Archive | February 2015


Not Deflation


The Consumer Price Index dropped 0.7% in January, bringing the year-over-year change to negative 0.1%. With the exception of the 2008 financial meltdown, the January decline brought the index to its first negative annual change since 1949 (see Chart below). Energy is behind this. Energy prices fell 9.7% in January, and are down 19.6% over the last 12 months. Ex-energy, CPI is up 1.9% from a year ago. This is not deflation, which is caused by tight money, but rather a one-off drop in the price of an important commodity. The headline number also obscures encouraging data on income. Real Read More




Each year for clients we update a very colorful graphic ranking the annual performance of various asset classes. Each asset class has its own color, and the graphic is striking because of the kaleidoscope picture it presents: many colors, seemingly placed randomly throughout the graph. Which is precisely the point of the graph: the colors appear randomly placed because they are. That is, it is impossible to predict the order of performance in any given year because there is no consistent pattern. And so, the implication for investors is to diversify. If there is no way of predicting which asset Read More




Interest rate cycles are long: lasting not years, but decades. Consequently, we don’t have many data points for statistically significant conclusions about patterns. That said, we work with what we have, and the chart below shows 10-year US Treasury yields from 1850. I’ll highlight three observations from this chart. First, cycles are indeed long: 40-50 years is not uncommon. Secondly, the turn to lower interest rates is preceded by a sharp (parabolic) spike higher, and then a very quick and meaningful decline. Thirdly, in contrast to the turn lower in interest rates, the turn higher occurs gently, over a long Read More


Where Have All the Bonds Gone?


Apologies to Pete Seeger for stealing his song lyric, but I think bonds and flowers are sufficiently different that he wouldn’t mind. The chart below (from our friends at Morgan Stanley) shows that net global sovereign bond issuance among the US, UK, Europe and Japan total about $1.2 trillion (first graph). But after central banks get through their bond buying to support the various Quantitative Easing (QE) programs in place, net issuance of sovereign debt is actually negative. Investors continue to demand holding sovereign debt, but there isn’t any! Because central bankers are buying it all to feed the QE Read More




My quarterly letter talks about the strength of the US dollar and why it should continue to rise (see Chart below), but I wanted to note here the huge impact currencies have had on investors in the past year. Since January 2014, US equities are up 13%. But so are European equities, and Japanese stocks are close behind (+10%). However, these numbers are in local currencies, and the euro is off 20% and the yen off 12% against the dollar this past year, so, for a US investor, in dollar terms, European equities are not up 13%, but are actually Read More


Jobs, Jobs, Jobs


The US economy is stronger than we think: 257,000 net new jobs in January, but another 404,000 jobs were “found” (due to a recalculation) in November and December. More than 140 million are currently employed, a record high (see Chart below). The unemployment rate is 5.7%, but if we include part-timers and discouraged, that percentage rises to 11.3%. Way too high, but making progress (see Chart below). One of the details in the data is the number of people quitting their jobs: 9.5% of the unemployed quit their jobs, the highest percentage since 2008. This is a datum only a Read More