The Economics Thread

[SaintessHeart]

Japan raises economic view as PM pushes "Abenomics"

(Reuters) - Japan raised its view of the economy for the first time in eight months on Wednesday as private consumption held firm and business sentiment improved, in a sign that Prime Minister Shinzo Abe's policy of easy money and big spending, dubbed "Abenomics", has begun taking effect.

Improvement in exports and recently compiled economic stimulus steps will likely put the economy back on a recovery path, but a slowdown in overseas economies remains a risk factor, the government said in its monthly economic report.

Abe, who led his Liberal Democratic Party to a landslide election victory in December, has called for aggressive monetary easing and heavy fiscal spending to beat persistent deflation, helping to drive down the yen and boosting share prices

The government also said it expects the Bank of Japan (BOJ) to take bold steps to meet a 2 percent inflation goal that the government agreed with the central bank on Tuesday as part of a bold push to escape nagging deflation and to revive the economy.

"The economy is weak, but signs of bottoming out can be seen in some areas," the report said.

That marked an upgrade from last month, when the government said the outlook was weakening due to a slowdown in overseas economies.

Abe's cabinet approved a 10.3 trillion yen ($116.3 billion) stimulus package this month, while the BOJ, in its most determined effort yet to end years of economic stagnation, on Tuesday decided to switch to an open-ended commitment to buying assets next year and double its inflation target to 2 percent.

"(The government) expects the Bank of Japan to promote bold monetary easing so that the price stability target will be achieved as soon as possible," the monthly report said.

Japanese economics minister Akira Amari, talking to reporters after the approval of the report by the cabinet, said the improved outlook reflected the positive impact a softer yen and firmer stock prices were exerting on corporate sentiment.

Hiroaki Muto, senior economist at Sumitomo Mitsui Asset management, agreed.

"The yen has depreciated by about 10 percent (against the dollar) thanks to "Abenomics", and expectations (for economic recovery) are running high," Muto said.

"Higher expectations aside, the yen's softer trend will have an impact on the real economy. That's a major factor behind the upward revision."

SOLID CONSUMER SPENDING

In the monthly report, the government raised its view on private consumption for the second month in a row, saying consumer spending is holding firm.

"Auto sales bottomed in October and were on the rise in November and December. Car production is recovering as well. Private consumption is showing signs of bottoming out," a Cabinet Office official in charge of compiling the report said.

"Corporate leaders' views on business conditions are recovering against the backdrop of a recent correction to the yen's appreciation and gains in share prices," he said.

The risk of overseas developments negatively affecting the Japanese economy has diminished, he added, as the U.S. government has averted triggering automatic spending cuts and tax hikes known as the "fiscal cliff", and Japan appeared to be past the worst of its diplomatic row with China.

Sino-Japanese relations deteriorated sharply after the Japanese government in September bought disputed East China Sea islets, known as the Senkaku in Japan and the Diaoyu in China, from a private Japanese owner, triggering violent protests across China and a boycott of Japanese goods.

Although Asia's two biggest economies are still sending patrol ships to waters near the islands, raising worries that an unintended collision could escalate into a broader clash, anti-Japanese demonstrations have subsided.

Japanese automakers including Toyota Motor Corp (7203.T) and Nissan Motor Co Ltd (7201.T) saw a slow recovery of sales in China in December as the bruising effects of the territorial spat waned.

To keep the recovery trend going, analysts said,the government needs to tackle such tasks as deregulation and possible participation in the U.S.-led Trans-Pacific Partnership (TPP) free trade pact.

Businesses want Japan to join the pact so that Japanese exporters can better compete with overseas rivals, but politically powerful agricultural lobbies oppose the participation for fear of the influx of overseas farm products.

"What's important is how much headway the government will be making on these fronts." Sumitomo Mitsui's Muto said, noting that government could be wary of taking measures that could impact voter sentiment ahead of elections for the upper house set for July.

Cmon grow you damn Japanese yen! Stop making figurines so expensive!

[willx]

Bill Gross (PIMCO) on the "Credit Supernova"



http://www.pimco.com/EN/Insights/Pag...Supernova.aspx

[DonQuigleone]

Originally Posted by willx

Bill Gross (PIMCO) on the "Credit Supernova"



http://www.pimco.com/EN/Insights/Pag...Supernova.aspx

My gut instinct is that debt is something to be avoided except for the following:

1. Capital investment. IE whereby your debt is going towards something that will lead to greater returns (or savings) then the cost of the interest.

