A new paper shows the global multi-asset market portfolio 1959-2011. It represents the views of the market crowd with respect to the pricing and value of all asset classes. In 2011, for the first time in the observation period, equities no longer outweigh government bonds.
Doeswijk, Ronald Q., Lam, Trevin W. and Swinkels, Laurens A. P., Strategic Asset Allocation: The Global Multi-Asset Market Portfolio 1959-2011 (November 2, 2012). Available at SSRN: http://ssrn.com/abstract=2170275
"The portfolio of the average investor contains important information for strategic asset allocation purposes. This portfolio shows the relative value of all assets according to the market crowd, which one could interpret as a benchmark or the optimal portfolio for the average investor. We determine the market values of equities, private equity, real estate, high yield bonds, emerging debt, non-government bonds, government bonds, inflation linked bonds, commodities, and hedge funds. For this range of assets, we estimate the invested global market portfolio for the period 1990-2011. For the main asset categories equities, real estate, non-government bonds and government bonds we extend the period to 1959-2011. To our understanding, we are the first to document the global multi-asset market portfolio at these levels of detail for such a long period of time." Source: SSRN
Keywords: Strategic Asset Allocation, Optimal Portfolio
Keywords: US Budget, Fiscal Cliff
Axel Merk and Nick Reece of Merk funds have some good thoughts in their latest newsletter:
"American consumers (and Chinese exporters) have been subsidized by the artificially weak Chinese currency, to the detriment of Chinese consumers who have faced stunted purchasing power. However, we believe this dynamic will continue to change and suggest that a stronger RMB is very likely not only on Bernanke, Obama, and Romney’s wish list, but increasingly in China’s own interest. That would mean the tables getting turned on the American consumer." Source: Merk Funds
Read the Newsletter here:
Keywords: Currencies, Exchange Rates, Renminbi, RMB, US Dollar
Strong Share buy back activity is a logical consequence in an environment of shareholder value maximization and modest innovation. Consequently, we need policies which foster quality innovation and not The Great Stagnation.
Jay Ritter has some insights on the relationship between economic growth and investor returns:
Ritter, Jay R., Is Economic Growth Good for Investors? (Summer 2012). Journal of Applied Corporate Finance, Vol. 24, Issue 3, pp. 8-18, 2012. Available at SSRN: http://ssrn.com/abstract=2161183 or http://dx.doi.org/10.1111/j.1745-6622.2012.00385.x
"When measured over long periods of time, the correlation of countries' inflation-adjusted per capita GDP growth and stock returns is negative. This result holds for both developed countries (for which the correlation coefficient is ¨C0.39 using data from 1900¨C2011) and emerging markets (the correlation is ¨C0.41 over the period 1988¨C2011). And this means that investors would have been better off investing in countries with lower per capita GDP growth than in countries experiencing the highest growth rates. This seems surprising since economic growth is generally assumed to be good for corporate profits. In attempting to explain this finding, the author begins by noting that economic growth can be achieved through increased inputs of capital and labor, which don't necessarily benefit the stockholders of existing companies. Growth also comes from technological advances, which do not necessarily lead to higher profits since competition among firms often results in the benefits accruing to consumers and workers. What's more, it's important to recognize that growth has both an expected and an unexpected component. And one explanation for the negative correlation between growth and stock returns is the tendency for investors to overpay for expected growth. But there is another - and in the author's view, a more important - part of the explanation. Along with the negative correlation between long run average stock returns and per capita growth rates, the author also reports a strong positive association between (per share) dividend growth rates and overall stock returns. Such an association is not surprising since unusual growth in dividends is a fairly reliable predictor of increases in future earnings. But another effect at work here is the role of dividends - and, in the U.S., stock repurchases too - in limiting what might be called the corporate overinvestment problem, the natural tendency of corporate managers to pursue growth, if necessary at the expense of profitability. One of the main messages of this article is that corporate growth adds value only when companies reinvest their earnings in projects that are expected to earn at least their cost of capital - while at the same time committing to return excess cash and capital to their shareholders through dividends and stock buybacks." Source: SSRN
Keywords: Economic Growth, Returns
Keywords: Venture Capital, Funding
Today, UBS announced a massive downsizing of its investment bank. Other banks are in the same process of will follow. This is a logical consequence after various of the investment banks had reached a "bubble stage" prior to the financial crisis. Excesses happened in an environment of governmental regulation of the US real estate market and weak governance of various banks. The current process will not at all be the end of investment banking. In contrary, firms from main street (as opposite to Wall Street) are in urgent need of services which help them to finance projects, to get advice in acquisitions and capital market transactions, to make optimal use of the financial resources etc. Downsized and less risky investment banks can be a more reliable partner in this respect.
MarketObservation: Nature of investment banks today and in the future, October 11, 2007:
Banks such as UBS have lost billions in the subprime mortgage crisis. This business was done out of the investment banking departments of such banks. It is questioned again whether it could make sense to spin off investment banking from large banking conglomerates as they might have a negative impact on overall risk-adjusted value of such conglomerates.
