A Corporate Strategy For Rising Interest Rates PDF Print E-mail
Written by Burnham Banks   
Monday, 13 May 2013 10:59

Having borrowed heavily in the bond markets in the past couple of years. If interest rates should rise substantially, a corporate CFO might be tempted to buy back their company's debt at below par and retire its debt. Its an interesting way of making money without producing a single widget.

One wonders how significant this impact could be. It certainly won't hurt to own the equity.

Last Updated on Monday, 13 May 2013 11:03
The Japan Trade. Heading Higher PDF Print E-mail
Written by Burnham Banks   
Friday, 10 May 2013 04:58


The Japanese stock market is up some 40% year to date while the JPY has gone from 86 at the end of 2012 to 101 today. Wow. Is it too late to invest in Japan? I think not, but at the same time, it pays to be more circumspect.

Last Updated on Monday, 13 May 2013 10:47
'Abenomics'. This Time Is Different. Japanese Economic Recovery and Central Banking PDF Print E-mail
Written by Burnham Banks   
Tuesday, 30 April 2013 22:28

'Abenomics' isn't particularly innovative. Keynesian spending funded by central bank debt monetization was popularized by the Bank of Japan as an ineffective tool to raise output since before every Western Central bank and its accessories multiplied their balance sheets post 2008, with some surprising success. Japan has tried this before with little success, so is this time different? Yes and no. Past attempts at QE by the BoJ were sterilized so that while on the one hand it was buying assets, on the other it sold to maintain a moderate balance sheet expansion. You cannot have a semi-responsible central bank. Irresponsibility is best overdone if one decides to do it. In previous QEs, the current account and the JPY strengthened confounding efforts. Today we see the reverse. So large is the scale of asset purchases by the BoJ that the JPY has lurched down while the current account has deteriorated. Good job!

Last Updated on Monday, 13 May 2013 10:46
How Dependent Is The Economy On Low Interest Rates? PDF Print E-mail
Written by Burnham Banks   
Friday, 19 April 2013 22:50

Corporate balance sheets have been significantly repaired since the crisis of 2008. On the other hand, sovereign balance sheets became and remain in poor condition. Most countries have addressed this problem by instituting programs of debt monetization with, as an associated bonus feature, artificially low interest rates across the relevant term structure.

Last Updated on Saturday, 20 April 2013 00:30
Ransom the European Financial System. Buy Italian Banks PDF Print E-mail
Written by Burnham Banks   
Tuesday, 02 April 2013 05:17

The cool thing about the Euro is that it doesn't really work, and yet, the politicians in Europe insist on having it. This creates periodic buying opportunities. Here is an indirect Euro 'we'll hold it together come hell or high water' trade.

Last Updated on Tuesday, 02 April 2013 05:36
Deposit Insurance: How To Protect Your Money The Alternative Way PDF Print E-mail
Written by Burnham Banks   
Thursday, 21 March 2013 07:56

When you keep your money in a bank, you are basically a general creditor to a business that is typically leveraged by about 10 X to 50 X, even today after the deleveraging post 2008.  Fortunately, most countries have some form of deposit insurance. Unfortunately, the guarantees are limited. In the Eurozone, which includes Cyprus for example, the limit of deposit insurance is 100,000 EUR. In Switzerland, it is 100,000 CHF, in the UK it is 85,000 GBP, in Hong Kong it is 500,000 HKD, in the US it is 250,000 USD and in Singapore it is 50,000 SGD. That’s not a lot.

Last Updated on Thursday, 21 March 2013 07:59
Economic War: Trade wars, currency wars and intellectual property wars. PDF Print E-mail
Written by Burnham Banks   
Friday, 08 March 2013 13:24


When the pie shrinks, people are less likely to share. It was clear back in early 2011 that with successive rounds or quantitative easing and debt monetization rotating through the world's central banks, that eventually a trade war would develop. With the consumer demoralized, businesses cautious and governments broke, exports would be the last desperate hope for many countries seeking to grow their way out of voluntary and involuntary austerity. And so country after country, both net creditor and net debtor began to print money in an effort to either monetize a debt pile grown too big or to improve their terms of trade or both. Equal success in the former and equal failure in the latter has brought the phoney war to the surface. Japan's once and new prime minister was firs to break the deadlock, sending the JPY into a downward spiral that today worries her trading partners but which tomorrow may worry the Japanese themselves as unforeseen consequences and diminishing returns to policy set in.

