… Looks A Lot like Elkhart, Indiana, proclaimed the Wall Street Journal on April 13, 2018 in a feature story about the RV manufacturing hub. It is with some authority that I commend Bob Davis’ reporting as anything but fake news. Thorough and perceptive, Davis captured well not only a defining swath of life in Elkhart, my home town, but perhaps a message to a much broader audience.
Rudi Dornbusch, the late MIT economist, coined what is today known as “Dornbusch’s Law:” Crises take longer to arrive than you can possibly imagine, but when they do come, they happen faster than you can possibly imagine.” It may well apply to what could happen to portfolios today. Recent headlines evoke the specter of the 1930s: an incipient trade war between the US, Europe and China, the scapegoating of minorities, families separated and interned, shifting alliances and uncertainty about the role of the United States in the world. To be sure, there are also major differences. The global superpowers are not currently looking to upset the prevailing world order through war, for instance. Continue reading “Moving the Needle on a Portfolio”
The Black-Scholes option pricing model is one of the most famous equations in finance. With it mathematics replaced intuition as the means of pricing options. The knowable inputs in the equation are the stock or index price, the exercise price, the time to expiration and the risk-free rate (which is currently so low that its omission from the formula will not materially alter the results except for very long dated options). Continue reading “Black-Scholes, Volatility, & Risky Tales”
Occasionally you will see a long-term chart of the S&P with vertical lines indicating expansion peaks and recession troughs. The blue-shaded rectangles in the graph below indicate the official dating of the beginnings and ends of recessions since 2000. Such dates are determined retroactively by the National Bureau of Economic Research’s Business Cycle Dating Committee. Continue reading “The Data of Dating & Staying Ahead of the Curve”
This is the first of two back-to-back posts on US business cycle expansions and contractions. That the current expansion, which began in June 2009, is now, at 108 months—one year shy of besting the record from March 1991 to March 2001—makes good copy, if nothing else. For those who are statistically inclined, the National Bureau of Economic Research is overflowing with data. The NBER is still somewhat subjective, though, in the parameters it uses in defining the business cycle. For example, rather than stipulating dogmatically that a recession requires two consecutive quarters of decline in real GDP, it specifies that a recession is a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” This subjectivity rises to the fore in the next post.
For the moment, we will attempt to sketch thumbnail comparisons among the five longest expansions since the beginning of the 20th century with the one the matters most to us, the current expansion. Continue reading “This Isn’t Your Grandfather’s Expansion”
Since 2002, I’ve found great joy writing birthday letters to my seven grandchildren, now ranging in age from 8 to 21. Most of the content is about them, a mental snapshot of who they are at that point in our lives that often morphs into a painfully long narrative for anyone under 25! Somehow, I manage to sandwich in an object lesson or two with which they might resonate a decade or two later. What follows is an excerpt from a letter to my baseball-loving grandson on the occasion of his eighth birthday. Continue reading “Baseball & Waiting for the Fat Pitch”
In a March 23, 2018 New York Times editorial, Robert Shiller was true to himself. Understating to overemphasize, he matter-of-factly observed: “When it comes to big shifts like a recession, economists aren’t very good at predicting them.” True to form, the behavioral economist and winner of the 2013 Nobel Prize in economics, unlike most pundits, had done his homework. Complementing his own research dating back to 1987, he referenced data produced by the Federal Reserve Bank of Philadelphia from 1968 to 2017. From studying the surveys he concluded: “While professional forecasters as a group have had some ability to assess the probability that GDP will decline in the next three months, they have exhibited no ability to do so a year in the future.” Continue reading “Recession on the Horizon?”
Every Fed tightening cycle eventually exposes and leads to the collapse of the bubbles de jure. One such bubble may well be in a seemingly unlikely place. With corporate taxes being cut to 21% from 35%, corporate profit margins before the tax relief already near record highs, and the window open to tax-efficiently repatriate foreign earnings, one would logically conclude that corporations should be in robust financial health. Continue reading “Debt, Loans, & Credit Quality: The Devil is in the Details”
Share buybacks have been all the rage throughout this bull market. Warren Buffett has opined on the efficacy of such repurchases routinely over the years. His latest discussion is in Berkshire’s year-old 2016 shareholder letter: Continue reading “Buybacks & the Instant Gratification of Financial Engineering”