It is argued that the break up value of a bank such as UBS might be substantially bigger than the current market capitalization of the bank. When thinking about such scenarios it is also important to look at the nature of todays large investment banking operations. They are not homogenous at all within themselves. The investment banking business is a combination of highly computerized, scaleable businesses and businesses where tacit skills are highly important (e.g. M&A deal making). When discussing possible investment banking spin offs from banking conglomerates a differentitated view, looking at the various risk profiles of investment banking businesses, should be taken.
Attached article provides a valuable overview of the current nature of investment banking operations:
Key conclusions are:
Author's guess about the future:
"The central concept of an investment firm is fuzzier than might immediately appear. Why do investment firms exist at all? What should be the range of their activities? This exploratory study investigates forces which shape the boundary of the investment firm by analyzing firms in the Private Equity industry. The PE industry offers a rich ground for research, given that substantial parts of the PE universe have been rapidly migrating from traditional single-product PE firms towards multi-business investment firms. Based on interviews with senior investment professionals and executives from leading PE firms and based on case studies, I find that the boundary of the firm is determined by the trade-off between expansion enhancers, in particular ‘deal sourcing advantages’, ‘capital sourcing advantages’, ‘procurement cost advantages’ and ‘information sharing advantages’, and expansion inhibitors, particularly ‘conflicts of interest’, ‘asset allocation authority’, and ‘parenting disadvantages’. Moreover, I speculate that if the new generation of multi-business investment firm models succeeds, they may fill the gap which most recent regulation has created in the commercial and investment banking industry, given that multi-business firms are not scrutinized to the same extent."
Keywords: Private Equity, Multi-Business Investment Firm
Selected other MarketObservation posts about investment banking in the past:
You find below selected feeds of think tanks, institutes and institutions which support the idea of liberty and free markets.
You find here comprehensive lists of libertarian think tanks around the globe:
Podcast feed of the Cato Institute (United States)
Fascinating! You can feel the "animal spirit".
Keywords: Silicon Valley, Entrepreneurship
The great economist about inflation and stimulus.
Keywords: Inflation, Quantity of Money
Find here a presentation by a professor of the University of St. Gall about causes and consequences (as related to institutional investing) of financial repression:
Keywords: Institutional Assets, Financial Repression, Real Interest Rates
Reinhart and Rogoff, many times referred to on this platform, show in their latest article on Voxeu.org that the current recovery is not slower as those in previous financial crises.
The de-leveraging process is at the best in a beginning stage. We will see much more austerity and financial repression. A kind of bad prospects on a macro level... some "animal spirit" on a micro level can make life a bit sweeter .. at least for those who are looking for entrepreneurial challenges.
Keywords: Financial Crisis, Recovery after Financial Crisis
The slow recovery from the financial crisis and recession of 2007 – 2009 has become a centerpiece of the Presidential election. In last Tuesday’s debate, Mitt Romney, picking up on a theme that has been emphasized by John Taylor, contrasted the current slow recovery with the much faster recovery from the 1981 – 1982 recession. During the past two weeks, there has been an intense focus on a comparison of the current recovery with recoveries from other financial crises. On October 11, Taylor, using historical data from a paper by Michael Bordo and Joseph Haubrich, argued that the current recovery is much slower than the average of previous American recessions associated with financial crises. This was followed by an October 14 paper by Carmen Reinhart and Ken Rogoff who argue that the aftermath of the U.S. financial crisis has been typical of the recoveries from other severe financial crises, an October 15 reply by Taylor, an October 16 rejoinder by Reinhart and Rogoff, an October 17 piece by Paul Krugman, and an October 17 reply by Taylor. read more on Econbrowser
Keywords: Financial Crisis, Revovery after Financial Crisis
Full recovery in 2016 - after the crisis began in 2007? Quite frustrating prospect. Could more "animal spirit" speed up the process?..
Buyout firms have a new strategy for reducing portfolio company debt.
FORTUNE -- I recently wrote about private equity's golden hangover, or the glut of large-cap companies that remain in PE portfolios after being acquired between 2005 and 2008. Conventional wisdom is that many of these companies are planning 2013 IPOs, but such offerings can face serious challenges. Namely, that capital raise targets are tied tightly to debt repayment.
Here's what I mean: read more on CNN Money
Keywords: IPO, Private Equity Leverage, IPO to Repay Leverage
We could read today in various newspapers that the IMF sees progress in the structural reforms in Southern European countries. The re-balancing of the wage levels to non-distorted conditions is a key process for long-term recovery. Following graph is amazing!
Keywords: European Crisis, Market Distortions, Re-Balancing
Keywords: Private Equity, Bain Capital, Mitt Romney
Keywords: Economic Development, Growth, Trust
"This paper argues that self-fulfilling beliefs in credit conditions can generate endoge- nously persistent business cycle dynamics. We develop a tractable dynamic general equi- librium model in which heterogeneous firms face idiosyncratic productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dynamic complemen- tarity between current and future credit constraints permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. In a calibrated version we compare the features of sunspot cycles with those generated by shocks to economic fundamentals."
Keywords: Self-Fulfilling Beliefs, Credit Cycle
Keywords: Behavioral Economics, Mental Accounting, Home Bias
Keywords: Monetary Policy, Interest Rates, Housing Market, Housing Prices
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