Last Updated on Monday, 11 March 2013 03:54
Singapore Car Loans. Imprudent Banking Practices PDF Print E-mail
Written by Burnham Banks   
Tuesday, 05 March 2013 00:06

Until a week ago it was possible to buy a car in Singapore with a 10% down payment and a 10 year loan. Cars are acutely expensive a shortage of land (Singapore is a tiny island at the foot of Malaysia) has necessitated the rationing of cars through a quota system. The rationing requires car buyers to first buy a 10 year right to operate a car called a certificate of entitlement or COE. COEs are auctioned monthly with supply based on the number of cars being de-registered that month plus an acceptable growth rate. This idiosyncratic system has led to wild swings in COE prices, mostly to the upside, resulting in Singapore having the most expensive cars in the world. As an example, an Audi A6 in Singapore would cost the same as a Ferrari 458 Italia in London.

Last Updated on Thursday, 08 August 2013 05:20
Pension Model PDF Print E-mail
Written by Burnham Banks   
Saturday, 16 February 2013 07:43


The ideal pension would be a defined benefit scheme whereby workers would be required to contribute a minimum portion of their earnings into a pension scheme. The assets of this pension scheme would be held in custody on behalf of the worker.

Last Updated on Saturday, 16 February 2013 07:59
US Economic Growth 2012 PDF Print E-mail
Written by Burnham Banks   
Wednesday, 30 January 2013 23:53
  • US 2012 Q4 growth was -0.1% which surprised most analysts who expected at least slow to moderate growth. While disappointing, this is no cause for alarm.
  • Inventory draw downs shaved 1.3% off GDP growth. Worries about the fiscal cliff in the 4th quarter of 2012 tempered business expectations and investment.
  • Defense spending and government cutbacks accounted for a further 1.3% shortfall in growth. The rollback from 2 major areas of conflict and the need to reduce government debt will only reinforce this trend.
  • Seasonal weather effects such as Hurricane Sandy on the Eastern Seaboard also detracted from growth.
  • Without the decline in government spending and inventory destocking, GDP growth would have been a healthy +2.5%, above the post crisis long term equilibrium rate of circa 2%.
  • On the positive side consumption and business investment remain robust. Consumption growth has accelerated to 2.2% helped by increased household after tax income. Household's debt service, that is, debt payments as a percentage of disposal income has fallen sharply from 14% in 2007 to 10.6% today on the back of lower interest rates and debt repayment. Debt outstanding to personal income has also fallen.
  • Employment appears to be recovering albeit at a glacial pace. US productivity is improving.
  • The housing market continues a steady recovery. House building grew at over 15% accelerating from 13.5% in the prior quarter.  The November reading of the Case Shiller 20 City home index accelerated to a 5.5% increase in November from a prior 4.2% increase in October. 
Last Updated on Wednesday, 30 January 2013 23:57
The Origination and Distribution of Intellectual Property and Implications for Growth PDF Print E-mail
Written by Burnham Banks   
Monday, 21 January 2013 00:46

‘We think of it, we build it, we buy it.’ This all works nicely until the economy reaches its speed limits and potential. Then the economy overheats and prices rise more quickly. The limits of an economy can be extended by trade and specialization where productive capacity is exported to areas or countries with cheap labour to bring down costs and relieve capacity constraints.

The True Cost of the Euro PDF Print E-mail
Written by Burnham Banks   
Thursday, 10 January 2013 00:08

With the ECB warrantying that it will be lender of last resort to Euro zone governments it seems that the risk of a break up of the Euro is no longer. Be that as if may, as each day passes the cost of maintaining the Euro becomes more and more apparent. The charge is not one of market turmoil, sovereign funding cost, financial sector imbalances or fiscal discipline but a more fundamental issue of price discovery and factor and goods market equilibrium. If a single currency is to persist, domestic prices of all things, goods, services and inputs, need to be flexible so that markets clear. Yet we know that for various reasons wages tend to be sticky upwards, that is, wages are easier to raise than to lower. Labour laws and unions are the main reasons for this asymmetry of wage friction. As a result, the labour market fails to clear and we have Euro zone unemployment close to 12% with youth unemployment substantially higher and Club Med countries running at double the zone's average.

Last Updated on Thursday, 10 January 2013 00:14
Investment Strategy 2013. Q&A With Burnham Banks PDF Print E-mail
Written by Burnham Banks   
Thursday, 27 December 2012 02:04

Q&A with Burnham Banks

Last Updated on Friday, 01 March 2013 02:44
Investment Review 2012. Investment Outlook 2013. PDF Print E-mail
Written by Burnham Banks   
Wednesday, 12 December 2012 02:56

Model Portfolio and Strategy Review:


It's time to review our investment outlook and strategy for 2013. It is remarkable how have arbitrary time intervals when we review and make our plans but that is how we humans have chosen to behave and so any study in human behavior or endeavor should reasonably respect these arbitrary wavelengths. We begin with a review of the investment strategy for 2012.

