In light of the market volatility in recent months, we thought it might be a good time to check the gauges in our car and provide a periodic review—a summarized highlight of various asset classes we operate in.

Government Bonds

We might have been considered geniuses if we’d decided that an already-low Treasury yield of 3.0% or so wasn’t already low enough and was poised to hit 1.8%.  That was not, in fact, the case.  The probabilities were just not stacked in that direction of lower rates, for a number of reasons, and we were not alone in this view at the time.  The S&P downgrade of the U.S. government counter intuitively caused a flood of cash away from risk assets into Treasuries, causing them to become even more expensive/lower-yielding.  Over the last several years, investments in agency mortgage-backed securities have offered better coupons and valuations, so that is the direction we took—which worked when intermediate-term bonds did well. Read more

According to Margaret Thatcher, former Prime Minister of Britain, “the trouble with socialism is that sooner or later you run out of other people’s money.” That seems to be the point of the current European debt crisis. For the peripheral nations of the Euro-Zone, Greece, Portugal, Ireland, that day has come and gone. They have run out of money. But for each, joining the Euro-Zone provided them one big shot at still more ‘other people’s money’. When the three nations joined the Euro they each were introduced to much lower interest rates than they could qualify for on their own merits. They also were introduced to a much deeper and more liquid market for Euro-denominated securities. This was magical for the new Euro countries and provided a big lift to their economies. The Irish became the Celtic Tiger, the Greeks experienced a rebirth of economic growth, and the Portuguese, well there isn’t much hope for the Portuguese under any circumstances. Read more

Saturday was the tenth anniversary of the 9/11 attacks by al Qaeda on America. We’ve been inundated with reminders of that awful day. Likely everyone can remember where they were and what they were doing when those planes went into those buildings. That was then, this is now.

In those ten years we have seen our lives largely return to normal. The US has not become a terrorist battleground as some feared. We did not turn violently on our neighbors with Middle-Eastern roots. By and large, the world we live in today is unaffected by the events of 9/11. But, there are subtle differences. Read more

Season’s Greetings happy business new year! Now is the business new year, since by the time 2012 actually hits in four months, it will be too late to plan for it. The start to 2012 is now as far as business-types are concerned. Budgets must be created, revised and funded before the new year commences. Now is the time to do that. It is also the new year for the financial markets. 2011 is essentially over as nearly everyone’s focus now shifts to 2012. 2011 is barely half over when it comes to statistical analyses of the numbers, but 2012 will begin to dominate everyone’s thinking. Usually, there is a new year’s celebration of a great start to a better than ever year. However, this year is being greeted with severe caution. Usually, when this happens, the caution has proven unnecessary. Let’s all wish a new year’s wish that this is another time when caution is better saved for when we feel a lot better about the upcoming year. Read more

The Bubble Report: August Edition

World financial history has been characterized by a series of periodic manias. There have been more than two dozen key manic events during the past several centuries (and that only includes those formally recorded—there have been others and for much further back than that, based on anecdotal accounts). Often, bubbles begin with a rational concept, such as high-growth new technologies/industries, real estate in a new area, or some other new/unique asset that suddenly becomes popular (a key example being Holland’s tulip bulb mania of the 1600’s—when plants briefly turned into valuable financial property). Bubbles have also had a tendency to begin as an unintended byproduct of other conditions or policies, such as newfound levels of discretionary wealth or easy borrowing conditions. Read more

Macro is the Greek for large or expansive. Micro is the Greek for small or limited. Macroeconomics deals with big picture stuff like what broad sectors of the economy are doing or what entire economies are doing. Microeconomics is all about what small economic players are doing, like individual companies or consumers taken one by one.

Most of our problems lately have been macro problems. The simple fact that the broad economy hasn’t grown very quickly lately is a macro element. The historical condition that most of Western Europe has a highly evolved but very expensive welfare state is a macro problem. The situation in the US where we have a large block of the electorate that doesn’t want to have higher taxes while at the same time a largely over-lapping group of Americans won’t stand to have services curtailed is a macro issue. Read more