Peter Dag & Friends: August 2009

8/31/09

Double dip?

News. Aug. 31 (Bloomberg) -- The bond market isn’t buying all the optimism over the end of the global recession.

While the International Monetary Fund said last week the economic recovery will be faster than it forecast in July, investors pushed yields on government debt to the lowest level since April, according to the Merrill Lynch & Co. Global Sovereign Broad Market Plus Index. The gauge, which tracks $15.4 trillion of bonds worldwide, gained 0.73 percent this month, the most since 1.02 percent in March.

My view. Watch closely commodities and bond yields. A double dip is most likely if bond yields and commodities start heading south. Is the large deficit orchestrated by Washington going to crash the economy? I would not be surprised. Read the previous post.

To find out more about my in depth view of the markets and my strategy just visit our website https://www.peterdag.com/ where you can review The Peter Dag Portfolio. You can also call me at 1-800-833-2782 to discuss your specific money management needs.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/30/09

All the nonsense about deficits and inflation

The US deficit is close to 100% of GDP (click on the graph to enlarge it). Everybody is screaming because they predict soaring inflation.

Nonsense. Nonsense. Nonsense.

Italy's deficit is 115% of GDP and inflation is plunging below 2%. Japan's deficit is 157% of GDP and they are deep into deflationary times. So, what is all this screaming about the dangers of deficits? OK, this is the way I see it. It is not the first time I have stated my views on this subject.

The deficit of a country measures the transfer of wealth from us -- the populace -- to the bondholders -- the investors financing our debt. The government is just an intermediary. The government makes sure we pay the bondholders.

The outcome is that we get poorer and the bondholders amass a huge amount of wealth -- our money. As we get poorer we can afford fewer and fewer things. Demand for goods and services declines. Houses get smaller. Cars become more efficient and tiny. We learn to live with less. Prices decline. Inflation disappears and deflation is a strong possibility because we can afford less and less.

This is exaclty what is happening now. And we have no escape. The bondholders own us. As a bank owns us when we borrow excessively.

The dollar has little to do with this process. A currency strengthens when investors see opportunities in a country. The dollar will strengthen if we offer profit opportunities. It will weaken if the government strangles business with taxes and regulations.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/28/09

Profits drive the economy and the dollar

Let's not forget a simple idea. Profits drive the economy. Higher profits encourage business to hire and foreign investors to bring their money in our country.

The above chart (click on the chart to enlarge it) shows that rising or declining profits lead to higher or lower production.

One more concept. Profits peaked in 2004. This is the time when the dollar went into its recent multi year slide. The dollar, like interest rates, is an important fever chart of the economy. It is not enough to say "we want a strong dollar." We have to earn it!

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/27/09

The meaning of history

What is the meaning of history? None! It is the reason we will never learn from history. History is about the success and destruction by the hands of the powerful. We will never learn its dynamics.

Hitler, Napoleon, Stalin & Co. pursued power to its catastrophic end. The French Revolution, the British and Roman Empires sought growth to the ultimate collapse. The Church of Rome during the Dark Ages, Greenspan, A. Burns in the 1970s, and Bernanke witnessed immense destruction of wealth. Their power was useless in avoiding disaster. They caused it.

People go to Yale, Princeton, and Harvard to study … what, why? To become powerful and amass wealth. If we knew, if we understood the meaning of history, we would not have had the problems humanity has had throughout the millennia – and now. They write learned dissertations. The outcome is disaster. Why? Because they do not have a clue on how the world works.

If they knew, we would live in a static, wonderful existence without problems – now and forever. However, nothing stands still. The economy grows faster, then slows down, sometimes severely, to correct the excesses. Why, in spite of all the money we spend to educate the pundits, do these awful oscillations keep coming? Because they do not know. They do not have a clue of what and why events unfold.

