16 Fresh Insights That Challenged What We Thought We Knew About Investing

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We thought we had it all figured out before this week started.

We were wrong.

The top minds in the investment business offered some novel analysis, broke conventional wisdom, and even opened our eyes to some misperceptions.

This particular week, we learned cheap stocks aren’t always cheap, top experts have Reinhart and Rogoff all wrong, the bond market may be in a bubble, and that the biggest bond funds are almost guaranteed to underperform this year.

What follows are excerpts from such stories this week.  All of the important stuff you might’ve missed this week is right here.

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permalink=”the-relationship-between-stock-and-treasuries-broke-down-1″
title=”The relationship between stock and Treasuries broke down”
content=”‘…What you can see is that the stock market has grown considerably more optimistic, pricing in growth, and perhaps some inflation. Yields on the other hand indicate a massive, ongoing bid for Treasuries, suggesting fear and scepticism about growth…’

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permalink=”most-bond-fund-managers-will-take-a-knee-in-2012-2″
title=”Most bond fund managers will ‘take a knee’ in 2012″
content=”‘…Earlier in the call, Gundlach noted that nearly 95% of active bond fund managers underperformed the Barclays aggregate bond index in 2011. ‘You basically can’t do that again [in 2012] without putting your whole business at risk,’ said Gundlach.

This fear of underperforming the benchmark again is spurring the widespread shift toward indexing strategies. Gundlach described it as ‘taking a knee’ in 2012…’

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permalink=”the-age-of-consumer-deleveraging-is-over-3″
title=”The age of consumer deleveraging is over”
content=”‘The latest Consumer Credit data was just posted to the St. Louis Federal reserve, and we instantly noticed this. For the first time since the recession, the year-over-year change in revolving consumer credit (credit cards) is 0%…’

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permalink=”falling-crash-confidence-could-be-a-buy-signal-4″
title=”Falling crash confidence could be a buy signal”
content=”‘…According to the latest read (h/t Bespoke), crash confidence is at its lowest level since early 2009. In other words, investors are increasingly worried about an imminent market crash.

However, this could also be a bullish contrarian indicator. Back in 2009, this similarly low reading in the crash confidence index was followed by a monster bull run in the stock markets…’

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permalink=”bubble-spotter-robert-shiller-sees-a-bubble-in-the-bond-market-5″
title=”Bubble-spotter Robert Shiller sees a bubble in the bond market”
content=”‘Yale professor and economist Robert Shiller famously called two of the biggest bubbles of all time: the dot-com bubble and the housing bubble. …So when Shiller talks about asset bubbles, people listen…The U.S. bond market surge that has pushed debt yields to record lows may constitute a ‘bubble,’ he says…’

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permalink=”theres-nothing-special-about-the-recent-housing-bust-6″
title=”There’s nothing special about the recent housing bust”
content=”‘…’For the first 144 years of real estate enclosure in the U.S., land sales and/or real estate construction peaked almost consistently, every 18 years,’ Anderson writes. ‘The world’s worst downturns are always preceded by land speculation (the chasing of the economic rent) fuelled by misguided credit creation courtesy of the banks.’…’

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permalink=”mass-skyscraper-construction-preludes-economic-crisis-7″
title=”Mass skyscraper construction preludes economic crisis”
content=”‘…Barclays is out with its Skyscraper Index, which shows a correlation between construction of the next world’s tallest building and an impending financial crisis. In fact the report even suggests that the rate of increase in height could also reflect the extent of that economic crisis…’

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permalink=”the-peak-spending-demographic-is-on-the-decline-8″
title=”The peak spending demographic is on the decline”
content=”‘…The alarm is being sound by Harry Dent, who notes that the demographic of those in their peak spending years (age 46 to 50) has been on the decline since 2009.

Based on Census data, this trend should continue until 2022…’

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permalink=”everyone-is-misreading-reinhart-and-rogoff-9″
title=”Everyone is misreading Reinhart and Rogoff”
content=”‘…First of all, Reinhart and Rogoff did not write about the 90% threshold in This Time is Different; they published research about that threshold only after the book was written, in two separate articles (found here and here).