Last Updated on Monday, 17 December 2012 00:35
Even Regulators and Investment Professionals Don't Get Hedge Funds PDF Print E-mail
Written by Burnham Banks   
Monday, 10 December 2012 00:50

Hedge funds don't make investors rich, they preserve the wealth of the investor who is already rich. Most hedge funds are aware of and carefully manage downside risk and volatility. Long only mutual funds have benchmarks to which they tend to cling. A volatile benchmark can seriously injure an investor's portfolio.

A Theory About the Gold Rout and Implications for Risk Assets under QE PDF Print E-mail
Written by Burnham Banks   
Monday, 13 May 2013 10:44

The sudden weakness in gold is intriguing given the acceleration in global QE most recently by the Bank of Japan. Gold has always been thought as a hedge against inflation and deflation. In fact most gold bugs would have one believe it can cure physical ailments. It is established wisdom, however, that gold is a hedge against the debasement of fiat currency. Now this thesis at least sounds plausible and I can accept it. But why then, in the midst of rotational, global, wholesale currency debasement, is gold weak?

Last Updated on Monday, 13 May 2013 10:58
Market Outlook Review 4Q 2012 to 2Q 2013 PDF Print E-mail
Written by Burnham Banks   
Thursday, 09 May 2013 05:40


Our methodology is simple. Its getting it right that’s difficult. First of all, we observe, all the time, data, anecdotal evidence, trends, events and developments, everything. Then we postulate theses, what we think all the information evolving before us means. From these theses come predictions about the evolution of investable asset markets. This is the hard part. The next part is easy. We sit back and see if our predictions come true. If they do, we still ask ourselves if it is a coincidence or pure dumb luck, or if it was a consequence of our theses. If they don’t, then we revisit our theses to see if they are still sound or valid. If they are not, then its back to the drawing board. We almost never rely entirely on the price evolution of the asset markets we are interested in. That’s like forecasting the weather by looking out the window. We are not going to wait for a 20% drawdown in the market to inform us that we are in a bear market. That type of signal is ever so slightly late.

Last Updated on Monday, 13 May 2013 10:46
The Slowdown in the US Economy. A Temporary Pause. PDF Print E-mail
Written by Burnham Banks   
Tuesday, 30 April 2013 22:26

The US economy is currently in a slowdown. How significant is this?  If we assume that trend growth for GDP is 4%, as was widely believed to be the case pre 2008, then 2.5% GDP growth would have indicated an economy failing to recover fully in its latest cycle, which would be quite negative. If, however, trend growth is 2% as I believe it is in a post 2008 world where the economy is not only no longer fueled by credit creation but also attempting to gradually deleverage itself, then 2.5% growth represents an overshoot, a cyclical high from which the US economy is currently climbing down, and therefore to be expected. It would be indicative of a normal recovery, albeit along a so-called 'new normal' equilibrium path of lower growth. 

Last Updated on Thursday, 02 May 2013 06:59
Second Quarter 2013: Investment Thoughts PDF Print E-mail
Written by Burnham Banks   
Sunday, 14 April 2013 12:42

The first quarter of 2013 has ended with risk assets mostly higher than at the end of 2012. It would seem that the optimism that greeted the new year was well placed. Indeed many of the problems in the world have been solved, patched or postponed.

Last Updated on Monday, 15 April 2013 05:05
Is The Stock Market Rally Sustainable? PDF Print E-mail
Written by Burnham Banks   
Tuesday, 26 March 2013 00:13
  • Inflation is an emerging market problem created in the developed markets.
  • Equities are being boosted by factors other than fundamentals, which is fine.
  • We invest and spend in nominal terms, it pays to stay invested and it costs to not be invested.
  • Uncertainty prolongs trends, consensus ends them. Until bullishness reaches an extreme, the trend will continue.
  • Its not useful to think of equities or companies along national lines. Most businesses are global.
  • Developed markets have an intellectual property advantage. In trade wars, exchange rates are the first salvo. Intellectual property is the next.

Last Updated on Monday, 01 April 2013 02:43
Equities and Credit: One Correlated Bet? PDF Print E-mail
Written by Burnham Banks   
Tuesday, 19 March 2013 03:55

Today, equities, bonds, FX and most asset classes are driven by one thing. Central bank policy.

A China Debt Obligation PDF Print E-mail
Written by Burnham Banks   
Friday, 08 March 2013 03:45

In November 2011 I counseled caution on the Chinese economy, expecting a serious slowdown in growth. At the same time, I was concerned about the poorly policed financial system, a concern which has not gone away, despite the recovery in other parts of the Chinese economy. While the Chinese economy has recovered, it remains at risk from a fragile financial system and excessive credit creation.

The Singapore Housing Market. Contingency Plans. PDF Print E-mail
Written by Burnham Banks   
Sunday, 03 March 2013 10:13

Singapore's property market has surged since 2008 when it had previously halved from the highs of 2007. Low interest rates, easy credit and an influx of foreigners and foreign capital have propelled housing prices in the past 4 years. Money printing in desperate developed markets have also overflowed into capital attractors like Singapore fueling general inflation as well as asset prices.

