Does money matter? The answer depends on who’s talking. Suffice to say, however, Milton Friedman’s dictum that inflation is always and everywhere a monetary phenomenon is now debatable in the academic community as well as in the board rooms of central banks around the world.
Consensus on the strategic answer for managing inflation appears to be fading. Michael Sesit at Bloomberg News has a nice essay today on some of the stress points that harass the subject of inflation theory these days.
Monthly Archives: May 2008
TALKING ABOUT OIL
Where’s the price of oil headed? Higher, says Matt Simmons, CEO of Simmons & Co. International, a Houston energy-focused investment bank. Of course, Simmons has been saying that for years. In fact, his bullish view on crude predates the great energy bull market of the 21st century.
The surge in oil’s price doesn’t surprise Simmons because the fundamentals of supply and demand have been sending a clear signal about the future since the late-1990s, he says. For example, the discovery of large oil fields on a global basis has trailed off over the years, his research advises. Meanwhile, global demand keeps rising. And with China, India and other developing economies looking for more oil than ever before, the prospect of keeping supply and demand balanced looks more challenging by the day.
YIELD ANALYSIS
Dividend yields don’t tell you everything, but they tell you a lot. Sometimes.
A fair number of studies over the years find that the correlation between yield and subsequent return over the next five years and beyond is strong enough to convince fair-minded investors to watch those yields for clues about what’s coming. In other words, higher yields have a tendency to lead to higher returns, while lower yields imply lower returns.
No, it’s not absolute. Nothing ever is in finance. That caveat aside, favoring markets, and points in time when yields are relatively higher has a tendency to improve the odds of capturing higher total returns in the years ahead. In fact, this is an old idea, captured in Ben Graham’s famous counsel that the market is a voting machine in the short run and a weighing machine in the long run. By that he meant that speculators rule now, tomorrow, next week and even next year when it comes to setting prices. But over longer periods, certainly five years or more, valuation dictates price. And dividend yield has proven to be an especially robust signal of expected returns.
With that in mind, we present two charts, each telling different stories. The first chart below graphs the dividend yield history for the world’s developed markets. Although the absolute levels vary, the trend of late has been consistent across regions: yields are up. That’s a function of the fact that prices have fallen relative to levels of a year ago.
click to enlarge
WILL MAY LOOK LIKE APRIL?
It’s hardly great news, but the fact that job destruction was a bit less destructive last month will inspire the optimists that the recovery has begun.
Nonfarm payrolls shrunk by a relatively modest 20,000 last month, or roughly a quarter of the monthly losses that have been posted in each of the previous three months of this year. The April reprieve, if we can call it that, certainly made a graphical impression. As our chart below shows, last month’s softening in job losses ended a five-month stretch of decelerating conditions for minting new employment opportunities. By that we mean that for the first time since last October, the trend last month didn’t worsen compared to the previous month. And while we’re pointing out reasons to be cheerful, let’s note that the jobless rate ticked down to 5.0% in April, slightly better than the 5.1% for March.
But let’s not get carried away, at least not yet. Let’s not forget that goods-producing employment is still getting hammered even as the broader employment picture offers reason for hope. Meantime, Wall Street is eager to see light at the end of this tunnel, as yesterday’s stock market surge suggests. Yet another rate cut by the Fed earlier in the week helped get the bulls’ hearts racing, as did an improvement in the dollar in forex markets. And as we noted yesterday, April generally was a good month for most asset classes.
So, what’s the problem? As always, there’s no shortage of things to worry about. But no one should underestimate the stock market’s capacity for climbing this year’s wall of worry. Mr. Market is always looking forward while many of us are overly focused on the past. Such is the limitations of being stuck with wetware as the primary tool in the business of asset management.