Social Security Goes Cash-Flow Negative

February 5, 2010

Allan Sloan at Fortune makes a great point about the Social Security system. It will be cash-flow negative for the first time since the early 1980s. Covering the shortfall will inevitably lead to either more debt or some kind of benefit reductions. Alternatively, I guess, they could just print more money and create inflation, although there are a number of economists who argue that deflationary forces (from deleveraging) in the economy are so strong right now that we don’t have to worry about inflation at all.

Fortunately I’m not an economist so I don’t really have a position on this. We’ll find out everything we need to know from the price of government debt and U.S. credit default swaps. Although it is impossible to precisely forecast what the effects on financial markets might be, supply and demand will figure it out over time.

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Posted by Mike Moody

Interview with Carmen Reinhart

February 5, 2010

Carmen Reinhart has collaborated with Kenneth Rogoff for nine years now-they were both economists at the International Monetary Fund. They are the foremost experts on financial crises and their aftermath. The Wall Street Journal today carried a very informative interview with her about where we are in the financial crisis.

Ken and I have been arguing fairly forcefully that historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely.

Her main point is that we could be in for a long period of deleveraging, and obviously some of that deleveraging could be accomplished through default.

Although direct parallels to the 1930s may be overdone, Reinhart makes the case that we haven’t seen anything similar to this in the investment careers of anyone around today.

We have not seen an economic downturn so synchronized, a downturn in trade so sharp and widespread, post-World War II. We have not seen this many economies in the advanced world, which accounts for the lions’ share of world GDP, simultaneously have financial crises since the 1930s. Nothing even close.

Viewed from that standpoint, what we are going through doesn’t have any easy comparisons. We’re somewhat in uncharted waters. We have a big downturn like the 1930s, yet the world is a very different place today. A more global, more tactical approach to investing might be required to navigate through these treacherous waters.

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Posted by Mike Moody

Hilarious Clip of NFL Players at the Super Bowl

February 5, 2010

CNBC’s Darren Rovell went around Miami quizzing Colts and Saints on the Economy (as reported at The Business Insider.) My favorite line: After finding out the unemployment rate is 10%, Colts linebacker Cody Glenn exclaimed “What’s everybody crying about?”

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Posted by Andy Hyer

Sector and Capitalization Performance

February 5, 2010

The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s). Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong. Performance updated through 2/4/2010.

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Posted by Andy Hyer