The Great Depression, the inflationary 1970s with their frequent recessions, the technology and housing bubbles, credit crises, the recent convulsions. Why? Because all the knowledge gained in premier schools is used with the sole purpose of achieving power. Moreover, power is achieved with class struggle and destruction of the weakest. This is what creates “progress”, some say.

Why is humanity staggered with disasters? Because we do no not know. What we study is used to win the fight. The fight makes our knowledge of history useless. Because we do not know the players. The constant of history is imbalance, inequality, instability. These wild seminal oscillations cannot be predicted or controlled. Only the winning power group will eventually convince us things are under control. Under their control.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

It happens in all business cycles

This graph shows the relative strength of the major global banks and the materials sector (click on the graph to enlarge). The rising trend reflects the stronger performance of the financials relative to commodity-driven stocks.

This is exactly what investors should expect when the economy is growing slowly and coming out of a recession, the yield curve is steep, and the Fed is easing aggressively.

The time to invest in commodity driven stocks is when the economy is much stronger than what it is now.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/26/09

Bernanke's important call

Look at the relationship between short-term interest rates and the stock market from 2003 and 2007. This was the time when Mr. B was raising relentlessly interest rates from 1% to .... Well, he kept going and going and going to 5%.

Again, if you look at the charts, the system started to crack when short-term interest rates went above 3%. My point is that Mr. B should have probably stopped when the fed funds rate was 3%. After all, we were just coming out of a period when we endured a major destruction of wealth -- the implosion of the 2000-2002 tech bubble.

But then, who am I to judge Mr. B, the chairman of the Fed who probably triggered the Great Recession?

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

China will save us. Really?

China is 10% of the world GDP (source: IMF). The EU is 22% and the USA is 20% of the global economy respectively.

I just cannot believe that China, with so may development problems, is going to pull us out of our problems. Let's be serious! How can you think the TV pundits who tell us China is going to be the global locomotive. China is still very much dependent on the West to grow.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

Two great minds ..two different views

Two great minds have two opposite views. Who is going to be right?

M. El-Erian is seriously concerned about the outlook of risk assets and suggests a more conservative strategy at this stage of the game. His articles on the Pimco website, the FT, and interviews on CNBC make his point.

On the other hand, the veteran and confident Byron Wien, looks for the S&P 500 to move higher propelled by liquidity and an economy that is likely to be quite strong.

Who is going to be right?

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

Commodities and the business cycle

Commodities are very sensitive to economic growth. They are a reliable "real-time" indicator of the strength of the economy.

They were sinking last year in the midst of the recession and the financial crisis.

Commodities have been rising since March, responding to improving economic conditions as discussed in detail in our monthly report to subscribers The Global Business Cycle. They seem to be losing momentum but the trend is still definitely up.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/25/09

The meaning of deficits

News. WASHINGTON (AP) -- In a chilling forecast, the White House is predicting a 10-year federal deficit of $9 trillion -- more than the sum of all previous deficits since America's founding. And it says by the next decade's end the national debt will equal three-quarters of the entire U.S. economy.

The White House Office of Management and Budget indicated that the president will have to struggle to meet his vow of cutting the deficit in half in 2013 -- a promise that earlier budget projections suggested he could accomplish with ease.

My view. No one really understands the implications. If they did we would not be in this mess. Deficits represent a transfer of wealth from the people of a country to the owners of the deficits -- the bondholders.

We will be taxed to make the payments flow smoothly from the US Treasury to the bondholders. Yes, our standard of living will be greatly reduced in order to pay the interest on the debt.

The real issue is not inflation, lower dollar, rising commodities. The real issue is our standard of living. It will continue to erode as the bill we have to pay to the bondholders relentlessly rises.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

Democracy in the Midlle East

Democracy is a process.

Democracy has little to do with elections. Democracy comes from the rise of the middle class. From the modernization of infrastructures and the growth of business.

The middle class will eventually ask for institutions to protect them. Elections are a small part of this process.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/24/09

The business cycle works

This chart shows the relative strength of the major banks sector relative to the CRB commodity index (click on the chart to enlarge).

