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The Process - page 3

U.S. Must “Man Up and Take the Pain” or We’ll Become Japan

in 5 Minutes of Fame/FP: Latest/Japan/The Process by

After it’s property bubble burst, Japan embarked on a stimulus program Katsenelson describes simply as: “Lower taxes and borrow money to finance it,” which pretty much sounds like U.S. fiscal policy during the Bush years. Japan’s central bank has also employed quantitative easing repeatedly since the early 2000s; if their experience is any indication, Ben…

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Shadow over Asia

in 5 Minutes of Fame/China/Feature-box - China/FP: Latest/The Process by

The summer is over in Denver.  Of course, in Denver the summer was officially over Labor Day weekend, when the outdoor swimming pools were drained and locked for the winter.  For most people summer ended a few weeks later, when the leaves turned bright yellow.  But not me, I wanted to hang on to this…

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Don’t call me Dr. Doom, call me Mr. Realist

in China/FP: Latest/Japan/The Process by

 I had an interesting conversation last week with a potential investor.  I described my thoughts on the US economy, explaining that in our (my firm’s) view the current strength of the US economy is significantly boosted by steroids graciously provided by the US government in the form of stimulus.  (I’ve written about it in this…

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Chinese Quest for Shortcut to Greatness

in China/Feature-box - China/FP: Latest/The Process by

The Chinese economy must be getting out of control, because the Chinese government is doing the unthinkable: It is desperately trying to put the brakes on the economy. When you pump a stimulus package that represents 14% of GDP through a fire hose into an economy, which was already on shaky bubble foundation, in a…

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Barron’s: Economic Steroids Are Toxic, Too

in FP: Latest/The Process by

AS THE NEW YEAR OPENS, THE stock market is behaving as if the past 20 years were about to repeat themselves: Another recession will turn into a robust expansion. Stock prices already are discounting an earnings recovery to something only slightly below the level before the financial crisis. Risk-taking is in vogue again. The global…

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Q&A with FT:Investing in Range-Bound Markets

in FP: Latest/The Process by

In the bull market that preceded the collapse of Lehman Brothers and the ensuing financial crisis, equity valuations reached some very frothy levels. The correction that followed only lasted until March, since when, the S&P 500 index has risen more than 60 per cent, while the FTSE Eurofirst 300 has gained a similar amount. Vitaliy…

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The China Bubble’s Coming — But Not the One You Think

in China/The Process by

Financial commentators are obsessively debating whether the recent rise in the Chinese stock market means there’s a bubble — and if so, when it’s going to burst. My take? Who cares! What happens to the broader Chinese economy is what we should really be watching. It will have a far-reaching impact on the rest of the world — much more far-reaching than a decline in stocks.

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Katsenelson Predicts

in The Process by

I find January to be one of the most difficult months for long-term investors. In the spirit of the fine American tradition of making New Year’s resolutions, we feel a need to make a resolution for the stock market (as if it will listen to us) in the form of a prediction.

I don’t dismiss the benefits of forecasting, but we should forecast what we can forecast – market timing is not it. We just listen to our gut (which for all I care could be influenced by the fat content of food consumed at the time of the prediction) and verbalize it in well structured sentences that give our fortune telling much needed sophistication.

Though some do a great job playing market timers on business TV, with the assistance of sound horns and theatrical Oscar-like performances, the advice granted is not worth the damage to your ears or eyes. Timing short-term markets is a loser’s game. Let’s be honest with ourselves – we really don’t know.

The problem with forecasting short-term market movements is that even if you get the economic event right and Lady Luck kisses you on the cheek and you nail its timing, the market may just spit in your direction and chose to ignore it till a later date. Last summer, for example, the housing bubble finally burst, bringing the toxic waste (sub-prime) loans onto the surface. Credit markets froze… and you’d think the stock market would decline? No, the Dow went on to make an all time high, hitting 14,000 and ignoring the problems for months.

Let’s leave the market timing to the media, take a drink of cold water and approach forecasting the right way. Even a long-term investor has to recognize that long-term consists of a series of short-terms. The tsunami of short-term events may change the direction of the long-term. We have to accept that we probably won’t get the timing right, adopt an “I’d rather be vaguely right than precisely wrong” attitude, focus on identifying shorter-term risks that may stand between us and the long-term, and stress test our portfolio for them accordingly.

It would be careless to dismiss the possibility of a recession (some argue that we already are in a recession). Past recessions were caused by excesses of inventory and overcapacity in the corporate sector. As corporations rationalized their inventories and factories, higher unemployment followed – we were in a recession. Excesses were worked out, corporations started to hire, and voila – we were out of the recession.

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