2. Making large cash intensive purchases, whereby it might not be practical to provide all money up front (IE a house, or a car, though those two can count as 1, depending on your living situation).

I've heard peers casually talk about going into debt in order to go on holiday, or buy clothing. Madness. A person can only be the loser in such a transaction.

Debt is only "good" if it's going to something that can "grow", in which case your financier and yourself are sharing in that growth, case 1. Case 2 is to overcome pragmatic difficulties (most people, even if they're diligent savers, can't provide large quantities of cash upfront).

Banking institutions that encourage consumer debt are being irresponsible, I think. They're normalizing an unhealthy practice. I think it's also a bad move long term, as people who get used to consumer debt spending, are going to eventually end up bankrupt, as eventually reach a point where they can no longer afford to pay more interest, as the debt only encourages them to unsustainably live beyond their means. It's better for banks to do due diligence and ensure the money they provide is going towards a worthwhile investment.

[Bri]

The figure is misleading as it involves absolute values. (Not surprising as it basically part of an advertisement). One would have compensate for economic growth and inflation. That's why expressing debt as percentage of GDP usually provides greater insight.

Debt can also be used to effectively lower taxes on capital. Another use is to increase risk and payoffs. Debt is not inherently bad but, like any other powerful tool, can cause a lot of damage if poorly used.

[Solace]

Relevant to discussion:

http://www.gmo.com/websitecontent/JG...rALL_11-12.pdf

Always interesting to see what investment firms think of the future.

[SaintessHeart]

It seems that, regardless of how the market is trending, Wall Street always finds a way to make money.

Fear indexes on the rise on global stock markets

And just one of the many strategies they have used :

Letting the VIX tell us when to get out

[willx]

Oaktree's Marks Warns Pre-Crisis Behavior is Back

LOS ANGELES (Reuters)—The chairman of the world's largest distressed debt investor on Tuesday [March 5] warned that the "unsound practices" of before the financial crisis are creeping back into credit markets, with private equity firms bidding increasingly high prices for companies.
Howard Marks, co-founder and chairman of Los Angeles-based Oaktree Capital, told a conference that investors, in their search for returns, were becoming overly confident while the economic background was still gloomy.

In a presentation titled "Investing in Uncertain Times," Mr. Marks noted the ease with which lowly rated companies were issuing debt this year, how companies were paying out record dividends to their shareholders and the increasingly high debt-to-equity multiples private equity firms were paying for companies amid a resurgence in deals.

http://www.hedgeworld.com/open_news/...er_share=70193

This is from the same man that wrote a very simple and easy to understand piece on the price (intrinstic or not) of gold: http://www.oaktreecapital.com/MemoTr...2012_17_10.pdf

PS: I don't have the data on me, but I ran a historical analysis of U.S. recessions and the price of gold. They were actually relatively poorly correlated, but I did find some research showing that gold responds to systemic shocks. IE. Gold is a poor inflation hedge but has been a decently good "crisis" hedge.

[SaintessHeart]

Originally Posted by willx

Oaktree's Marks Warns Pre-Crisis Behavior is Back

This is from the same man that wrote a very simple and easy to understand piece on the price (intrinstic or not) of gold: http://www.oaktreecapital.com/MemoTr...2012_17_10.pdf

PS: I don't have the data on me, but I ran a historical analysis of U.S. recessions and the price of gold. They were actually relatively poorly correlated, but I did find some research showing that gold responds to systemic shocks. IE. Gold is a poor inflation hedge but has been a decently good "crisis" hedge.

Before you signed onto this forum, I posted this before with regards to gold. Gold doesn't have much correalation other than that towards fear. Maybe it might be related to volumes? I don't know.

Dow hit 14,000 again. Not a surprise that the bulls (and their shit, excuse my sarcasm) are back. I certainly hope it will not be another Black Tuesday, though it would be great if the reinstated the Glass-Steagall Act.

[willx]

Originally Posted by SaintessHeart

Before you signed onto this forum, I posted this before with regards to gold. Gold doesn't have much correalation other than that towards fear. Maybe it might be related to volumes? I don't know.

You whipper-snapper! Check out my join date! I was just .. on hiatus ..