The rising line reflects the stronger performance of the banks relative to commodities.

This is exactly what we should expect when business is coming out of a recession, the yield curve is steep, the Fed is easing aggressively, and financial risk is declining.

When the economy starts growing at a faster pace, commodity-driven stocks outperform the financial sector. At this time the Fed talks about tightening, financial risk rises, and the yield curve flattens.

This time, in spite of the excitement, the relationship between the business cycle and stock sectors is repeating.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

They do not really know .. but keep trying

News from the WSJ. Proposed federal legislation aimed at curbing global warming would drastically reduce domestic fuel production, according to a new study commissioned by the oil industry as part of its campaign to oppose new restrictions.

The report's findings, which are expected to be released Monday, project that by 2030, U.S. refining production could drop 17% from today's levels if the climate bill is passed as currently proposed. The drop would have to be made up by foreign imports, the study says, meaning the U.S. could end up relying on other countries for 19.4% of its refined fuel -- nearly twice the amount it imports today.

The industry sees the climate-change bill sponsored by U.S. Reps. Henry Waxman (D., Calif.) and Ed Markey (D., Mass.) as the harbinger of a grimmer future. Proponents of the law say its costs would be minimal and that it would create millions of new jobs in renewable-energy industries and help steer the U.S. away from a dirty fuel source.

My point. Nobody knows for sure. If they knew all the legislation and regulations passed since day one would have created an ideal world for us. I do not see an ideal world. The opposite. A very unstable environment mired with uncertainties.

One more point. The government is deciding for us which industries will do well in the future. Governments have never had a good batting average in making these kind of decisions. Will they be right this time? What about natural gas?

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/23/09

The business cycle works

The business cycle drives all asset prices. Make no mistake about it.

The economy is moving from phase 4 to phase 1. When the economy comes slowly out of a recession the financials are among the strongest sectors.

Eventually, when the business cycle gains more strength and the Fed starts tightening, the financials under perform and commodity driven stocks shine.

One more point. Buying stocks in the strongest sectors minimizes the odds of losses. A rising tide lifts all boats. Playing the odds is the best strategy.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/21/09

An interesting chart

The above channel (click on the chart to enlarge) shows the impressive momentum of the market. Will the market break on the downside?

The problem is that almost everybody is expecting this correction. The graph, however, is saying that the trend has been your friend. Stay tuned.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

Is leadership the real issue?

The President's centeredness, calm, and dignity inspire trust but also suggest a certain lack of combativeness, a reluctance to express indignation, and an unwillingness to identify enemies -- resulting in a tendency toward compromise even at the early stages of controversy. (Source: blog of Robert Reich -- the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley).

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

A worrisome trend

Consumer and producer prices are declining (click on the chart to enlarge). It will take strong economy growth to turn them around.

Deflation, meanwhile, raises the real cost of money, discouraging borrowing and investments.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/20/09

A new indicator

I have developed a new indicator and I find it interesting. Why? Because the blue line moved above the red line in March. This was the time when the market started roaring ahead.

The blue line remained above the red line since March, indicating, quite correctly, that the trend was up.

Unfortunately there are not enough data to back test this gauge. The bottom line, however, is that as long the blue line is above the red line the odds seem to favor higher stock prices. Stay tuned.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

Another successful government program

NEW YORK (CNNMoney.com) -- The National Automobile Dealers Association is urging the federal government to begin shutting down the Cash for Clunkers program immediately.

Dealers have complained of problems and delays in getting payments due to them under the program. But Transportation Secretary Ray LaHood said earlier Wednesday that all dealers would be reimbursed.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/18/09

What do gold, fertilizer, crude oil,....have in common?

News. Aug. 18 (Bloomberg) -- Cargill Inc., the largest privately held U.S. company, said fiscal fourth-quarter profit plunged 69 percent because of lower demand for fertilizers.

