Reply-To: pkt at csf.colorado.edu Message-ID: <SIMEON.9810071543.C at rosserjb-7958.jmu.edu>
Greg,
Interesting piece. But I would not count the evidence on the closed-end country funds for anything. The Mexico fund showed a premium before the peso tanked. The closed-end funds show opinion of idiots in New York. The asset values show the opinions of insiders in the country. Who should you believe (duh).
As a matter of fact, closed-end funds are in general one of the notorious "anomalies" of modern financial economics. A paper in 1995 in the Journal of Financial Economics by Jeffrey Pontiff showed that one can beat the S&P 500 by buying and holding deeply discounted closed-end funds and one can lose relative to the S&P 500 by buying closed-end funds showing premia. In theory, closed-end funds ought equal the net asset value minus some transactions costs, tax losses, and minor other stuff, equal to about 5-10% discount on average.
BTW, this list's own Brad De Long had a paper in the Journal of Economic History awhile ago that documented the emergence of massive premia on domestic US closed-end funds in 1929 before the crash, definitely a bubble there. Since 1929, most US closed-end funds have tended to run discounts of varying amounts.
So, Greg, tell your brother to stay away from those funds with premia. Sucker bait! Barkley Rosser On Wed, 07 Oct 1998 14:26:43 -0400 Greg Nowell <GN842 at CNSVAX.Albany.Edu> wrote:
> My brother and I are both natural pessimists. He's
> had a good silicon valley career and had money to
> invest. I was astounded to learn that for the past 9
> years it had all been in money market funds. He kept
> waiting for the market to go south. We had a long
> discussion, and finally I said: It's easy to make the
> downside argument at this point--the 1929 meltdown
> scenario. What's more interesting, by way of
> contrarian exercise, is to make the up-side argument.
> Here are a few:
>
> 1. There has been a big hit in commodity prices (oil,
> frozen concentrated orange juice, wheat, copper, &c.).
> However, if one looks at futures contracts on a variety
> of commodities they all uniformly show increasing
> prices over the next 12-24 months. Natch, futures
> traders are not invincible. They can take a bath. But
> nonetheless, they have not priced a deflationary
> scenario into major world commodities; to the contrary,
> they have priced inflation. Unlike lenders, who
> anticipate inflation and try to protect themselves by
> wheedling an "extra margin" at the time a fixed-rate
> loan is made to protect themselves against unseen
> inflation, commodity traders get hammered on futures
> contracts that are priced north when prices go south.
> To the extent that "investor sentiment" is a
> self-fulfilling part of capitalism, the upward curve in
> pricing on major commodities is a signal not just to
> traders but to producers that "the market" is not
> anticipating deflation.
>
> 2. As of last wkend, the closed-end country funds for
> stocks (Japan fund, Indonesia fund, France fund, etc.)
> listed in Barron's were all (Asian, that is) priced at
> very low prices from their yearly highs. What was
> amazing, however, was the fact that all of the Asian
> funds except Korea were trading at *premiums* to the
> underlying asset value. This indicates that investors
> currently view Asian stocks as so undervalued that they
> are willing to pay more than their current market
> price.
> [A closed end fund is a company which holds, like a
> mutual fund, a portfolio of stocks (or bonds).
> Investors are invited to purchase shares in that fund,
> not from the fund itself, but where they are listed on
> an exchange. It is therefore possible for a fund to
> hold stocks in Asia which are valued at $1000 based on
> Asian closing prices, but for people in the US to value
> holding stocks in the fund at a price greater than the
> assets that the fund holds. This is called trading at
> a premium. When the opposite occurs, it is called
> trading at a discount.]
> If investor sentiment was as bleak as could be, we
> would expect the closed end funds to be trading at par
> or at discounts to their underlying asset values.
>
> 3. The long bond at 4.7% is yielding about 3.2%
> relative to inflation (about 1.5%). The real rate of
> long interest is thus about where it was in late 19th
> century Britain. No one can say whether 4.7% is a
> "bottom" to the long bond but it seems unlikely that to
> me that it will be pushed lower than that for very
> long, especially if vestigal inflation remains (as
> anticipated by commodity traders).
>
> Recent cuts by the Fed may not affect the long rate of
> interest, and I don't know whether the will succeed in
> narrowing the very large spread between the 30-yr
> treasury and other kinds of loans, such as mortgages.
> It is conceivable that the 30-year mortgage, if the
> "spread" between it and the long bond narrows, may go
> to 6.2% (as of today it was 6.5-6.625%. Rates are
> lower in places like California or Boston where loans
> are bigger. Avg rates listed in papers may be lower
> because they include people who pay points). However,
> I would not bet on this, for reasons which I need not
> enumerate here. In any case, the main point is this:
> changes in the discount &/or federal funds rate will
> weaken the dollar, which is good for Asian countries
> including Japan that have a problem with an
> appreciating greenback (appreciating US dollars
> increase reserve requirements in japanese banks,
> causing them to restrict lending, etc.). Lowering the
> federal funds &/or discount rate will also provoke
> inflation fears which may send US long bond prices
> lower (raising the interest rate). The prospect of
> losing money on the present value of long bonds may
> force investors into alternative forms of investment.
> At a minimum, a rising long rate would allow hedge
> funds to "unwind" short positions and would, in turn,
> decrease pressure to sell off other securities
> (especially foreign bonds and US junk) to raise capital
> to meet margin requirements. There is some argument
> that some of the buying pressure on long bonds is
> coming from speculators who think that by pushing the
> rate down now, they can force the hedge traders to "buy
> now, because it will be even worse later." This
> technique could particularly work if it forces hedged
> traders to pony up big time on margin calls, making
> holding out for a better position very expensive. But
> I think that the 4-trillion dollar treasury market is a
> bit to big to be manipulated in this way. Perhaps I am
> wrong, but that is my hunch.
>
> To conclude. Certain of the conditions currently
> prevailing in world markets are strongly reminiscent of
> the 19th century style "busts" (cf. 1896, 1907) that
> wreaked a good deal of havoc and which were supposedly
> tamed by the advent of the welfare state, social
> security (both spurs to consumption) and deficit
> spending. And indeed it is *precisely* those states in
> which these redistributive mechanisms are *weakest*
> that the economic crisis is *worst*. So we cannot
> exclude calamity. However, there seem to be
> indications that grinding discomfort (including perhaps
> a recession) rather than calamity (1929 style meltdown)
> may be the exit solution from the current situation.
> However, it should be pointed out that in some
> countries of the world the situation is *exactly* that
> of a 1907-style bust, and that people are hungry and
> miserable as a consequence.
>
> --
> Gregory P. Nowell
> Associate Professor
> Department of Political Science, Milne 100
> State University of New York
> 135 Western Ave.
> Albany, New York 12222
>
> Fax 518-442-5298
>
>
-- Rosser Jr, John Barkley rosserjb at jmu.edu
--- End Forwarded Message ---
-- Rosser Jr, John Barkley rosserjb at jmu.edu