Bob Carlson

November 21, 2014

Long-Term Effects of Severe Downturns

Filed under: Economy,Financial crisis — Bob @ 1:13 pm

There was a lot of debate in 2009 after some economists published research concluding that economic growth always is slower after a financial crisis and that it takes a long time for the economy to return to its old high. Some people disputed the data and conclusions. Now, the Federal Reserve has published new research concluding that indeed growth is much slower after a severe recession and that the economy isn’t capable of higher growth for some time. But the surprise conclusion is that perhaps the Fed shouldn’t keep interest rates low for a long time. It’s possible that inflation could spike up despite all the unused capacity if the Fed stimulates for a long time after the recovery begins.

Fed officials have held their short-term interest rate near zero for nearly six years, in part because they believe the difference between the economy’s output and its potential—the so-called output gap—is large, and should therefore hold down inflation pressures. But if the economy’s potential rate of growth is lower than they thought, that would mean the output gap is smaller than estimated and inflation price increases could start picking up sooner than expected. That would argue for raising interest rates sooner than currently envisioned.

Interpreting the Data

Filed under: Asset Allocation,Investing — Bob @ 9:20 am

I frequently remind people that they should examine the data before making investment and personal finance decisions. Don’t invest on rules of thumb or short cuts. But that’s not the end of the story. Data often says different things to different people. And the data often doesn’t tell a compelling story everyone can agree on. Here’s a good post listing guidelines for using and interpreting data.

It’s never going to be easy. Even if we had 5,000 years of data it still wouldn’t be a large enough sample size because investors would continue to make their own biased judgments of what that past data means to them. Every cycle is unique, so using historical market data works better as a way of defining risks, not as a way of knowing exactly what’s going to happen next.

November 20, 2014

Fading Capital Spending

Filed under: Economy,Investing — Bob @ 6:30 pm

One reason economic growth has been so slow in the post-2008 recovery is that businesses aren’t investing. They aren’t putting a lot of money into equipment and new employees. Instead, they’re using profits from their historic profit margins to eight buy back stock or pay dividends. Management isn’t comfortable about higher demand and isn’t going to invest in anticipation of demand. It’s also not stockpiling as much cash as many reports indicate. has all the details.

Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300 percent since March 2009. Now, with returns slowing, investors say executives risk snuffing out the bull market unless they start plowing money into their businesses.

“You can only go so far with financial engineering before you actually have to have a business with real growth,” Chris Bouffard, chief investment officer who oversees $9 billion at Mutual Fund Store in Overland Park, Kansas, said by phone on Oct. 2. “Companies have done about all that they can in terms of maximizing the ability to do those buybacks.”

Housing Market Improving

Filed under: Housing — Bob @ 4:48 pm

It could be that the slowdown in the housing market is over or ending. Lower interest rates and increased inventory increased sales of existing homes in October. Even better, fewer and fewer sales of existing homes are distress sales. There’s a lot of be positive about in the report. Here’s a summary of the report, and here is some analysis and observations from Bill McBride.

And another key point: The NAR reported total sales were up 2.5% from October 2013, however normal equity sales were even more, and distressed sales down sharply.  From the NAR (from a survey that is far from perfect):

Distressed homes – foreclosures and short sales – increased slightly in September to 10 percent from 8 percent in August, but are down from 14 percent a year ago. Seven percent of September sales were foreclosures and 3 percent were short sales.

Last year in October the NAR reported that 14% of sales were distressed sales.

The Latest in Life Expectancy

Filed under: Retirement - General — Bob @ 8:20 am

Many people underestimate their life expectancy, and that makes it harder for them to make their nest eggs last. It doesn’t help that the professional actuaries are conservative. They don’t revise their official life expectancy tables very often and are careful not to overestimate expectancies for some reason. The big news is that the American Society of Actuaries is updating its actuarial tables for the first time since 2000. No surprise: Americans are estimated to live longer than back then. Bottom line: To avoid running out of money, most people should plan for living to at least 90 unless they have good reason to believe they won’t live to average life expectancy. Married couples should anticipate at least one spouse will live to 100.

American men are living an average of two years longer than they were in 2000 (the last time the tables were revised), and women are getting an additional 2.4 years of life, according to new mortality projections from the Society of Actuaries (SOA). The SOA is the official keeper of the mortality tables used to calculate the value of future pension obligations, and longer lives mean greater cost for plan sponsors.

November 19, 2014

Managing Lifestyle Inflation

Filed under: Cash Management — Bob @ 6:31 pm

This post discusses how many people let their expenses float out of control. It consider lifestyle expenses to be the regular, recurring expenses of our standard of living or lifestyle. You want to control and limit those so that you can either save more money (if you’re not retired yet) or preserve your nest egg for other things (if you’re already retired).

