Starting after this month, you are going to see more of your year-over-year performance reports show gains, rather than losses. The strength in the market since March has finally overcome some of the weakness last fall. Once we are past the collapse last October, we will be ahead for the past year. Funny how that works, just like the rant last week on why the ‘lost decade’ tells us more about where it started than where it ends, the past year tells us more about last fall than this year. The decline in September last year was -8.9%. October fell -16.8%. November was a further -7.2%. We’ll have just gotten rid of that first bit in the short-term history when this month is over. After December’s gain of 1%, January fell by -8.4% and February dropped -10.7%. Add in the first 9 days of March and that put us down over 25% year-to-date from December 31^st. Most of the whole big stock rally since then has only just recently gotten that 25% drop back and a little bit more. (Remember that you need to gain one-third to overcome a drop of one-quarter, up a half to get back a third, up 100% to get back a half.) Read more

The dollar, any currency, has several major functions in an economy. The one we are most familiar with is that of ‘a medium of exchange’. That means we go to the bar with a ten in our pocket and exchange that for a beer and a sandwich. We have exchanged money for goods. The second is what we call a ‘store of value’. You can take that ten and put it in your pocket (or in your bank account) and leave it there and you’ve got purchasing power tomorrow. The third function of currency is as ‘a unit of account’. Which is what happens when we say we buy $1 trillion worth of stocks when what we really own are a bunch of electronic blips on a computer at Fidelity, but we account for everything in dollars. We use the currency to account for the real value of the goods. That is only different from the medium of exchange in that we use it whether we make the exchange or not. Money, to be any good has to be ‘legal tender’. That means we can use the money to pay our taxes, pay our bills, repay our loans and other legal obligations (see Shakespeare The Merchant of Venice). Since it is legal tender, the other party has to take it, even if it is worth less than the dollars they lent us or whatever.  Read more

We’ve been on the ‘new normal’ kick for a while now. Maybe it’s time for a break?

Your punditry team was chatting the other day (actually we do that a lot, but that is one of the most useful parts of the job) and we got off on the topic of turnover. Have you ever wondered why it is that value investors tend to have a fairly long time horizon while growth investors seem to be much more focused on the near term? It would seem that value investors ought to be the ones with the fairly short time frame. Value, if you do it even remotely right, ought to be the approach that would compel you to buy and sell, buy and sell as one investment after another became cheap and then was recognized as being undervalued and bid up. By the same token, true growth companies should work for perhaps decades before the growth fades and they become more pedestrian. So, which group has it wrong? The value investors who wait and wait until even their worst ideas work out? Or the growth folks, who demand instant satisfaction? We think it is mostly the growth folks. Too many ‘growth’ investors are in fact only momentum investors. Read more

TIPS (Treasury Inflation-Protected Securities) are much in the news these days and also in the hearts of many investors. Is this the right approach? That depends. If you are looking at TIPS as a long-term hedge against inflation, then TIPS make a lot of sense, nearly all the time. As a tactical move, in anticipation of nearby inflation, we’re not so sure. Read more

The Fed should raise short-term interest rates soon and by quite a bit. Why, you might ask should they do this? Because rates at zero have done their job and because once the real crisis passed this spring the need for zero interest rates was over. Would it make any difference to anyone in the real economy if short-term rates were 1.5% instead of zero? We doubt it. Would the financial markets scream and yell? Sure. But, the financial markets aren’t the real economy and we shouldn’t let the tail wag the dog. The financial markets would get over modestly higher interest rates a lot quicker than the real economy would, so let’s do it. Read more