My answer. None. They are all commodities. Over the long term, commodities rise when demand is strong (the economy is growing rapidly) and are weak when demand is sluggish (the economy is going nowhere).

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

They promise, promise, promise....

News. Philadelphia Mayor Michael Nutter on Monday announced an additional $20 million of cuts to the city's fiscal 2010 budget, citing the failure of state lawmakers to agree to budget-balancing measures.

Nutter also said 30 positions will be eliminated effective the end of August, regardless of whether state legislators reach agreement on a proposed increase in the city's sales tax.

My point. People ask. Politicians give. Until they do not have any more money. We do not seem to learn. Why? Beause we are greedy. We rather sink with the ship than try to save it. See what happened to GM.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

Growth and development

A recent article in Foreign Affairs, relying on substantial research, challenged the view on how to allow democracy to succeed with many power groups competing among themselves.

A country cannot have modernization without industrialization. Industrialization brings social changes flowing into democracy. Iran is in the midst of this historical transition. Countries evolve and eventually establish democratic institutions. See, for instance, what has happened to China and Russia in the past 50 years.

The Industrial Revolution in the late 1700 defined England as a bastion of democracy as it allowed the interaction of several power groups. Karl Marx failed to recognize, the importance of having many competing power groups in a society.

Modernization theory believed in financial assistance – as delivered by the IMF or World Bank. It has proven to be a failure because it encourages socialist tendencies by channeling aid through governments, making governments the major players.

The rapid growth of South Korea and Taiwan shows that producing goods for the global market upgrades the human and technological capital and enlarges the middle class. Once the middle class becomes large enough, it presses for democratic institutions. This is the meaning of the protests in Iran.

The process is not simple or rapid given the different cultures and value systems of each society. The struggle for control of the process makes the objective difficult to achieve. Again, see what is happening in China, Iran, and Russia.

What is impressive is that the history of the world shows that we continue evolving and changing as we struggle to gain power and wealth while others barely survive. One thing is sure.

We cannot stand still and wait. We have to participate by educating those around us about the fluidity of political and economic systems. Why they change. To eventually reach a new equilibrium to become unsettled again by the introduction of new ideas.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/17/09

An ugly trend

The above chart shows an interesting and scary "channel". Let's hope the market will break the upper channel line on the upside moving decidedly above 1000.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

Beware the Ides of August

The Ides of March was a festive day dedicated to the god Mars and a military parade was usually held. In modern times, the term Ides of March is best known as the date that Julius Caesar was assassinated in 44 BC. In William Shakespeare's play Julius Caesar, Caesar is warned to "beware the Ides of March."

After many years in this business, I have learned to "beware the Ides of August" as far as the stock market is concerned. Mid-August is a period when major crosscurrents appear and markets become nervous and volatile. It does not happen every year, but I learned to be careful anyway.

This morning the sell-off in Asian stocks was broad-based with financials, industrials and materials providing the biggest drag on the MSCI index of Asia Pacific shares traded outside Japan which was down 2.2 percent and within striking distance of the month's low.

U.S. stock futures dropped more than 1 percent on Monday, dragged down by a slide in Asian shares, on worries that the broad surge in shares had run ahead of the global economic recovery. The European markets are also poised to open lower according to the futures.

Again, beware the Ides of August.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/15/09

Enjoy this great music - the complete performance of The Pines of Rome

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

Interesting patterns

This is what I noticed.

--- Commodities are losing momentum.
--- The dollar is weak.
--- High-grade bonds are strengthening again.
--- Low-grade bonds are losing their strong momentum.
--- Stocks look tired.

All these trends, if they continue, may be saying the economy is weakening again. Stay tuned.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/14/09

Something strange happened to this blog...

Suddenly a very strange ad appeared on this blog. An ad I cannot describe otherwise it is going to appear again. Why? Because blogs are screened constantly by programs trying to understand the material so that the ads fit the profile of the readers of the blog. Of course we are given the option to approve the ads, but sometimes they fall through the cracks.

