Hussman Weekly Market Comment: The Reality of the Situation

For nearly two years, the massive interventions of central banks have repeatedly pulled a fundamentally weak and debt-burdened global economy from the brink of resumed recession. The Federal Reserve's balance sheet is now leveraged 52-to-1, with assets having an average duration of over 5 years, suggesting that if those assets were marked-to-market, an interest rate increase of less than 50 basis points would wipe out the Fed's entire capital base. Of course, the Fed takes no marks on its assets when it reports its balance sheet, though it does occasionally take down the value of the securities in the Maiden Lane shell companies that it illegally set up to bail out Bear Stearns and other entities (in violation of Section 13(3) of the Federal Reserve Act, which Congress had to amend and spell out like a See-Spot-Run book as a result). 

At a 10-year Treasury yield of 1.7%, interest on reserves of 0.25%, and a monetary base now at about 18 cents per dollar of nominal GDP (see Run, Don't Walk), further purchases of long-term Treasury securities by the Fed would produce net losses for the Fed in any scenario where yields rise more than about 20 basis points a year, or the Fed ever has to unwind any portion of its already massive positions. So further QE by the Fed would effectively amount to fiscal policy. Moreover, the benefits of central bank interventions are becoming progressively smaller and short-lived (nearly log-periodic in fact, to borrow a term from crash dynamics). None of this restricts the Fed from embarking on further interventions. It just emphasizes how far the Fed has already descended into the deep.

GMO whitepaper: The What-Why-When-How Guide to Owning Emerging Country Debt

As GMO approaches its 20th year managing emerging debt, Tina Vandersteel of GMO's Fixed Income Division offers a buyer’s perspective on how the asset class has evolved. She outlines the rewards and risks offered when investing in emerging external, local, corporate, “blended” and “multi asset” (including equities) strategies as well as insights into timing, portfolio fit, and other asset allocation considerations.

I Cannot Leave the Truth Unknown - By Frank Martin

Link to: I Cannot Leave the Truth Unknown

...................

Related previous post: Martin Capital Management - 2011 Annual Report

Ray Dalio quote (the holy grail of investing)

From Maneet Ahuja's book, The Alpha Masters:

Dalio says if you have 15 or more good, uncorrelated bets, you will improve your return to risk ratio by a factor of five. He calls this the holy grail of investing. “If you can do this thing successfully, you will make a fortune,” he says. “You’ll get the pot of gold at the end of the rainbow.”

Joel Greenblatt quote (diversification)

“Here is part of the tradeoff with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term.” –Joel Greenblatt, The Most Important Thing Illuminated

Nassim Taleb quotes (the unexpected and the "unknown unknown")

“Plans fail because of what we have called tunneling, the neglect of sources of uncertainty outside the plan itself…..The unexpected almost always pushes in a single direction: higher costs and a longer time to completion. On very rare occasions, as with the Empire State Building, you get the opposite: shorter completion and lower costs—these occasions are becoming truly exceptional nowadays…..As I said earlier, we are too narrow-minded a species to consider the possibility of events straying from our mental projections, but furthermore, we are too focused on matters internal to the project to take into account external uncertainty, the “unknown unknown,” so to speak, the contents of the unread books.” –Nassim Taleb, The Black Swan

Seneca quote

“Just as conversation or reading or some deep reflection deceives travellers, and they discover they have reached their goal before knowing they were approaching it, so it is with this unbroken and rapid journey of life, that we make at the same pace, whether awake or asleep: those who are busy with other things do not notice it until the end comes.” –Seneca, Dialogues and Essays

Ray Dalio quote (learn from history)

“If you’re limiting yourself to what you experienced, you are going to be in trouble. . . . I studied the Great Depression. I studied the Weimar Republic. I studied important events that didn’t happen to me.” -Ray Dalio (as quoted by Maneet Ahuja in The Alpha Masters)

Seneca quote (learning from the minds of the past)

“Since nature permits us to have a share in every age, why should we not forsake this insignificant and fleeting span of time and devote ourselves with all our minds to the past, which is vast, which is eternal, which we share with better men?” –Seneca, Dialogues and Essays

John Mauldin: Meanwhile, Back at the Ranch

It is simply hard to tear your eyes away from the slow-motion train wreck that is Europe. Historians will be writing about this moment in time for centuries, and with an ever-present media we see it unfold before our eyes. And yes, we need to tear our gaze away from Europe and look around at what is happening in the rest of the world. There is about to be an eerily near-simultaneous ending to the quantitative easing by the four major central banks while global growth is slowing down. And so, while the future of Europe is up for grabs, the true danger to global markets and growth may be elsewhere. But, let’s do start with the seemingly obligatory tour of Europe.