From: nfs@hart (Norbert Schlenker)
Subject: Re: Is Marty Zweig's portfolio down in 92?
Originator: news@nimaster
Organization: Princeton University, Dept. of Computer Science
Date: Sat, 26 Sep 1992 23:24:15 GMT

In article <1992Sep26.031541.23283@cs.brown.edu> jhc@iris.brown.edu.UUCP (James H. Coombs) writes:
>Also, I am getting tired of
>hearing Z talk about M2 growth lagging "and that's not so good." Well,
>why isn't it so good.  I didn't get that from his book.  I am convinced
>that the Fed's actions lower interest rates and shake money around, but
>why is it so important that the aggregate targets be met?  Is Z just a
>monetarist?  Did he simply embrace monetarism because it was the thing
>when he was in grad school?  I am not suggesting that these are facts:
>they are just suspicions.  Perhaps they are irrelevant, but then that
>is what I am saying: the relevance of M2 is not clear, and monetarism
>is only one of many competing theories.

Zweig is one of many who has noticed that there is a remarkable
correlation between M-2 and economic growth.  In modern financial
history, there is one striking previous example of a period in which
M-1 grew at double digit rates while M-2 fell slowly (at least at
first).  Unfortunately, that example is the period 1929-1933.

It's Saturday, so Barron's is out.  For any of you who read it, I
suggest paying close attention to two items in Abelson's column.  The
first has to do with the personal income figures released by the
Commerce Dept. on Thursday.  Commerce reported that personal income
fell by 0.5% in August, but said that it would have been up by 0.7%
but for Hurricane Andrew.  I found the assertion astonishing at the
time, and so does Abelson, apparently.  Ask yourself whether it is
possible for national personal income to fall 1.2% short of where it
could have been because of this storm.  My understanding is that at
most 250,000 people (i.e. 0.1% of the population) are affected, in
both FL and LA, people whose incomes before the storm were below the
national average.  I believe the Commerce Dept. has fibbed.

The second item is a reproduction of two graphs, courtesy of Ed Hyman
(a bull), showing consumer debt as percentages of income and total
assets.  Both charts show a sharp ascent to a recent peak, followed by
a recent small decline.  I believe that the numerator of the ratios
(total household debt) is a well defined number, unlikely to be wrong
to any significant degree.  The denominators, however, are somewhat
more suspect, particularly the "total assets" category.  I'd love to
know what methodology is used to estimate that total - relying on
government figures for income or year old estimates of total
residential equity as part of "total household assets" is a recipe
for overestimating the size of the denominators.  I wonder whether
the ratios have fallen at all.

The party is about over.  The Fed has pushed interest rates to 30 year
lows, governments are running a total deficit approaching 10% of GDP,
and the economy is going nowhere.  Employment is stagnant, personal
income is stagnant, retail sales are stagnant, bank deposits are not
growing but currency in circulation is growing like topsy.  The FDIC
has stopped closing banks for now, which seems to be related to the
election; by law, this charade must end in mid-December, when we will
finally discover which money center bank the Fed knows is in trouble.
The largest single asset of the average middle class family, the
equity in a house, is just melting away.

Market P/Es are at historic highs. For those who say that it's just a
temporary thing, let me point out that GM, which has taken huge
yearend writeoffs every year now for three years (thus raising the
apparent P/E of the Dow), is going to take another huge yearend
writeoff in 1992.  These "one time charges" are becoming a pretty
regular thing, aren't they?  For those who say that P/Es should be
judged in light of interest rates, ask them to explain how 3% short
rates and 7% long rates justify a P/E of 25 today, when the 3% short
rates and 5% long rates of 1955 could not justify P/Es above 16.

Norbert
nfs@cs.princeton.edu
Newsgroups: misc.invest