (The Flaws in the Fed Model).
Stated simply, the “fabled stock-market predictor doesn’t work.”
The idea here, once formalized as the “Fed Model,” is that stocks’ “earnings yield” (reported or forecast operating earnings for the S&P 500, divided by the index level) should tend to track the Treasury yield in some fashion. With this earnings yield now above 7%, based on a trailing price-to-earnings ratio near 13, this model and its various offshoots render equities a no-brainer buy. Or, if one prefers, that Treasuries are in a reason-defying bubble.
This simply doesn’t hold up in theory or practice. The Fed Model only “worked” as a predictor of market action in the 1980s and ’90s, when bond yields were steadily descending and stock values consistently rising as inflation and interest rates were slowly strangled. Both before that period and since, the Fed Model relationship has been mostly a non sequitur in terms of foretelling market performance.
For sure, the Fed Model is useless. But why it is useless is not well understood by most investors. Understanding this about the Fed Model or any other Wall Street hokum may help you look askance at other seemingly plausible, even persuasive arguments that actually fail.
Regarding the the Fed Model, it does not do what it claims to do. It does not tell an investor if stocks are cheap. Back in 2008, I made an attempt at explaining why: The key taker away is that it controls for two variables — not just one:
Note that the formula contains two variables: While it is commonly described as a way to evaluate when stocks are over- or under-valued, the other variable in the formula above is the forward S&P500 earnings consensus. SPX prices and the 10 year yield are the knowns, while BOTH valuation and forward earnings estimates are the unknowns.
Thus, the Fed model today might be telling you either of two things: When equities are undervalued — or when consensus earning estimates are simply too high.
-The Flawed Fed Valuation Model, February 5, 2008
Said differently, the Fed model assumes analysts consensus is accurate. That assumption has been the undoing of many an investor . . .
Statistics: Posted by yoda — Sat Jun 09, 2012 1:08 pm
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WITH little fanfare, a dangerous notion has taken hold in progressive policy circles: that the amount of money borrowed by the federal government from Americans to finance its mammoth deficits doesn’t matter.
Years of Soaring National Debt
Debt doesn’t matter? Really? That’s the most irresponsible fiscal notion since the tax-cutting mania brought on by the advent of supply-side economics. And it’s particularly problematic right now, as Congress resumes debating whether to extend the payroll-tax reduction or enact other stimulative measures.
Here’s the theory, in its most extreme configuration: To the extent that the government sells its debt to Americans (as opposed to foreigners), those obligations will disappear as aging folks who buy those Treasuries die off.
If that doesn’t seem to make much sense, don’t be puzzled — it doesn’t. Government borrowing is still debt that must eventually be paid off, just as we were taught in introductory economics.
Failing to repay the debt would mean not only the ugliness of default but also depriving the next generation of whatever savings their parents parked in government bonds.
And remember that just a small fraction of Treasuries are owned by individual Americans. Institutions and many foreign entities own the rest and are not about to give up claims that they are owed.
The more realistic alternative of continuing to service that debt offers the unattractive eventual prospect of either higher taxes or sharp cutbacks in government programs, or both.
That problem is greatly compounded by the fact that the $10 trillion of debt that is held by investors represents only a fraction of the federal government’s obligations and ignores an additional $46 trillion of commitments to Social Security and Medicare.
Of course every modern economy both tolerates and benefits from some amount of debt. But the United States has been on a binge, brought on by a toxic mix of spending increases and tax cuts that began with the Reagan tax cuts in the 1980s and were later turbocharged by those of President George W. Bush.
The figures are stark. In 1975, government debt per household was roughly equal to half of a typical household’s annual income. Today, it’s 1.7 times. Add entitlements, and the obligations would take a mind-boggling nine years of family income to pay off.
Even deficit hawks like me recognize that with the economy still barely above stall speed, now is hardly the moment for the government to slam on the fiscal brakes, debt or no debt.
So that means there’s no realistic alternative to more debt. But we can reduce the adverse consequences by how we spend this borrowed money. There are two main forms of stimulus: one kind is channeled through tax cuts and then mostly spent, just like a strapped family that puts its monthly expenses onto a credit card. Alternatively, government can direct its resources toward long-term investments that earn a return; think roads and dams but also medical research and education.
At the moment, gridlock grips Washington, and about all that Congress has offered is a two-month cut in the payroll tax, which may help shake the economy out of the doldrums but provides little lasting benefit.
We could just as effectively throw borrowed hundred-dollar bills out of airplanes. About the only worse approach would be nothing at all.
Government’s focus should shift toward investment. To do so, multiple challenges must be overcome.
First, unlike every company in America, the government doesn’t keep its books in a way that highlights these important two categories, investment and consumption. As a result, Congress can’t evaluate the long-term impact of its actions.
Second, the dark shadow of the Tea Party movement has made added spending — the route for most new government investment — taboo.
While public investment may take longer to unleash its positive forces, the case for it is compelling, in part because rising entitlement expenditures have crowded out government’s investment activities.
In the early 1950s, government devoted about 1.2 percent of gross domestic product to infrastructure; by 2010, that amount had fallen to just 0.2 percent. Meanwhile, federal spending on research and development dropped from a high of nearly 2 percent in 1964 to 0.9 percent in 2009.
By contrast, Franklin D. Roosevelt’s much-praised Works Progress Administration spent the equivalent of at least $1.5 trillion over eight years on projects that in New York City alone ranged from building La Guardia Airport to reroofing the New York Public Library to creating a lasting body of literary and artistic work.
I agree that short-term help for the economy combined with long-term deficit reduction is the right direction for budgetary policy.
But we also need to make every dollar of debt matter, and therefore we should be directing our efforts to lifting the economy toward programs that provide long-term benefit, not just a short-term burst of caffeinated energy.
Statistics: Posted by yoda — Mon Jan 23, 2012 1:18 pm
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