A few days ago I wrote a piece on protectionism and I used a word that was taken out of context. The outcome was that an ad I really objected to appeared out of nowhere

I apologize if I offended you, but as you read my blog on protectionism you might understand what happened. A friend of mine explained the puzzle to me.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

The real danger: global deflation

Consumer prices in the 16 countries that use the euro accelerated their decline to a fresh record low rate in July, but the earlier-than-expected return to growth in Germany and France may lead to a quicker rebound.

The European Union's official statistics agency, Eurostat, said Friday the consumer price index in the euro zone fell 0.7% in July from a year earlier. In June the year-to-year rate fell 0.1%, the first annualized decline in the currency bloc's 10-year history.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

An interesting pattern in commodities

Commodities are very sensitive to economic conditions. They rise when business improves. They decline when business deteriorates.

Commodities have been strong since March (click on the chart to enlarge). They lost their spark, however. What does it mean? Is the economy stalling? If so, "cyclical" sectors should not perform well. This is something to watch closely.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/13/09

Make no mistake about it

News. The euro gained traction Wednesday after the U.S. Federal Reserve held a key bank lending rate at a record low near zero, and the U.S. Commerce Department said that the U.S. trade deficit edged up slightly in June.

It was bolstered further Thursday after Germany reported that when adjusted for price, seasonal and calendar variations, gross domestic product rose 0.3 percent over the previous quarter, the first rise since the first quarter of 2008, when the country entered recession.

My point. Make no mistake about it. A currency reflects the strength of a country. That we like it or not. The Euro is strong because the economies of the Euro-area are stronger. The dollar will strenghten when our economy is attractive and the policies of Washington make sense. Only then will investors buy dollars to invest in the USA and the dollar will appreciate.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

The leading indicators were right

News. European stocks climbed as government data showed gross domestic product rose a seasonally adjusted 0.3 percent from the first quarter in Germany and France, pulling the euro region’s two largest economies out of their worst contractions since World War II. Shares in Asia climbed after Fed policy makers signaled they aren’t rushing to end unprecedented efforts to promote lending and stabilize the world’s biggest economy.

My point. The leading indicators of all the major countries shown in our monthly special report The Global Business Cycle were correct. The global economy is giving signs of turning around. Including the USA.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977

8/12/09

Buy the rumor...sell the news?

News. Stocks bounded higher Wednesday after the central bank ended a two-day meeting by saying the economy appears to be "leveling out" rather than shrinking at a slower rate. The Fed's more positive take on the economy than it had in June wasn't surprising but it still bolstered hopes for a recovery.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

Translation

News. Aug. 12 (Bloomberg) -- The Federal Reserve plans to slow the pace of its purchases of U.S. Treasuries as the recession eases, and signaled that the $300 billion program will end in October.

“To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October,” the Fed’s Open Market Committee said in a statement in Washington. The program was previously scheduled to end in September.

Translation.

!. The banks have too much money in the vaults.
2. The yield curve is so steep banks can make all the money they want.
3. Financial risk is low and the markets have stabilized.
4. We will keep monetizing the debt.
4. The money supply is likely to slow down.
5. Hopefully the banks will deploy the enormous reserves at the Fed.
6. High-grade bond prices are not likely to perform as well as they did in the past several months.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

8/9/09

Not bad!

George Dagnino was ranked No. 1 for the 6 month period from 1/31/09 to 07/31/09 in the issue 497 of August 3, 2009 of "Timer Digest", a publication devoted to monitoring the market timing performance of investment advisors.

More protectionism?

News. Representatives of American tire distributors told officials from the Office of US Trade Representative (USTR) at a hearing Friday that China-made tires do not compete directly against US-made products in the North American market.

They further pointed out an increase on trade tariff against low-cost Chinese tires will cause more job losses in the US and additional outlay for American consumers.

