September, 2011 Archives

22
Sep

Welcome To Another Financial Crisis!

by Riaan Nel in Global Economy

Cartoon by Adam Zyglis - Eurotrash

  In a June 23 article in The Register-Guard (http://www.registerguard.com/web/opinion/26404701-47/rates-fed-inflation-interest-higher.html.csp ), Professor Romero and I discussed the investment implications of the conclusion of the Federal Reserve’s bond buying program, Quantitative Easing 2 (QE2).  In a June 30th article we were criticized by Professors Thoma and Duy for not acknowledging the positive role the various monetary tools of the Fed played in preventing deflation.  They downplayed our concern regarding long-term inflation, and they condescendingly dismissed  our warning of another impending crisis stating “financial crises have been part of the economic environment since the dawn of commercial society.”   The European Union is currently in the grip of an intractable financial crisis infecting the entire global economy.  Unfortunately, Thoma and Duy’s nonchalant comment at the end of their op-ed did nothing to help prepare or protect investors from the current crisis.  For months I have argued in my public appearances that another financial crisis will occur sooner rather than later since we haven’t fundamentally addressed the underlying credit bubble at the heart of the 2008 crisis. 

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21
Sep

Operation Twist

by Riaan Nel in News

The above is an illustration of the Fed’s balance sheet (supplied by Cleveland Fed).

Here is a link on CCN Money regarding the launch of Operation Twist: http://money.cnn.com/2011/09/21/news/economy/federal_reserve_operation_twist/index.htm

Here is a link to criticism of Operation Twistt: http://seekingalpha.com/article/295086-why-operation-twist-is-especially-stupid-there-s-no-lack-of-short-term-financing

 

14
Sep

The American Jobs Act

by Riaan Nel in News

On the whole, The American Jobs Act proposed by President Obama does not excite me.  Granted, Obama has been dealt and incredibly bad hand by the global economy.  Moreover, in this globaly integrated world we live, one man and one administration can only do so much.  Americans actually expect too much of their President; futhermore, for the good and the bad, the presidency’s influence is overestimated.  This notwithstanding, and contrary to many in the Tea Party, the federal government does have a role to play in stimulating the economy.  The American Jobs Act will help the economy in the short term, but not significantly.  Is it worth the price?  In a certain sense, yes.  A lot of the tax credits and incentives are to expire by 2013 – so small business owners are still facing a massive potential tax increase.  A number of the tax increases proposed will also offset the impact of tax credits and incentives in the plan.

The transfer payments to states to help protect certain public sector jobs will of course be helpful.  It will support demand, while keeping the teachers and so forth productively employed.  That is preferable to supporting demand by paying unemployment benefits, and not getting any productive input in return.  However, this does not address the structural deficiencies of our public sector system and educational system. 

The one proposal I like is the infrastructure spending.  I think that will help support aggregate demand, and provide society with long-term benefits in the form of improved and upgraded infrastructure.  I would like to see more emphasis on a public private partnership in this regard.  (I have not read the details of the act, so I’m unclear to what extent a public private partnership is addressed.)  The aspects I dislike are that most of the expenditures are fund through tax increases.  Some of the tax increases I’m a proponent of, like changing the way depreciation is calculated on corporate jets, classifying carried interest as income, and limiting the deductions for oil and gas companies.  However, setting the threshold for being considered “wealthy” as someone earning more than $200,000 is to low.  Many small businesses are sub-chapter S corporations, and many of these business owners will be hit by higher taxes because their income will be more than $200,000.   

What would have been better than this proposed act?  Something that’s very difficult to do.  If Obama wants to rise above being a mere president to the level of extraordinary visionary leader, he needed to propose his own plan to fundamentally deal with entitlement reform, simplifying the tax code, dealing with structural reform of the educational and public pension system, and massive investment in infrastructure.  I did agree with the case he made before the joint session that there is a role for government to play, and that just shutting down the government is not the answer.  Nor is this proposed act the long-term solution we need!

14
Sep

How Endowments Allocate

by Riaan Nel in Global Investments

The following paragraph illustrates the difference between the allocations of Endowment Funds with more than $1 billion in assets and the average individual investor.  The structural changes taking place in the global economy necessitates a move away from purely traditional investment approaches to approaches inclusive of alternative asset classes, as well as an increased focus on risk management.