[SaintessHeart]

Originally Posted by willx

You whipper-snapper! Check out my join date! I was just .. on hiatus ..

Go eat a moose. I ninja-ed you 2 years! Swear fealty!

[willx]

So, I haven't posted in this section in a while, but in light of conversations that I've been having with many people in all aspects of "high finance" .. I'm going to put some of my thoughts down. These are just preliminary mental ramblings but it'll be good to have them in a place I can reference them.. and for people to critique and challenge me on them.

As a preface, I sound very cold and emotionless in this analysis, and I am .. but do not take that as me viewing emotions as being irrelevant to this topic. Emotions .. consumer and corporate confidence in the future whether it be job security, social safety nets, economic activity .. it is this sentiment that drives the ebb and flow, the waves if you will, of the economic cycles.

Rates & Liquidity / QE(Infinity) & Abenomics

Spoiler for Wall O Text:

So as we all know (or should know) the current effective real interest rates in the U.S. (now) and in Japan (for a while now) have been negative. What does this mean exactly?

Well, to simply matters, there is inflation: where $1 today buys you less than $1 in the future of the same pool of real assets/consumables/etc and there is deflation: where the opposite is true, $1 today buys you more than $1 tomorrow.

Obviously one of these scenarios is better for consumers and the other is better for savers. Intrinsically when you think about it neither of these situations are bad persay but when you drill down to the reality of it our fundamental economies and human perspective are driven by the ideas of progress, innovation and growth. Thus, inflation, always always inflation, albeit moderated at a sustainable rate (ie. Higher inflation deflates to lower levels of inflation. Lower levels of inflation inflates into higher levels of inflation). Therefore our global economies fluctuation from higher to lower levels of inflation. Deflation to oversimplify, shows a break-down of the system, and it has happened and is happening.

The fear of existing and continuing deflation has caused governments to take drastic measures. Many believe these measures to be necessary. I both agree and disagree. I will make this clear -- when I think about these terms, I do so academically, economically, with little to no emotion on the topic. I will stare at unemployment figures, civil unrest and increased suicide rates and nod, acknowledge them and feel nothing. Anyone that wants to debate the rightness or wrongness or the humanity of it should go elsewhere. I care not for sob stories or individual impact other than how it factors in to desired, targeted or actual economic, political or policy outcomes.

Continuing on after that caveat, I know massive deflation will result in social unrest, this has been a case made to me on the U.S. situation and I believe it. Massive over consumption and failed policy investments in entire swathes of the economy must have a reckoning. The problem is, without QE-X and continuing stimulus, that reckoning would result in 20% unemployment rates and a true great depression. Insane levels of liquidity have propped up the consumer, house prices and corporate investment -- albeit not directly improving the unemployment rate (enough) and completely not sustainable. This further "inflation of the bubble" or at least "using tape to save a burst bubble" prevents the "explosive" scenario but will result in tepid to negative economic growth for decades .. high single to double digit unemployment will be the norm. Social benefits and infrastructure spend will dwindle and standards of living will fall. The poor will be hit the hardest. The rich have and will get significantly less rich (on a % basis, it's already happened http://freebeacon.com/cbo-rich-lose-...cession-taxes/) albeit it's poor comfort for people suffering to make ends meet.

The fear months and years ago was an "economic lost decade" for the U.S. like what people believe happened in Japan. The fear now is a great depression and food riots.

Japan -- (This section is more rambling than the one above. This was a conversation I literally had a few minutes ago)

As a person that has only started researching Japan's economic history now in light of world economic woes, I am perhaps not the most qualified. The case that is obvious to me though is incremental massive government spending is likely not the right answer.

Based on my understanding of the situation, the massive economic boom and real estate bubble fueled rampant speculation until it burst, resulting in massive losses and a giant economic slump. To stave off horrific losses and the resulting deflationary environment, massive government spending projects, stimulus and budget deficits were instituted to spur economic activity. It clearly failed. Japan now has the highest Debt / GDP ratio of any developed nation. It was close to Zimbabwe last time I checked.

So post economic crisis, real estate market crash .. investor confidence is low. Unemployment is high. Trend continues. Deflation reigns. Investors take negative real returns on their money (deposits) in exchange for perceived safety. Cheap debt fuels more government spending to try to spur the economic. Government debt levels becomes the next concern suppressing economic confidence.

