William Sterling of Trilogy Global Advisors has an interesting new paper on the abrupt changes in financial markets subsequent to Lehman's bankruptcy on September 15, 2008.

Sterling's paper is in part a response to earlier analyses by John Taylor (2008, 2009) and John Cochrane and Luigi Zingales who noted that the spread between the LIBOR interest rate (London Interbank Offered Rate) and the OIS (Overnight Index Swap) rose only gradually following the Lehman bankruptcy, leading these scholars to see Lehman as just one of many relevant developments at the time. But Sterling questions the meaningfulness of the LIBOR or OIS indicators during these weeks given that markets seized up and little trading activity was occurring in these instruments. Sterling instead proposes to take a look at Bloomberg Financial Conditions Index, which Bloomberg launched in August 2008. The index is based in part on

Or, how come you used to say that if consumers don’t save more, it will wreck the economy, and now you say, if consumers do save more, it will wreck the economy?

For the record, I am certainly among those who had been suggesting that America’s low saving rate was a significant problem. Let me begin by reviewing why I said that. Recall that we can separate the various components of GDP (Y) in terms of goods and services purchased by consumers (C), government purchases (G), investment spending (I), and net exports (X):

Y = C + I + G + X

Subtracting C and G from both sides of the equation,

Y – C – G = I + X

The two terms on the right-hand side are the critical determinants of what kind of economic future we’ll have. Investment in plant and equipment is the single most important variable

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HIDDEN VALUE

Dear Reader,

There’s a “great miracle” playing out right before your eyes.

It seems that in the face of one of the worst financial failures in history… one that has obliterated consumer spending… and brought economic titans to their knees… Keynesianism economics is making everything okay again.

Bloomberg reports that China’s own stimulus package is working.

Asian stocks have hit four-month highs. And… hallelujah… banks are lending again.

This from Bloomberg:

Chinese banks may have offered a record 1.2 trillion yuan of new loans in January, the China Securities Journal reported today, citing people it didn’t identify.

The four biggest state-owned banks completed 20 percent of their full-year target, with the majority of the loans lent for railways, highways, electricity grids and other infrastructure projects.

Of course, one thing China doesn’t have to bother about is

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Your retirement nest egg might have lost 40% of its value since this summer and 10% the last 2 weeks. What should you do? Here's the advice I've been giving to friends who ask, as well as what I've been doing with my own portfolio.

First, let me begin by stating that I make no claim whatever to be able to predict whether stock prices will go up or down over the near term or when the market bottom might be reached. In part that humility is inspired by a large academic literature demonstrating that it's very hard to predict stock prices with formal statistical models.

The one element of predictability for which I do see some support in the academic literature is the claim that the price/dividend or price/earnings ratios do not wander too far from their long-run historical averages. The implication of that finding is that