The more important problem with the claims that Gross and others have made about the 90% threshold is that they ignored Reinhart’s and Rogoff’s own words of caution with respect to the special situation of the US, and they failed to consider the limits inherent in Reinhart and Rogoff’s dataset of countries with high debt levels…’

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permalink=”expensive-stocks-can-be-cheaper-than-cheap-stocks-10″
title=”Expensive stocks can be cheaper than cheap stocks”
content=”‘…However, the historical relationship between low P/E ratios and 12-month returns isn’t exactly linear. Citigroup’s Tobias Levkovich provides the graphic below. It turns out that since 1940, the 12-month return for the S&P 500 higher during periods when the P/E ratio ranged from 12 to 16 than when it ranged from 8 to 12…’

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permalink=”us-exports-to-europe-only-count-for-3-of-gdp-11″
title=”US exports to Europe only count for 3% of GDP”
content=”‘…And if there’s no financial crisis in the US… then it’s hard to see how the US gets slammed from Europe, since really the US isn’t too Euro-dependent. At least when it comes to trade.

This chart is from Goldman…’

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permalink=”its-not-easy-for-the-fed-to-create-inflation-12″
title=”It’s not easy for the Fed to create inflation”
content=”‘…The Fed on the other hand doesn’t have a CREATE INFLATION button*. It might have some tools that are quasi-proxies for this, such as lowering rates, or buying assets, or some other mechanisms, but these are crude, at best. Even if the Fed could just print dollars and throw them from helicopters (a proposition that’s legally dicey), that still wouldn’t be the same as creating actual inflation, though it may, possibly feed into that…’

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permalink=”the-us-is-not-exactly-japan-13″
title=”The U.S. is not exactly Japan”
content=”‘..Here’s a look at US unemployment vs. Japanese (adult) unemployment. Not only does the US have much higher unemployment, the swings are much more extreme, whereas Japan’s slowly has ground worse. On the one hand, you might argue that the US ‘adjusts’ or takes its ‘medicine’ faster. On the other hand, when things get tough in the US, workers feel it a lot harsher, and faster…’

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permalink=”the-300-day-moving-average-is-the-new-200-day-moving-average-for-gold-support-14″
title=”The 300-day moving average is the new 200-day moving average for gold support”
content=”‘…Remember in December when gold tanked and fell below its 200-day moving average.

We ran a chart showing that 300-day moving average, showing that for years it was the true ‘support’ for gold…’

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permalink=”the-decline-of-american-manufacturing-is-over-15″
title=”The decline of American manufacturing is over”
content=”‘Investment bank Jefferies takes a non-consensus bullish view on U.S. competitiveness in a new report. Chief Equity Strategist Sean Darby predicts a U.S. industrial renaissance ‘through a combination of higher wage inflation overseas, a weaker U.S. dollar and better productivity gains.’ ‘

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permalink=”confidence-and-stocks-move-hand-in-hand-16″
title=”Confidence and stocks move hand in hand”
content=”‘…The University of Michigan index closely follows the stock market, so a strong start to 2012 may have buttressed the figure.

Below is data from the St. Louis Federal Reserve, charting consumer confidence and the S&P 500’s movements…’

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permalink=”bonus-fomc-meetings-are-way-less-boring-than-we-though-17″
title=”BONUS: FOMC meetings are way less boring than we though”
content=”‘…During the September 2006 meeting Richard Fisher, president of the Dallas Fed, took to a surprising analogy when describing a market that was about to drown.

As one CEO told me, the only subject that has been more analysed than the housing situation is the birth of Brad Pitt’s baby. [Laughter],’ the transcript says…’

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permalink=”bonus-however-not-all-fed-members-find-fomc-meeting-interesting-18″
title=”BONUS: However, not all Fed members find FOMC meeting interesting”
content=”‘…’Another key issue is that we need to greatly improve the quality of the written documents that go with this process. The current Monetary Policy Report is really terrible. It’s dull; it’s sex made boring. I don’t want to criticise too much, but it is. [Laughter]’…’

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permalink=”gary-shilling-offers-20-investment-themes-for-2012-19″
title=”Gary Shilling offers 20 investment themes for 2012″
content=”GARY SHILLING: 2012 Is Going To Be Totally Crappy >
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