If inflation takes hold -- how does the government service its debt load when its own borrowing costs start rising?
Capital flight has already started -- additional market liquidity is flowing directly to large corporates and individuals that cannot generate adequate returns in the domestic market so must look overseas
Standard of Living -- this is going to fall, it has to, it'll always hurt the poorest the most. McDonalds has announced its increasing its prices in Japan. (http://www.bloomberg.com/news/2013-0...ince-2008.html)

Anyways, this is my first "thought dump" on this and other varied economic topics. I'm pretty sure I don't have everything down yet. A simple summary is that it's not a case of "the worst is yet to come" but more of a "things got really bad, haven't really gotten better, and what severity and in what form will the pain take"

I'm in the process of rebalancing my own personal portfolio. I'll talk about that more when I get to my next topic re: treasuries, corporate yields and equity markets.

Relevant Recent Readings:
http://blogs.marketwatch.com/thetell...ney-investing/
https://www.gmo.com/America/CMSAttac...j9wkBRE6RIiPGQ
http://money.cnn.com/2013/04/23/news...ics/index.html
http://www.forbes.com/sites/realspin...-currency-war/
http://worthwhile.typepad.com/worthw..._source=feedly
http://worthwhile.typepad.com/worthw..._source=feedly
http://www.calculatedriskblog.com/20...alculated+Risk)

[oompa loompa]

Originally Posted by willx

So, I haven't posted in this section in a while, but in light of conversations that I've been having with many people in all aspects of "high finance" .. I'm going to put some of my thoughts down. These are just preliminary mental ramblings but it'll be good to have them in a place I can reference them.. and for people to critique and challenge me on them.

As a preface, I sound very cold and emotionless in this analysis, and I am .. but do not take that as me viewing emotions as being irrelevant to this topic. Emotions .. consumer and corporate confidence in the future whether it be job security, social safety nets, economic activity .. it is this sentiment that drives the ebb and flow, the waves if you will, of the economic cycles.

Rates & Liquidity / QE(Infinity) & Abenomics

Spoiler for Wall O Text:

So as we all know (or should know) the current effective real interest rates in the U.S. (now) and in Japan (for a while now) have been negative. What does this mean exactly?

Well, to simply matters, there is inflation: where $1 today buys you less than $1 in the future of the same pool of real assets/consumables/etc and there is deflation: where the opposite is true, $1 today buys you more than $1 tomorrow.

Obviously one of these scenarios is better for consumers and the other is better for savers. Intrinsically when you think about it neither of these situations are bad persay but when you drill down to the reality of it our fundamental economies and human perspective are driven by the ideas of progress, innovation and growth. Thus, inflation, always always inflation, albeit moderated at a sustainable rate (ie. Higher inflation deflates to lower levels of inflation. Lower levels of inflation inflates into higher levels of inflation). Therefore our global economies fluctuation from higher to lower levels of inflation. Deflation to oversimplify, shows a break-down of the system, and it has happened and is happening.

The fear of existing and continuing deflation has caused governments to take drastic measures. Many believe these measures to be necessary. I both agree and disagree. I will make this clear -- when I think about these terms, I do so academically, economically, with little to no emotion on the topic. I will stare at unemployment figures, civil unrest and increased suicide rates and nod, acknowledge them and feel nothing. Anyone that wants to debate the rightness or wrongness or the humanity of it should go elsewhere. I care not for sob stories or individual impact other than how it factors in to desired, targeted or actual economic, political or policy outcomes.

Continuing on after that caveat, I know massive deflation will result in social unrest, this has been a case made to me on the U.S. situation and I believe it. Massive over consumption and failed policy investments in entire swathes of the economy must have a reckoning. The problem is, without QE-X and continuing stimulus, that reckoning would result in 20% unemployment rates and a true great depression. Insane levels of liquidity have propped up the consumer, house prices and corporate investment -- albeit not directly improving the unemployment rate (enough) and completely not sustainable. This further "inflation of the bubble" or at least "using tape to save a burst bubble" prevents the "explosive" scenario but will result in tepid to negative economic growth for decades .. high single to double digit unemployment will be the norm. Social benefits and infrastructure spend will dwindle and standards of living will fall. The poor will be hit the hardest. The rich have and will get significantly less rich (on a % basis, it's already happened http://freebeacon.com/cbo-rich-lose-...cession-taxes/) albeit it's poor comfort for people suffering to make ends meet.

