Ask most monetary policymakers how they think about their job and the conversation generally goes like this:
- There is “an equilibrium interest rate” that somehow balances out the desires of savers and borrowers
- This “equilibrium rate” can be estimated roughly in real time
- The role of the central bank is to ensure that actual interest rates align with this theoretical ideal
We don’t really buy any of these points, especially 2) — see our earlier post discussing research by BAML’s Ethan Harris and Goldman’s Jan Hatzius, among others, on the difficulty of determining the “equilibrium” rate at any point in time — so naturally we want to highlight some new papers that reinforce our monetary policy nihilism. Read more
A tongue twister:
Peter Piper picked a peck of stock pickers;
The pick of picking pickers Peter Piper picked;
If Peter Piper picked the pick of stock pickers,
Who’s the pick of picking pickers Peter Piper picked.
The subject is the skill of active investment managers prompted by a GMO white paper which reports 80 per cent to 90 per cent of US equity funds failed to beat their benchmark last year. Do you try to pick stocks, or do you pick stock pickers, or do you pick the picker of stock pickers? Read more
James Montier of GMO is the subject of the latest Welling on Wall Street newsletter, a weekly long-form interview conducted by Kate Welling.
Montier, ever the bear, doesn’t like the negative expected return environment we’re in. He thinks we’ve learnt little from the crisis and that one the biggest risks is that the market isn’t being adequately compensated for the risk it’s being forced to take.
We can’t duplicate too much of the interview here, but consider the following something of a teaser. The questions (in bold) are being posed by Welling: Read more
We are big fans of index tracking, particularly for those cash strapped and socially sensitive large pension funds, and we are far from alone: passive is massive for a reason.
But where there’s a fee there’s a way. As alternative investments suffer the slow zombification of poor performance, active managers have been trying to find a way into this passive game, prompting some elegant demolition. Read more
Global stocks hit a fresh six-month high and demand for government bonds eased amid hopes for a worldwide economic recovery, the FT reports. Gains were limited though, as lack of an agreement in Greece over terms required for a second bail-out program weighed on sentiment. The FTSE All-World equity index was up 0.2 per cent, and it touched its best level since the start of August. Wall Street’s S&P 500 erased earlier gains, and in early afternoon trading in New York was 0.1 per cent lower, but still near its best levels since the summer of 2008. Industrial commodities are seeing demand, with copper up 0.8 per cent to $3.91 a pound, and Brent crude consolidating above $116 a barrel. US 10-year notes yields traded at 2 per cent right after the government sold $24bn of the securities at an auction at a yield of 2.02 per cent. A measure of the demand at the auction, the bid-to-cover ratio, came reasonably solid at 3.05 per cent. Industrial commodities are seeing demand, with copper up 0.8 per cent to $3.91 a pound, and Brent crude consolidating above $116 a barrel. US 10-year notes yields traded at 2 per cent right after the government sold $24bn of the securities at an auction at a yield of 2.02 per cent. A measure of the demand at the auction, the bid-to-cover ratio, came reasonably solid at 3.05 per cent.
In a note released on Tuesday, GMO, the global asset management firm headed by Jeremy Grantham, writes that “European banks need tons of money” to correct capital shortfalls. This much, we know.
But the five scenarios used by Richard P. Mattione, the firm’s head of macroeconomic research, for why banks will need to raise much more capital should prove familiar to FT Alphaville readers. Mattione uses data from the July EBA tests and July BIS data, so be warned. In fact, there are a few points here that seem to be behind the results of the latest EBA efforts. Read more
Albert Edwards has a soul mate — GMO’s Jeremy Grantham.
Like the SocGen strategist, he too is worried about the massive transfer of income to the very rich that has occurred and has been tolerated only because Central Bankers have created housing booms. So worried is Grantham that he thinks debt forgiveness and changes to the tax system may be needed if America is ever to prosper again. Read more
GMO’s Jeremy Grantham reckons we are witnessing the most important economic event since the Industrial Revolution, reports FT Alphaville. “From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.” Read more
It’s not just FT Alphaville’s Tracy Alloway who is a dab hand with the MS Paint programme.
GMO’s Jeremy Grantham is also good. Read more
GMO’s James Montier has added his two-penneth to the bond bubble debate.
He reckons it is a largely sterile conversation because what investors should be asking themselves is whether bonds are a good investment at their current low levels. Read more
James Montier, the former SocGen analyst now allocating assets at hedge fund GMO, is prone to occasional outbursts of macroeconomic theorizing.He’s entered the austerity debate with his latest paper, which FT Alphaville compared to Bernard Mandeville’s 1705 epic Fable of the Bees. Quick translation: if everyone saves at once, we all get poorer. Read more