If you really want to get blown away by a common misperception regarding the returns of equities, take a look at this article by First Quadrant chairman, Mr. Robert Arnott: What Risk Premium is "Normal"? ( right hand side of webpage, highlighted in tan color ). http://www.firstquadrant.com/WhatsNew.htm
I was in Barnes and Noble the other day and stumbled across a book in their business/economic section titled (not sure of the exact title) "The way the economy works." It seemed okay for explaining most macro principles. Basically you want to look for a book that thoroughly explains the National Income & Product Accounts, Econ Growth, and some IS-LM-BP (explains movements of the aggregate supply, aggregate demand, and balance of payment curves in the economy (there are 6 received theories that do this). The problem with economics though is that you can quickly move from a simple explanation to taking the logs and derivatives of exponential functions. Whatever you do, don't buy an intro to principles of either micro or macro because it is too general. And you may also need to read up on some micro too because production theory, the theory of the firm, and economic behavior is explained in that branch... Anyone else have a suggestion because all the books I have took a great deal of time to absorb, so I can't really recommend them. Give me a chance to look and maybe I will find something to recommend. Maybe there is an easy to understand watershed book like the Market Wizards out there for economics.
I'm not a economist but I thought the article made many valid points, even as it misstated or glossed over others. Its basic premise is unassailable, namely that we are experiencing a period of virtually unprecedented policy stimulation through the Fed, tax cuts and an artificially high dollar. Using the obligatory addict/herion pusher analogy, the writer shows that our perceived prosperity rests on a shaky foundation of expanding debt and trade deficits. Our system is highly leveraged. In fact a major risk is no one knows how leveraged, witness the FNM and FRE debates. Tthe need to hedge or unwind exposure can lead to volatile moves. A relatively minor move in rates lead to a sharp sell off in bonds recently. A sudden break in bonds would no doubt destroy FNM/FRE, the entire mortgage finance sector, the redhot housing stocks and the moneycenter banks. The US and its trading partners are like two antagonists delicately balanced together on top of a tall pole that is gradually rising. Neither can change position without catastrophe for both, even as both realize the situation cannot continue indefintely and the longer they wait to do something, the worse the final outcome will be. Like most bubbles, it is easier to recognize than profit from. Positioning oneself prematurely runs enormous risks , as these situations can go on far longer than one would expect and often end with a parabolic move that cleans out everyone who is fading it. I must say however that I found the dollar sell-off yesterday in the face of strong data to be puzzling if not ominous.
I didn't want to have to do it, but I quess I will have to write my own article and analysis. But what happened to all of the analysis before the last stock market bubble? How many people predicted the subsequent housing bubble because of the fed trying to ease...? I bet only a handful predicted that would happen while most went in a different direction and everyone jumped on their bandwagon because they lacked the ability to do their own analysis. I liked some of the points brought up in the article, but during the conlusion the author stated his bias and thereby brought all implications into question. My problem with the article is the implications and as for the selloff in the dollar...GREAT! It will be a good thing not a bad thing, watch. And even if Freddie and Fannie cracked, which wont happen because of duration (dont feel like explaining on a Sat so dont ask), the gov will bail them out and then equities will shine, yada yada yada. Give me a few days to write my analysis and I will show you how step by step. Until then I will quit posting...
I take back what I said about liking any points in this article... I just reread this garbage of an article and it is the most backwards attempt to diagnose the current state of affairs in the economy. This guy is full of shizzzz. He talks about protectionism in that we shouldn't buy foreign goods when for all intensive purpose we create wealth THROUGH CONSUMPTION by the economies of scale created through trade. He is wrong in his conclusion on almost every point. GO AHEAD, THINK I AM CRAZY, BUT HE IS WRONG. I DON'T HAVE THE TIME OR THE INCLINATION TO DEBATE THIS POINT ANY MORE. IN FACT, MY POST ON "DOW 15000" COUNTERS HIS ARGUMENT. BELIEVE WHO YOU WILL BUT I JUST CAN BELIEVE THAT SUPPOSEDLY EDUCATED PEOPLE SUCH AS YOURSELVES BELIEVE THIS STUFF. FADE HIS PREDICTION AND MAYBE YOU WON'T GO BROKE. JUST DON'T SAY I DIDN'T WARN YOU...
Aren't you making a gross generalization here? Consumption does not automatically create value in a long term economic sense- it depends entirely on how the money is spent. Personal consumption choices can be value neutral or even value destroying. If a farmer spends $50,000 on a new combine and improves his operating margins through increased productivity and higher yield, value is created. If the farmer decides to spend 50K on blackjack and hookers instead, it's not quite the same thing. For a less extreme example, imagine you are a small business owner who had a financial windfall in the third quarter. You are debating whether to use the money to expand your business, or finance a sailboat with the windfall as a downpayment. Again, the value propositions in a long term economic sense are far from equal. Consumption decisions can also create voluntary wealth transfer between nations. Again to express through analogy, imagine poor country A stumbles onto a lucrative business exporting billions of dollars worth of legal narcotics to rich country B. Imagine country A then uses its substantial drug revenues to maximum long term benefit: build infrastructure, increase educational levels, upgrade technology, expand enterprise etc. Meanwhile country B gets high and watches MTV. Given enough time, country A becomes rich and country B becomes poor, because of consumption choices that bear dramatic effect over the long term. The current situation isn't that extreme, but with American consumers encouraged to buy high definition TV's and gargantuan SUV's and other goods of nil long term economic value, maxing out the home equity line all the while, I think you can see how the situation is similar. America currently has a consumption choice problem and a soft spot for Ponzi schemes. We have chosen and continue to choose to spend large chunks of capital on frivolous items that do not represent long term value, and we are paying for our credit binges through high debt service costs that represent even greater value destruction. The US is essentially living high on debt, and the debt payments are ultimately being used to finance long term growth of other nations who are making better consumption choices than we are. We are going to pay through the nose not because we have been screwed or duped by Asia, but because we have spent a lot of borrowed money on useless shit and our bad economic choices are going to have long term economic effect. While we may not become poor any time soon, our consumer addiction to imports and pollyanna view of debt is playing a part in their rise and our decline. I am pro free trade but anti debt binge. Bad choices always have consequences.
I don't think you're crazy, just touchingly arrogant and short sighted. When did you say you graduate?
darkhorse, there is no difference what the farmer spends his money on. the 50k to hookers and blackjack might just enable the hooker's kid to go to college thereby creating value OR the casino owner to hire more employees creating jobs. furthermore, there might be a drought causing the farmer's crop to be destroyed regardless of his new combine. best, surfer