The fear months and years ago was an "economic lost decade" for the U.S. like what people believe happened in Japan. The fear now is a great depression and food riots.

Japan -- (This section is more rambling than the one above. This was a conversation I literally had a few minutes ago)

As a person that has only started researching Japan's economic history now in light of world economic woes, I am perhaps not the most qualified. The case that is obvious to me though is incremental massive government spending is likely not the right answer.

Based on my understanding of the situation, the massive economic boom and real estate bubble fueled rampant speculation until it burst, resulting in massive losses and a giant economic slump. To stave off horrific losses and the resulting deflationary environment, massive government spending projects, stimulus and budget deficits were instituted to spur economic activity. It clearly failed. Japan now has the highest Debt / GDP ratio of any developed nation. It was close to Zimbabwe last time I checked.

So post economic crisis, real estate market crash .. investor confidence is low. Unemployment is high. Trend continues. Deflation reigns. Investors take negative real returns on their money (deposits) in exchange for perceived safety. Cheap debt fuels more government spending to try to spur the economic. Government debt levels becomes the next concern suppressing economic confidence.

If inflation takes hold -- how does the government service its debt load when its own borrowing costs start rising?
Capital flight has already started -- additional market liquidity is flowing directly to large corporates and individuals that cannot generate adequate returns in the domestic market so must look overseas
Standard of Living -- this is going to fall, it has to, it'll always hurt the poorest the most. McDonalds has announced its increasing its prices in Japan. (http://www.bloomberg.com/news/2013-0...ince-2008.html)

Anyways, this is my first "thought dump" on this and other varied economic topics. I'm pretty sure I don't have everything down yet. A simple summary is that it's not a case of "the worst is yet to come" but more of a "things got really bad, haven't really gotten better, and what severity and in what form will the pain take"

I'm in the process of rebalancing my own personal portfolio. I'll talk about that more when I get to my next topic re: treasuries, corporate yields and equity markets.

Relevant Recent Readings:
http://blogs.marketwatch.com/thetell...ney-investing/
https://www.gmo.com/America/CMSAttac...j9wkBRE6RIiPGQ
http://money.cnn.com/2013/04/23/news...ics/index.html
http://www.forbes.com/sites/realspin...-currency-war/
http://worthwhile.typepad.com/worthw..._source=feedly
http://worthwhile.typepad.com/worthw..._source=feedly
http://www.calculatedriskblog.com/20...alculated+Risk)

I haven't been reading about Japans economy for a while, but wasn't the yen seen as one of the safer currencies? Last time I went there there was serious deflation going on.. but clearly thats changed after just looking at the FX rate. Whats caused this?

AFAIK (or can remember):
As for the government programs, Japan is a bit of an anomaly. The governments stimulus is based on Keynesian thinking, that by pumping money in, and reducing interest rates they can stir investment. The average Japanese consumer however.. just doesn't seem to happy to budge. Apparently its a real liquidity trap, but I wonder if they were trapped from the start due to the odd Japanese consumer behavior. I suppose people were still saving because they didn't have faith in investments after the crash of the early 1990's. I don't think the Japanese people have much faith in their government ( and I can't say I blame them). An interesting thing about Japanese debt to take note of is that most of it is owned by the citizens.

I'm rusty but for those of you who want to get the basic idea behind the monetary stimulus should look up the Mundell-Fleming Model. http://en.wikipedia.org/wiki/Mundell...3Fleming_model (IS-LM-BP). Its not tough to get through and will be a breeze if you've done any keynesian macro before.

I'm not sure I agree with you about deflation showing a breakdown of the economy, in isolation both inflation and deflation can be harmful or beneficial. The constant rate of increase of money supply, (once again, AFAI remember) is backed by keynesian economics. When I say Keynesian economics, I mean that suppliers dont react immediately to price changes, so increasing money supply gives the illusion that people have more money a), and that real prices will increase in the next time period b). The logic says: If prices are increasing, I should buy something today since its going to be more expensive tomorrow, since my wage contract is binding for the period and cannot adjust immediately--> this is the kicker. They might have less, they might have more, they might have the exact same amount.

