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Saturday, February 2, 2013

In Investing Play for a Tie

In Investing, at Least, It Makes Sense to Play for a Tie - NYTimes.com: "Playing for a tie may go against the grain of most American sports, but it should be central in investing. That’s because a core finding of modern finance theory is that we don’t need to beat the market. In fact, for most of us, once we’ve decided how much risk we want to bear, a better approach is aiming to tie — or match — the market return. That’s the message of William J. Bernstein, an investment adviser and author, most recently, of the e-book, “Skating Where the Puck Was.” Periodically, Mr. Bernstein says, some investment manager discovers a way to generate outsize returns. Whether the favored asset class is Internet shares or gold bullion or oil futures or mortgage-backed securities, the new market-beater isn’t likely to last. “As soon as one gets discovered, it’s already gone,” he writes. Matching the market is the best that most of us should hope to do. Much the same insight appears in new research by two finance professors, R. David McLean of the University of Alberta and the Massachusetts Institute of Technology, andJeffrey Pontiff of Boston College. The professors analyzed 82 academic studies that came up with ways of outperforming the market."

The central bank money-printing party- MSN Money: "To say that there is a sea of paper money out there is an understatement; it is more like an ocean. All of that is quite likely the reason the Standard & Poor's 500 Index ($INX 0.00%) is as firm as it is, that coupled with the fact that too many in the paid-to-play (i.e., professional money management) crowd had too much angst about the recent fiscal soap opera and now are scrambling to own however many equities they need to catch up to their beloved benchmarks.   In any event, I believe that the result of all this madness will inevitably be much more inflation and a worldwide bond bear market, though as we learned in both of our bubbles, and Japan's before that, when crowd psychology is this disoriented, it is impossible to predict exactly when sanity will return."

Money for Nothing | The Weekly Standard: " . . . the press ignored Allison’s interpretation of the crisis since the Fed is a totem of the economic, journalistic, and intellectual elite. “Unfortunately, in [Alan] Greenspan’s case, power not only corrupted him, but also destroyed his integrity.” In the lead-up to the collapse, Greenspan “created a structure of negative real interest rates,” forcing rates down to 1 percent, encouraging and providing incentives to banks and borrowers to buy and sell poisoned products—and to take on vast amounts of shaky debt and leverage which could not be sustained if higher real interest rates returned. Enter Ben Bernanke, former Princeton economist and Fed vice chairman under Greenspan: “After he became chairman [in 2006] Bernanke rapidly raised interest rates and created an inverted yield curve” (higher short-term rates than the high long-term rates). But homeowners, businesses, and banks, lured by the Fed into leverage and cheap loans, could not finance the Greenspan interest-rate increases, followed by Bernanke’s abrupt move to raise the federal funds rate (the interest rate the Fed charges banks) to 5.25 percent. The impact of such an interest rate move (from 1 percent to 5.25 percent) must be thought of as a price increase of 500 percent plus—similar to an increase in the price of a loaf of bread from $2.50 to $15. Remember that Americans (and consumers worldwide) had borrowed and leveraged themselves during the period in which Alan Greenspan forced the federal funds rate down to 1 percent, giving rise to subprime homebuyers who were publicly encouraged by Greenspan to take on low-rate, “interest-only” mortgages. Global financial institutions subsidized by the Federal Reserve aggressively fabricated shaky loans, repackaged them, and sold them worldwide to individual and institutional client investors who trusted the lenders. . . . "

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