Singapore Issues PDF Print E-mail
Written by Regular Zhou   
Sunday, 10 February 2013 00:03


Singapore needs new ideas. Growing the economy through growing the population is the easy way out while ignoring he glaring space constraints. In addition, GDP growth alone does not distinguish between the share that goes to households and the share that goes to firms. Moreover, per capita income and consumption are neglected. These are more important metrics to the people of Singapore.

Last Updated on Sunday, 10 February 2013 00:20
Capital Controls. Inflation. An Eerie Calm PDF Print E-mail
Written by Burnham Banks   
Monday, 28 January 2013 00:14

Asset markets are coiled as tight as a spring, mostly wound up by the spread of quantitative easing of central banks the world over from the US fed to the ECB to the BoJ. Competitive easing is equivalent, or at least has as a collateral strategy, to competitive devaluation. In depressionary economies QE doesn't create the kind of inflation one might expect from the wholesale debasement of currency. However, inflation is already rising even in the weak economies of Europe and Britain. Only in the US is inflation low, suppressed by the shale oil, fracking boom that keeps energy costs, no small part of the CPI, low. Emerging markets are overheating as capital created in the developed markets flows elsewhere. At some point, countries in emerging markets will realize that open capital accounts render them vulnerable to the self interested yet  collectively destructive policies of the West. The case for capital controls may once again arise.

Last Updated on Monday, 28 January 2013 00:35
The Tyranny of Governments. How Politicians are NOT US. PDF Print E-mail
Written by Burnham Banks   
Friday, 11 January 2013 00:53

Britain's MPs have apparently lost the trust of the people. One of the charges leveled against MPs, indeed in any country, is that they are out of touch with society and don't understand the plight of the people. This is patently false. They understand the people alright; they just don't want to be the people.

Last Updated on Friday, 08 February 2013 23:44
Risk and Damage. Worry 2013 PDF Print E-mail
Written by Burnham Banks   
Tuesday, 08 January 2013 10:09

The VIX index has sunk to remarkably low levels, as has the MOVE index. Yields on bonds from treasuries to investment grade to junk have compressed significantly. The market is now more optimistic about the prospects for a recovery in China, a more robust US housing market and the ability of the Europeans to hold their common currency together. All is well.

Time to worry. Risk is highest in calm waters. Once the iceberg hits, its just damage. The best asset can be priced sufficiently highly to be a poor investment, and the worst asset can be priced sufficiently lowly to be a good investment.

Last Updated on Wednesday, 09 January 2013 03:43
Misguided Tax Strategy PDF Print E-mail
Written by Burnham Banks   
Thursday, 20 December 2012 07:03

In the age old children’s story of persuasion versus force, the sun and the wind compete to remove the traveler’s coat to prove their power. The wind’s efforts only make the man wrap his coat more tightly and securely while the sun’s heat eventually drives the man to voluntarily remove his coat.

Last Updated on Thursday, 20 December 2012 07:04
Buy Equities Sell Bonds PDF Print E-mail
Written by Burnham Banks   
Monday, 10 December 2012 00:52

The thirst for yield has led to companies raising more debt at cheaper funding levels than before. This has led to a deterioration of credit quality. Of late some companies have been raising debt for share buy backs recognizing the gap between the cost of equity funding and debt funding. This should imply that investors should prefer equities to bonds since the insiders are clearly signaling this through their adjustments to their capital structures and additionally, since debt issuance has increased to the extent that companies have sufficient liquidity for the foreseeable future, risk of default is low and yet leverage has increased, an ideal confluence for equities which can be regarded as a call option on the underlying value of the firm. 

The Wide Angle: Agency PDF Print E-mail
Written by Burnham Banks   
Monday, 10 December 2012 00:41

The Wide Angle: 

  • Customers of a company should want to see the employees of the said company buy their own products and services and own shares in the company or at least have a direct link between their compensation and the quality of the products and the satisfaction of the customers. As an employee of a company, I want to diversify my share holdings among my company's competitors and other industries as well. 
  • In some industries, the asymmetry of information between the seller and the buyer of the service is more acute. Examples are financial services, in particular retail financial services. There is the additional problem of institutions which represent systemic risk by being too big to fail. One solution to these problems is to require such institutions to constitute themselves as unlimited liability partnerships.
  • The encouragement to greater scope for risk taking and risk sharing is incompatible with the concept of limited liability. On the one hand economists encourage individuals to take more entrepreneurial risk and on the other they condone limited liability business structures. In fact the limited liability institution is a structure designed to encourage risk taking.
  •  The interests of the shareholder, customer, employee troika is beyond resolution.
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