As far as deflation goes, deflation is often symptomatic of extremely high sustained growth and development, just look at the Japanese currency rate in the 60's to the 80's. If overall production becomes more efficient, you will have higher supply for every given good at a nominal price resulting in deflation. The same trend was observed in the late 1900's in the U.S too AFAIK. In any case, theres quite a lot of literature that points towards monetary policy being totally ineffective --> which is why I hate macro.. no one can agree on anything (don't have a link for this at the moment, but shouldn't be a problem to verify if need be)

Inflation and deflation are often symptomatic of something else, for example like the concept of NAIRU (non-accelerating inflation rate of unemployment) http://en.wikipedia.org/wiki/NAIRU (which states that trying to reduce unemployment below a certain level will cause accelerating rates of inflation, you can see this graphically in the Phillips curve http://en.wikipedia.org/wiki/Phillips_curve . So you can have artificially high inflation but still have very high unemployment if your NAIRU is shifted due to a shock in Aggregate demand. In any case its extremely important to figure out whats causing the inflation or deflation, perhaps for a layman the relationship of inflation > deflation is true, but it doesn't hold true under scrutiny.

[Sumeragi]

Amusing for those that deal in metal:



In case anyone is wondering, you can sell US quarters made from 1932-1964 at over $4 each due to the composition of metals (silver).

[flying ^]

The best investment idea at Ira Sohn 2013 could be all about shorting everything that’s associated with the voracious Chinese demand for commodities, a symptom of policies that attempted to quell–but really just put on hold–the effects of the financial crisis.

Stanley Druckenmiller, former managing director of Soros Fund Management, said commodity producers were fooled in 2008, when the Chinese government injected 4 trillion yuan (at the time, $586 billion) in stimulus into the Chinese economy. That created a false demand for goods and for the raw materials to make them.

.......

http://qz.com/82728/trading-idea-a-d...modities-glut/

[willx]

Oops .. I never came back to do the second "thought dump" that I said I was going to do.. Ha! Well, since it's been a while, here we go:

Treasuries, Corporate yields and Equity markets:

Spoiler for Wall of Text:

So, in my last post, I posited my thoughts and positions on inflation/deflation and underlying economic fundamentals. We can agree or disagree -- we may both be right or wrong or could also be utterly mistaken -- but at least that should provide some of the underlying perspective I have on the world and it is from that basis that we move on to investments, portfolios, volatility and risk, etc.

Let me start with an anecdote --

Back in 2006/7 as someone still going to school, my professors and classes lavished praise on the U.S. financial system, capital markets and Alan Greenspan. We were in the midst of the longest continuing expansion in any recent memory (or maybe in history) and it made everyone very happy. I was getting myself ready to try my hand at getting a job in "high finance" and one of the more challenging courses I took was "Risk Management & Financial Engineering"

The only things I remember nowadays from that particular course was this:

1) Back in 2006, I was instructed on how to create CDOs and CLOs (as they were in vogue) and shown mathematically how they diversify risk. To this day, slicing and splicing credits, structural seniority or subordination are still valuable concepts -- the missing piece of the puzzle that was never touched on in class and the failure in the real world -- was the failure to avoid concentration in a specific and single asset class: Housing

2) I (along with two classmates - one of whom is doing a PhD in Econometrics at UC Berkley and another working in NYC for Goldman Sachs) put together a response to a end-of-year project to value an equity-linked security. We used MatLab to program a sequence to value the embedded option net vs. the FMV of the fixed income piece and our GS partner offered a trading strategy for it. We got 95% with comments that said: "???? Ok" .. I also have completely forgotten how to use MatLab.

The point of those anecdotes is to set out what "academic training" typically sits behind many of the individuals that operate in this obscure world of finance. My follow-up comment to the previous sentence is thus: All of that was completely useless for my actual job and only a small portion of the latter is used for other individuals when they do market analysis and then only so when they are valuing specific single instruments and securities

Skipping completely the fundamentals to understand cross-currency exchange rates and interest rate-parity, as I prefaced in my post back in May .. most of the world is operating in "negative real interest rate" territory. What I mean by that and why it's important for this next conversation is thus: The interest rates I refer to above, the rates on Government securities (i.e. Treasuries) is our benchmark for "risk-free rate" or basically, what in a semi-perfect world, is the expected rate of return that involves no risk.