The ITC proposal to activate a three-year duty hike against Chinese made "tier three tires" is the result of a petition brought by the US Steelworkers Union (USW) which represents workers at large US tire manufacturers.

My point. Who is the winner? The consumer? The unions? The employees of the tire dealers?

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

8/8/09

Cash for clunkers

With an additional $2 billion in funding, the “Cash for Clunkers” program has a new lease on life until Labor Day. These are some of my reactions about the program.

My sense is that this program is designed to make consumers feel good again and give them a reason to buy and shop.

The program aims directly to put some life back into the auto industry and those who work in that industry. Hopefully it will help the businesses associated with this sector.

It is a transfer of wealth from us (who do not need a new car) to "them". The power groups called "auto industry" and "unions" are clearly the winners of the game.

The money spent to buy a new car could have been spent to buy other things, so net net, it is not much of an economic stimulus.

It is another example of industrial/social engineering. Now we are targeting cars. Years ago we targeted housing.

We are stealing auto sales from the future. When the program, ends, auto sales will drop again because consumers are losing jobs and have little money to spend.

It seems to me we are living in a world of smoke and mirrors. I hope to be wrong.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

8/7/09

I am baffled

I am going through the world news on Google. Most of them are about Asia, Middle East, South America, and yes, UK.

Europe is 30% of the world economy. Not one word about what is happening in Germany, France,....Why don't we care? We like to make fun of them. But that's where our interest ends. We like to read about Australia (with a population of 21,007,310 -- one fourth of that of Germany) and New Zealand (smaller than Switzerland). Probably because we understand them when they speak, in spite of their accent.

Can we be global players with this narrow focus? Why do I worry about it? Because I hate to see this country missing the chance of leading the world because its citizens do not care about it.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

The consumer is in trouble

The Federal Reserve said today that U.S. consumers cut their debt for the fifth straight month in June, putting more into their bank accounts and less onto their credit cards.

Consumer debt in June dropped nearly 5 percent to $2.5 trillion (click on the chart to enlarge). This marks the longest pullback in consumer credit since the second half of 1991.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

Some sobering facts about employment

It's worth remembering that this job economy is likely the worst since the Great Depression. Here's a graph (click on graph to enlarge), from Calculated Risk, illustrating the number of jobs lost since the beginning of this recession and comparing each recession in the last 60 years (expressed as percentage of jobs held before the recession). No recession since the Great Depression has suffered this many job losses this long after the recession started.

In the last ten years, the health/ed/gov sector has far outpaced job growth in the rest of the economy. In fact, if you factor out that tri-sector, American job growth in the last decade has been negative, according to the Atlantic.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

An interesting conclusion

The current economic downturn is not only unusually severe and prolonged but also quite widespread. Essentially all industrialised countries have turned down during the past year, as have many developing countries. This synchronisation of business cycles across countries is by no means an unusual event. Indeed, contrary to much recent discussion (e.g., Economist, 2009), the world’s countries seem to be moving more closely over time, not less. That is, there is little evidence of “decoupling,” the idea that business cycles are becoming more independent and less synchronised across countries.

I always believed the global business cycles were moving together. This interesting paper discusses the issue in depth. I also believe the global equity markets are synchronised. When you buy foreign markets you buy volatility.Click here to read the whole article.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

8/6/09

This is what we get with protectionism!!!!!!

News. President Barack Obama’s stimulus spending has run into a problem: A shortage of General Electric Co. water filters.

GE makes them in Canada. Under the program’s ‘Buy American’ rules, that means the filters can’t be used for work paid for by the $787 billion fund.

Contractors are searching the U.S. in vain for filters as well as bolts and manhole covers needed to build wastewater plants, sewers and water pipes financed by the economic stimulus. As officials wait for federal waivers to buy those goods outside the U.S., water projects from Maine to Kansas have been delayed.

