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What We Read Today 01 March 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • New Federal Tax Proposal To Hit Homeowners Hard! (Michael Haltman, Hallmark Abstract Service) Michael Haltman contributes to Global Economic Intersection. The proposed tax legislation from the House Ways and Means Committee, David Camp (R, MI) would slash several tax benefits for home mortgages and capital gains. The bulk of the changes would impact higher incomes and expensive homes.


  • How the Fed Let the World Blow Up in 2008 (Matthew O'Brien, The Atlantic) The Fed was preoccupied with inflation (which had been collapsing for three months) as the financial system imploded. The graph below shows the warning signals from the TED spread which is a reliable market measure of distress in the financial system. Maybe Bernanke could play the role of Nero in a future movie "While Rome Burned".


Today there are 12 articles about the investment environment discussed 'behind the wall'.

Please support all of Global Economic Intersection with a $25 per year subscription to premium content 'behind the wall'.

We now have seen five consecutive years of positive annual returns on the S&P. The last time we had seen that was 2003 to 2007, which was followed by a loss of 38% in 2008. Since 1970 there has only been one instance where the market had positive returns for more than five consecutive years and that was from 1982 to 1989 (see "Time for a fall?" below).


  • This Common Misconception about China May Be Hurting Your Portfolio (Frank Holmes, US Global Investors, Advisor Perspectives) Frank Holmes has contributed to Global Economic Intersection. Lack of innovation in China is the misconception that Holmes says will damage your investment results in China. He says that the inventive spirit of the Chinese from centuries ago is still prospering in China today.
If starts or sales are up at least 20% YoY in any month in 2014, I will make a $100 donation to the charity of Bill's choice, which he has designated as the Memorial Fund in honor of his late co-blogger, Tanta. If housing permits or starts are down 100,000 YoY at least once in 2014, he make a $100 donation to the charity of my choice, which is the Alzheimer's Association.


  • The Profits Bubble (Chris Brightman, Research Affiliates) Brightman says that "profits are dangerously elevated by all reasonable measures". He says that the spectacular reallocation of income to capital and away from labor is unsustainable.
Many of today's investors uncritically assume that the conditions they have known over the course of their professional careers must be normal. The idea that we may soon experience a multi-decade period of zero or negative growth in real earnings per share, taking the level of profits down to a lower share of national income, seems preposterous. Yet economic history has seen many examples of such a turn, including the 1880-1890s, the World Wars, the 1930s, and the 1970-1980s. In fact, almost every decade except the 1990s and 2000s saw a protracted profits slump. Some declines in profitability lasted most of a decade; others, longer!

Click on images to view interactive graphics at Research Affiliates.

  • Secular Bull Or Bear? (Doug Ramsey, Advisor Perspectives) The jury is still out. If this is a new secular bull market it will have followed the shortest secular bear market in history.


  • Can the bond rally continue? (Thomas DeMarco, Fidelity Investments) Reasons for caution and reasons to stay invested. A good analysis and discussion.


  • What Areas of the Market Will Remain in the Limelight? (Frank Holmes, U.S. Global Investors) Frank Holmes has contributed to Global Economic Intersection. Consumer Discretionary and Health Care are the two sectors that have outperformed over the past three years (2011-2013). Occasionally a sector will remain at or very near the top for four years (see Energy 2004-2007), but that is unusual. Often leaders fall sharply and losers advance strongly after one or more years at the top.



  • A CAPE Crusader (James Montier, Advisor Perspectives) There are very few occasions (most notably 1990-99) when the realized returns from the Shiller P/E model have exceeded the predicted returns. For that reason the prediction of a spike in seven-year average returns for about two more years, followed by eight years with returns below 5% (again that's the rolling seven-year average) is a matter of concern. With a return of 28% on the books for 2013, that leaves only an average of about 1% a year for the other six years (if the average is 5%) until the 2013 returns drop out of the rolling average. Of course we could have another bubble like the 1990s. If it happened only once in 130 years does that mean it is not likely again? Not necessarily, although some might argue that lightening doesn't strike twice in the same place. That, of course, is an old canard which is false.



  • How far can gold run? (Houses and Holes, Macro Business) Article says gold is rising on the possibility that Yellen will slow the taper. Key resistance levels are identified.



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