Investments, investing and portfolio management is at it's simplest about managing risk while growing assets, generating income and preserving capital. All of the initial basis then becomes predicated on the underlying assumption for what is acceptable returns for acceptable risk.

So how do we determine what is acceptable risk? Well, it's based on personal circumstances and personal goals. It's based on the stability and volatility of our own personal employment income. It's based on the other assets that we may own. And .. it's also based on what risk-free rates are.

Without going into it extensively (unless people want me to) for individuals, a basic application of diversified asset allocation is important as well at least a basic understanding of modern portfolio theory:

http://www.sec.gov/investor/pubs/assetallocation.htm &
http://en.wikipedia.org/wiki/Modern_portfolio_theory


My personal portfolio weightings roughly, in broad categories, is thus:
20-30% - Investment Grade Fixed Income
10-15% - High Yield Fixed Income
15-25% - Blue Chip Corps
10-15% - Small Cap Corps
10-15% - Alternative Investments / Discretionary / Active Trading
15-20% - Cash

So what does this mean and why is it this way? Regardless of whether this was my particular portfolio or that of another persons, ultimately it should reflect your particular risk appetite, personal goals and specific expectations for the future. The rough sketch of this portfolio of mine was crafted back in 2009-2010 with my fixed income, high yield and blue chip portions performing admirably, my small caps getting crushed and my "alternative investments" a bit of a mixed bag -- I wanted stability and expected conservative investments to outperform a weak economic back-drop while leaving room for growth and a large wad of cash for a "rainy day".

This portfolio composition is weighted heavily to Canada and U.S. with minimal EMEA and Asia exposure (I'm bearish on those markets) and it has been crafted to fit within not just my monetary/economic views, but risk factors unique to my personal circumstances -- volatile employment that is highly correlated to equity markets -- which should be a consideration for everyone.

Now having jotted all of that damn in a mad stream of consciousness .. I feel like I jumped a bit ahead of myself without expanding on topics such as the difference between debt and equity, let alone other things that may seem obvious to me but perhaps would be interesting to others ..

Additional Reading:
http://business.financialpost.com/20...-not-dead-yet/
http://www.investopedia.com/terms/m/...oliotheory.asp
http://en.wikipedia.org/wiki/Investm...licy_Statement
http://successfulportfolios.com/wp-c.../07/SA_v15.pdf
http://en.wikipedia.org/wiki/Alternative_investment

[Irenicus]

^Just an amateur's opinion but, aren't you pretty high on the fixed income and cash side? Is the Canadian bond market less wtflol than the US one, not as under the mercy of the US Feds? Or is it your choice and personal risk assessment?

Mind, I understand not committing heavily into US equities at this point, even blue chip ones, and if you are bearish on Europe/Asia I can see you'll have problems finding alternative asset classes. The S&P is at such a high that, while the US economy has sound fundamentals -- in the short term, and barring another political murder-suicide attempt -- it is not going to grow nearly as fast as the S&P and that means bubble. Bubble bad.

[willx]

Originally Posted by Irenicus

^Just an amateur's opinion but, aren't you pretty high on the fixed income and cash side? Is the Canadian bond market less wtflol than the US one, not as under the mercy of the US Feds? Or is it your choice and personal risk assessment?

Mind, I understand not committing heavily into US equities at this point, even blue chip ones, and if you are bearish on Europe/Asia I can see you'll have problems finding alternative asset classes. The S&P is at such a high that, while the US economy has sound fundamentals -- in the short term, and barring another political murder-suicide attempt -- it is not going to grow nearly as fast as the S&P and that means bubble. Bubble bad.

1) I am very much overweight fixed income now. It's performed very well for me over the last 2.5 years but it is definitely a drag on performance currently. My strategy at the time was admittedly an asset allocation one.

2) My view on "alternative investments" and the like might be very different than other peoples.

For example, I work with colleagues who have connections to individuals that may require 2nd mortgages on their family home at 65-80% LTVs but are willing to pay >10% rates on that debt. They may need that money to renovate another home, put it into their business or other opportunities. Sometimes there's other things like multi-unit residential where they are levering the same amounts off base value but putting all the additional into renovations. We do our diligence, review the opportunity and put money into that.

