A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
Economist Richard Koo rose to prominence with a brilliant explanation of Japan's lost decade(s) that was eventually applied to the financial crisis – the balance sheet recession. Mr. Koo recently warned Canadians of a rising risk of the same phenomenon here in Canada.
"In the bubble days, people leverage themselves up, and once the bubble bursts, liabilities remain, asset prices collapse and people realize their balance sheets are underwater. When that happens, people start repairing balance sheets by paying down debt or increasing savings… when everybody does it all at the same time, then we enter a massive fallacy of composition problem [ ie Keynes' Paradox of Thrift]"
"Is Canada at risk of a balance sheet recession?" – Macleans
Fawning admiration for Warren Buffett generally does not extend to the professional investor community for both good reasons (Berkshire Hathaway's leveraged investment strategy is less applicable by normal humans than it looks) and bad (buy and hold strategies get in the way of commission generation. Everyone respects Uncle Warren but most explanations of his success start with "Yeah, but…".
Mr. Buffett's annual letter to shareholders was released over the weekend and, as usual, parsed more heavily than the Dead Sea Scrolls. For me, the primary highlight was Mr. Buffett's discussion of declining floats at insurance companies.
Mr. Buffett predicts that the float – the money on hand insurance companies have on hand from policy payments that they invest to fund future liabilities – is declining across the industry. Over time, this trend will reduce overall market liquidity.
For Berkshire Hathaway, the float from the company's large insurance company holdings represents the "secret sauce' behind Mr. Buffett's success. Because it does its financing through its insurance companies, Berkshire's cost of capital has averaged almost five per cent below the average yield on the ten-year U.S. Treasury bond. Using the capital from his insurance company holdings, Mr. Buffett could have generated huge returns merely by buying bonds – a massive head start in the investing game.
"Annual letter to shareholders" – Berkshire Hathaway
"Annotating the Oracle: Experts weigh in on Berkshire's annual letter" – Wall Street Journal
Table; "Buffett's float ~ not your usual leverage" – Twitter
"Uncle Warren explains it all to you" – Epicurean Ddealmaker
"Warren Buffett explains his cozy embrace" – Levine, Bloomberg
The Economists' Buttonwood columnist cites a recent study in the Journal of Portfolio Management that amounts to biting criticism of financial analysis and unveils what most of Wall Street and Bay Street already know but dosn't want publicized too much – most financial research and analysis is gibberish.
"The authors' conclusions are stark. 'Most of the empirical research in finance, whether published in academic journals or put into production as an active trading strategy by an investment manager, is likely false. This implies that half the financial products (promising outperformance) that companies are selling to clients are false.'"
"False hope" – Buttonwood, The Economist
In disquieting news for Canada's notoriously cyclical economy, global shipping behemouth A.P. Moller-Maersk ASwarned of rapidly slowing global trade activity according to the Financial Times. Maersk Line CEO Soren Skou noted,
"The economies in Europe are still very sluggish. Brazil, Russia and China: those three economies used to drive a lot of growth, and right now we are not really seeing that to the same extent. The only real bright spot is the U.S., and even the U.S. is good but not great."
"Maersk warns of slowdown in global trade" – Financial Times
Tweet of the Day: "Here's when you can expect racial minorities to be the majority in each state bit.ly/1E7SNT1 pic.twitter.com/JUkmHjBsR9 "
Diversion: "@voxdotcom: Why Kevin Spacey's accent in House of Cards sounds off youtube.com/watch?v=mgCeH3…"
Follow Scott Barlow on Twitter @SBarlow_ROB