My point. Protectionism increases the cost of doing business to American enterprises. We want to save jobs, but protectionism forces business to raise prices or lay off workers.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

8/5/09

A bullish trend

The bank stocks are strong ... finally. This is good news for the market -- if it lasts.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

Thought of the day

No one knows.

If we did, the history of mankind would not be the sequence of disasters we experienced.

What counts is what we can do, what we know, what is driving us. Only each one of us has a sense of our strengths and how to use them.

The failures of our leaders throughout history -- except a few exceptions -- is a lesson we should learn and treasure.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

8/4/09

The business cycle works

The business cycle works. I am absolutely convinced it should be a crucial element of your investment strategy.

It is all a matter of odds. When the economy is weak and the Fed is easing one should expect (again, it is a matter of odds):
1. Short-term interest rates decline
2. Bond yields decline
3. Financial risk declines
4. High-yield bonds are strong and outperform stocks
5. Financials, insurance, brokerage, asset managers, REITs, ... are the best bets.
6. Commodity-driven stocks under perform

When the business cycle turns up and the economy grows at or above potential the leading sectors change and your strategy should reflect the changing business cycle.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

I am amazed

News. Car sales in the US were sharply up – by about 16 per cent – last month compared with June thanks to demand generated by car scrappage incentives.

My point. How can we really believe that this incentive program is a good thing? Here we go again stealing sales from the future. Once the program ends, auto sales will drop. The increase in sales will look like a small blip in a long-term chart.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

8/3/09

Off-the-cuff thoughts about currencies and markets

Few people follow currencies because they are difficult to understand. I believe a currency measures the relative competitive advantage between two countries.

The dollar has been declining since November. Peaked again in March and has declined since then. In the past few days it broke decisively below an important support level.

Why are people selling dollars? Do they see more opportunities in other countries? What are the implications for our markets and economy?

Only time will tell, of course. But we must keep in mind that the trend of the dollar is an important leading indicator.

The dollar peaked in 2004 and you know what happened to our markets.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

Thought of the day -- productivity and our compensation

The system -- any system -- does not allow wages and benefits to grow faster unless they are justified by increasing productivity.

In other words, we cannot become wealthier unless we increase the total wealth of the country through higher productivity. The issue is not capitalism or socialism. The issue is that this is how things work!

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977

8/2/09

Another example of my theory of power groups

The strength of a country depends on the number of competing power groups. As soon as a power group increases its reach, the country starts slowing down with rising social discontent. One or more of the four pillars for growth -- property rights, transportation, financial system, and education – are likely to suffer.

The book by T. Sowell – Housing Boom and Bust – gave me further insight on how to look at what happened.

My idea of power groups is useful in this context.

- The Fed sets the stage -- interest rates close to 0%, steep yield curve, and rapidly growing money supply, and lack of supervision.
- Ginnie Mae and Freddie Mac had the job to buy the mortgages from the banks, repackaging them, and reselling them.
- The building industry was in favor of any program, social or otherwise, that gave them more business.
- Congress passed the Community Re-investment Act of 1977 so that every American should own a home.
- Congress passed the American Dream Down Payment Act in 2002 subsidizing down payments of prospective buyers whose income was below a certain level.
- The press (NY Times 2002 editorial) endorsed and encouraged the government’s social engineering.
- Banking did its usual job of being the intermediary between financial transactions and trying to maximize profits by inventing new products.
- All of us tried to take advantage of the government’s largesse by investing, flipping, and speculating.

Put all these power groups in a big caldron and look at the fighting, pushing, scrambling, and you get the mess we are in. This is the dynamics of life. The main issue is that the same power groups/people who got us in this mess are trying to find a solution.

The solution will benefit some of them of course, not some of us. So, what are we going to do? We will have to play the game the best we can and survive by taking advantage of what is happening -- as Goldman Sachs did. There is no other alternative because, as suggested by N. Taleb – author of The Black Swan –, current solutions will cause even greater instability.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.
George Dagnino, PhD
Editor, since 1977