At other times .. I sometimes develop short-medium term personal trading strategies (ie. bull-call spreads, bear-put spreads, bear put-forward spreads multi-leg short delta/theta). My most recent one was the aforementioned option strategy crafted to cover a large chunk of a stock's "downside" portion of it's cumulative probability distribution. I put money into that too (and have also lost money at times too).

Or sometimes I just do selective individual high variability stocks bets. These are probably my least quantitative investments and are based on "I think this segment, this company or this industry" is in for gains or a correction. Personal employee stock loan bets.. etc. I classify all of these things as "alternative" ..

Near-term, I view economic fundamentals in the U.S. are more positive, but my longer-term view is that the country is still in for a significant shock as grow will be much slower due to continuing consumer deleveraging. That's my thesis anyway.

[kuroishinigami]

Personally, I'm bearish on USD denominated fixed income currently. Due to QE these past years, sooner or later, the US treasury rate is going to be increased to curb inflation. When that happens, current yield on fixed income won't be good enough and price will go down. Sure, there is still some potential for low yield decrease in the short term, but for me the risk is too big for such a small reward so I rather put it elsewhere. This is just amateur's view though XD.

Just out of curiousity, any reason why you don't put any weight in Emerging Market Equity/fixed income market? Those tends to give higher yield/return, although also with higher risk.

[SaintessHeart]

Originally Posted by kuroishinigami

Personally, I'm bearish on USD denominated fixed income currently. Due to QE these past years, sooner or later, the US treasury rate is going to be increased to curb inflation. When that happens, current yield on fixed income won't be good enough and price will go down. Sure, there is still some potential for low yield decrease in the short term, but for me the risk is too big for such a small reward so I rather put it elsewhere. This is just amateur's view though XD.

Well here is another amateur's view; with the effect of Abenomics and China still not willing to raise rates, I see it as some form of economic warfare to see whose printer works the most efficiently.

Inflation would keep blowing out until someone is unable to tolerate the pain anymore and raises rates.

Just out of curiousity, any reason why you don't put any weight in Emerging Market Equity/fixed income market? Those tends to give higher yield/return, although also with higher risk.

IMO, after looking at the marketwatch tab of rates on the right, the bond market is quite flat for the past 2 years, with little bits of volatility that would benefit speculators rather than long-term investors. I suspect that many would rather put their money into options and earn premiums instead of sitting on bonds.

As for Emerging Market Equity, I suspect the problem to be Emerging Market Debts. Considering the fact that emerging markets often have a patron currency used in its investment, the rates of bonds have failed to inspire confidence in the major investor currencies (USD, CNY for starters), therefore the invested extract less value from the investment funds to produce for the investors.

There is an opinion written on Reuters 2 months ago which joked about the BRICs as a Bloody Ridiculous Investment Concept that is worth reading; although the ideas are hardly agreeable, due to its lack of data as compared to this, it shares some ideas what the market MIGHT be actually doing behind our backs. Though like any other writing about investments and trading, it is a good idea to do some research into the ideas before taking a stand.

Still, there might be people putting money into the bank or dropping them on really long term investments, so the general direction might be into those sooner or later. This addiction to cheap money will kill us all.

P.S : I am a bear most of the time, so most good news seem like bull to me.

[willx]

Originally Posted by kuroishinigami

Personally, I'm bearish on USD denominated fixed income currently. Due to QE these past years, sooner or later, the US treasury rate is going to be increased to curb inflation. When that happens, current yield on fixed income won't be good enough and price will go down. Sure, there is still some potential for low yield decrease in the short term, but for me the risk is too big for such a small reward so I rather put it elsewhere. This is just amateur's view though XD.

Just out of curiousity, any reason why you don't put any weight in Emerging Market Equity/fixed income market? Those tends to give higher yield/return, although also with higher risk.

Right, so as I said, I'm overweight fixed income (both IG and HY) and will need to re-balance in the coming days as yields have been creeping up (dipped again during the shutdown and cliff scare). So, we're actually in agreement on this fact!

I personally am underweight or otherwise avoid Asia right now primarily because, frankly, I don't know it as well as I should. What I do know and am aware of -- between Abenomics, China, India -- does not make me feel bullish.. Albeit looking at how the SSE Composite has moved over the last 1-2 years is at first blush worth doing some more homework on. I'd have to figure out what the currency-swapped real-return in C$ looks like for me though so it's not trouble free.

Here's a quick snapshot on comparative worldwide benchmark bonds:

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