Wall Street Journal: Why Americans are so unhappy with this economic recovery.

This makes perfect sense.  Excerpts here and full link following:

"...Mr. Bernanke was attempting to promote what economists call "wealth effects," or an increase in spending that accompanies an increase in perceived wealth. Watching their assets rise in value, the argument goes, Americans will consume and invest more.

At least until the recent market correction, this part of Mr. Bernanke's strategy seemed to be going well. If you owned stocks, you had reason to feel better about the economy and your own financial circumstances.

The problem is that monetary policy is not a laser-guided missile...

One result has been a sharp increase in food and energy prices that took gasoline up to $4 a gallon. These have produced what economists call "income effects," or a change in consumption resulting from a change in real income. People who pay $4 for gasoline, or $30 more for groceries, have less money to spend on other goods. They also tend to feel poorer, which can influence their overall confidence in the economy.

One big difference is who feels these effects. The wealth effects have helped everyone but especially the affluent. The income effects have been felt most acutely by the poor and middle classes for whom food and energy are a much higher proportion of income.

QE2 and near-zero interest rates have been a boon for bankers and hedge funds. They haven't been so great for suburban families who commute to work and haul their kids to football and music practice. The monetary policy so favored by liberal economists and the White House has actively favored the wealthy over the middle class.

Could these income effects have also hurt economic growth by offsetting the wealth effects that Mr. Bernanke likes to take credit for?

...The larger economic lesson here concerns the sources of long-term growth and the limits of monetary policy. Easy money can help in a crisis, and it can raise asset prices for a while. But it cannot create a durable recovery, and to the extent it leads to bubbles and higher prices it undermines future growth and erodes middle-class incomes.

The real wellsprings of prosperity are private investment and innovation, which Washington has done so much to retard with regulation, the political allocation of capital, and promises of higher taxes. Reversing those policies would unleash a genuine wealth effect."

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Full Link: http://online.wsj.com/article/SB10001424052702303339904576403971545248668.html?mod=WSJ_Opinion_LEADTop

Contrary Opinion! "You don’t need Pimco’s Bill Gross or his bond fund"

From Chuck Jaffe at Market Watch:

"...Last week, PIMCO’s Bill Gross — the world’s most famous and influential bond-fund manager — suggested that investors looking for good yields give up on Treasurys, consider foreign bonds and, notably, high-quality, dividend-paying stocks...

The message wasn’t exactly new, but the takeaway was different.

If the recommendation was to buy stocks — something Gross’s flagship fund, PIMCO Total Return can’t do — and to make money by being a more nimble purchaser of bonds, then Gross was effectively suggesting that investors buy something besides his fund.

And he’s right, because looking at PIMCO Total Return, there’s a strong case to be made that it’s the Stupid Investment of the Week.

Stupid Investment of the Week highlights conditions and characteristics that make a security less-than-ideal for the average investor. While it is hard to imagine that the world’s preeminent bond manager is suddenly going to turn stupid relative to his peers — and this column is not intended as a sell signal — there’s a strong case to be made that investors would be better off going elsewhere, even in the bond-fund world...

At this point, the problem with PIMCO Total Return is that it’s too big. With Gross having shown his disdain for Treasurys — though he is heavily invested in mortgage-backed securities, which functionally is a distinction without much difference — and trying to seek yield elsewhere, size is, well, a giant problem.

Where Gross might once have added value by finding the best bond deals and executing them better than the competition, today even the best deals are too small to have much impact on the fund...."

Read the full story at this link:  http://www.marketwatch.com/story/you-dont-need-pimcos-bill-gross-or-his-bond-fund-2011-06-17?reflink=MW_GoogleNews

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Being too big has hurt other funds.  Fidelity Magellan?  American Funds' Growth Fund of America?  We have a link to Bill Gross' monthly commentary on the left column of this blog.  Keep following Bill Gross.

If Morgan Stanley can cut costs, why not you?

From the WSJ.com earlier this week: 

At Morgan Stanley, Focus Put on Costs

"Morgan Stanley offered a glimpse into Wall Street's future, and the outlook has changed so much from the heady days of the past that the firm is planning to keep a close watch on BlackBerry usage...

Morgan Stanley's penny-pinching obsession is a sign of the struggle inside many banks and securities firms to overcome sluggish revenue growth and the looming costs of new regulatory and capital requirements...

One of the biggest cost-savings opportunities at any investment bank didn't come up Tuesday... not a word about cutting salaries or bonuses."

Link:
http://online.wsj.com/article/SB10001424052702304906004576371890825149096.html?mod=WSJ_hp_MIDDLETopStories

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Good Start!  Why not cut your costs by avoiding Morgan Stanley and every other high cost adviser?


There is no reason not to cut your costs by up 95%, pocket the difference, and see how you can add up to extra hundreds of thousands of dollars to your wealth.


We teach investors how to invest with the lowest cost ETFs.

Beware inflation. Beware how the bond market responds.

From Bloomberg:

Food Prices Stay Near Record as Meat Costs Rise

World food prices lingered near record levels in May as meat and dairy costs rose, contributing to inflationary pressures that may drive millions into hunger, even as grain prices fell...

The European Central Bank raised interest rates on April 7, joining nations from China to Sweden that increased borrowing costs this year in a bid to control inflation partly blamed on food costs. Egypt, where rising food prices helped spark protests that led to February’s ouster of President Hosni Mubarak, yesterday forecast “elevated” inflation.

Link:  http://www.bloomberg.com/news/2011-06-07/world-food-prices-stay-near-record-as-meat-costs-increase-grains-decline.html

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Low Yields on U.S. Treasuries No Guarantee Against Fiscal Crisis

Treasury Secretary Timothy F. Geithner takes comfort from the government’s ability to borrow at low interest rates as the budget deficit hits a record high. “There’s a lot of confidence” in America’s capacity to meet its commitments, he told Bloomberg Television.

History suggests that such faith may prove to be misplaced in the long run. A study of 116 financial crises in 25 countries found that rates had a poor track record in foreshadowing financial difficulties, said Carmen Reinhart, a co-author of the analysis and the female economist whose work is most frequently cited by other researchers...

Reinhart is the No. 1 ranked female economist worldwide as of May, based on criteria used to judge the popularity of her work, according to RePEc: Research Papers in Economics, an online database of economic material operated by volunteers in 74 countries.

The research she did ... looked at crises from 1970 to 1995, focusing on everything from bank-deposit rates to yield spreads. “None of them worked well” in presaging financing problems, she said. The results were contained in “Assessing Financial Vulnerability: An Early Warning System for Emerging Markets,” a book published by the institute in 2000....

Link: http://www.bloomberg.com/news/2011-06-06/low-yields-on-treasury-debt-no-guarantee-financial-crisis-won-t-hit-u-s-.html

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Are you in danger of being surprised?  Beware inflation.

Inflation destroys the value/purchasing power of your money.  Bonds lose value when inflation rears its ugly head.  Now is the time to pay close attention and time to start taking action.

Things are not clear. 

The yield curve argues against a recession.  Read Carolyn Baum on Bloomberg.

But also read PIMCO's Bill Gross. 

Start taking independent action to make sure you have enough liquidity in your portfolios.  That means raising cash.

"Money" quote for the next 2 years

From Daniel Henninger of the Wall Street Journal:

"Strong-performing economies need clarity. Barack Obama has given ours indecision stretching to the horizon."

Link to article: http://online.wsj.com/article/SB10001424052702303745304576359570364488858.html