Balance

I don't see too many imbalances in the system. Equities appear fairly valued. The economy appears to be getting back on track. I guess bonds are the obvious area of imbalance, both in terms of the amount of debt outstanding and the price paid for that debt.

Of course, balance is predicated upon confidence and if confidence evaporates, then balance disappears along with it (or at least adjusts to a lower equilibrium).

The accumulation of overweight (aka as imbalance) is greatest in the sovereign area. But so long as sovereign's can maintain confidence, they can continue to accumulate liabilities.

Look for market reverberations (like in the summer of 2007) for signs of disequilibrium. Japan is the most obvious candidate.

Until then, party like its 1999.

Living with the sword

Better get used to the daily angst of living with the sword of Damocles swinging overhead.

The world's economic problems are structural in extent, systemic in breadth, and long term in nature.

There are no short term fixes for the imbalances and problems that have been brought to the surface by the financial crisis.

With the possibility of a bomb going off at anytime, the market will struggle for sustained confidence and likely vacillate in ranges.

We Need a Revolution

Just as Jesus threw the money changers out of the temple, so to do we need to do a purging of US political, legal, and economic institutions.

The system is weak, decrepit and bereft of integrity with various parasites feeding off the host. Money talks, and when you're talking about the wealthiest country in the world, there is a lot of money at stake. And it is precisely this money and the power surrounding it that will continue to eat away at the foundations of society.

Sadly, as with any unsustainable imbalance (think healthcare inflation, tertiary education inflation, rising debt levels, oil consumption, disproportionate military spending, etc.), nothing will be done until a catastrophe occurs. And even then, if the current response to the financial crisis is any indication, we are unlikely to achieve true reform. It is a bad position to be in, to be a Jeremiah, when you have no clue as to when the walls will come down. But the writing is on the wall, and history shows that when something is corrupt, economically unsustainable, and being eaten away by parasites, the result is foregone.

The current healthcare debate is just another symptom of the rottenness in the system. With it so hard to create good policy, is it any wonder that we can't get true reform until it is too late.

Mean Reversion Man

Mean reversion man says sell that which is overvalued, and buy that which is undervalued.

Thanks mean reversion man, you're a great help!

What is overvalued and what is undervalued? I dunno. But to garner a little perspective on that issue, I analogized that just as the global economy had significant structural imbalances, so to the domestic economy has probably got a few sectoral imbalances. We heard from Jim Chanos last week that he thought tertiary education, healthcare, defense and financial services had grown at growth rates greater than what was sustainable and so they were probably candidates for some sort of mean reversion (predicated upon govt intervention of some sort).

That got me curious. Does that thesis play out in the national accounts? The answer is yes, no and dunno.

I took a mosy on over to the US Bureau of Economic Analysis and dialed up the numbers for GDP by Industry from 1987-2007. I compared the current proportion of the economy for each industry with its long term average and sort to identify anomalies by seeing which sectors were outside of their one and two standard deviation ranges.

Interestingly, Mining was running 2 std dev above its long term average, with much of that change coming in the last year of the data. Perhaps not surprisingly, Petroleum & Coal is also running 2 std dev higher than long term average, as are Information & Data Processing and Management of Companies & Enterprises. I can see a little mean reversion going on in some of those sectors.

On the flip side, Agriculture, Forestry, Fishing & Hunting is running 2 std dev below its long term avg. contribution to the economy, along with Electrical Equipment, Appliances & Components and Retail Trade.*

And yes, education, healthcare, and financial services were all running one standard deviation greater than their long term average contribution to the economy. Defense was lumped into the govt spending category which wasn't, as of the date of the data, much different from its historic average.


* That one surprised me. I'm not sure of the definition of Retail Trade but I'll have to look it up.