Recurring expenses may seem small or insignificant, but, from the perspective of retirement or financial independence, they are all substantial. Why? Because of what I call the Rule of 300: “The amount of money you must save to meet a monthly expense in retirement is approximately 300 times that expense.”

Where does that factor of 300 come from? It stems, simply, from two multipliers. The first, 12, is easy to understand: To convert a monthly expense to an annual one, you must multiply by the 12 months in a year. The second multiplier comes from the well-known “4% rule” for withdrawal from retirement savings. (That rule is under attack as possibly too optimistic, but that only makes the need to control recurring expenses even stronger.)

Immersed in Valuations

Filed under: Asset Allocation,Investing — Bob @ 1:20 pm

Here’s a web post with lots of charts and tables about stock market valuations over time. If you like data and want to develop your own view of when stocks are valued fairly or not, spend some time looking it over. There’s no real commentary, only data and explanations of it.

Immersed in Pessimism

Filed under: Asset Allocation,Investing — Bob @ 9:20 am

The folks at money management firm GMO are sharp and thoughtful. I don’t agree with their views all the time, but they always are worth reading. Their latest third quarter shareholder reports are out and worth your time. But don’t read them if you’re feeling low. These value managers haven’t been optimistic for a while, and they aren’t now. You can find three essays in the latest collection. The main disagreement seems to be which of their pessimistic outlooks is more likely to be accurate. What they agree on, along with several other prominent firms, is that over the next 10 to 20 years investment returns from stocks and bonds are likely to be less than the long-term averages.

It would be incredibly convenient right now to know if we are going down the Purgatory route or the Hell
route. Our official forecasts are for the Purgatory path and our hopes are there as well because Hell is a very
unpleasant long-run outcome for investors. But if we knew we were in Hell, the right solution today is a decently
risked-up portfolio. That portfolio doesn’t make sense in a Purgatory scenario, as the extra risk gives almost no
additional return. There is no solution that is right for both scenarios, but having assets whose expected returns
are reasonably unaffected by which path we go down is a help. The strategies that most fit the bill are the very
“hedge fund-y” strategies that have so disappointed investors in recent years. That benefit is well short of an
argument for happily paying 2% and 20% for such strategies, but if you can find a way to do it more cheaply
(or you can actually find some managers talented enough to pay for their fees), we believe now is a pretty good
time to be on the look-out for shorter-duration ways to take standard risks.

November 18, 2014

Understanding Japan’s Problems

Filed under: Economy — Bob @ 6:22 pm

The new overnight is that Japan fell back into a recession. Many people were optimistic after Abe initiated new policies a little over a year ago, but the positive effects didn’t gather momentum. A tax hike is credited with overwhelming the new policies and restraining growth. Now Abe plans new measures to stimulate growth. Here’s a sobering analysis of the situation by Tyler Cowen of His bottom line is that there isn’t much economic policy can do to help Japan in the short term. It is brief but a little technical. It also links to several other commentators on Japan. It’s a good round up of news and viewpoints.

Unemployment in Japan already had fallen to about three and a half percent.  So how much of a miracle could Abenomics accomplish in the first place?  Not much, not even for committed Keynesians.  Commentators have grown to expect so much of the Phillips curve these days, but still a mechanism for the output boost is required and the Phillips curve (at best) holds only in some contexts.  Japan simply hasn’t had that many laborers to put back to work.  Getting more women in the workforce, as Abe has tried to do, is a positive development, but that is not mainly about macro policy nor is it mainly about the short run.

Cold Remedies that Don’t Work

Filed under: Health — Bob @ 1:20 pm

It’s cold and flu season, and advertising for various remedies already has increased. Before you get sick, take a look at this post. It identifies what does and doesn’t work for a cold. Note that he’s not talking about the flu or various upper respiratory bacterial infections. I’m not a scientist and haven’t read the research he cites, but it’s important to read something like this in addition to all the web site posts advising many little-known and miracle cures.

Some of these medications actually do treat symptoms, but none of them cure a cold. But mixed among them—sometimes side by side with real medicines—I found several products that don’t work at all.

How can a drug manufacturer get away with this? Simple: the products that don’t work are either supplements or homeopathic products. The manufacturers of both these types of “medicines” have successfully lobbied Congress to pass laws that exempt them from FDA regulation. Supposedly they aren’t allowed to make direct claims to cure or treat disease, but unless you read the wording on their packages very carefully, you’d never notice.

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