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DJIA 10,805.87 -82.29 -0.76%
Nasdaq 2,232.82 0.11 0.00%
S&P 500 1,249.48 -8.00 -0.64%
S&P/TSX 10,824.14 -118.49 -1.08%
Bovespa 31,916.76 265.21 0.84%
.S. Fed Funds Rate 4.00 0.00
U.S. Fed Target Rate 4.00 0.00
Canadian 10-Year Bond 4.06 0.02
U.S. 10-Year Treasury 4.48 0.01
U.S. GDP* 11/30 4.3%
U.S. Unemployment 11/04 5.0%
Canadian Unemployment 11/04 6.6%
Brazilian Unemployment 11/24 9.6%
*Quarterly rate annualize

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... during our multi-country European sojourn only the Americans asked us about the �fires� in Paris. From the European portfolio managers the questions du jour seemed to center on the dollar, interest rates, earnings, the economy (read: the consumer), and valuation levels. As for the dollar, we remain bearish, yet have successfully hedged that �bearish bet� twice over the past three years. Most recently, we entered 2005 looking for a counter-trend rally in the greenback and hedged our portfolios accordingly. We removed those hedges last summer, believing that the dollar�s rally was over. And that strategy looked correct until recently, when the dollar broke out to a new reaction high on November 4th (basis the Dollar Index). Our sense is that while the dollar may continue to have a �tailwind� into 1Q06, that tailwind should fade in the New Year. On interest rates; well, quite frankly, we have been wrong, having thought that in our finance-based economy Fed Fund�s rate-rape would stop around 3.5%. It appears now, however, that the new Fed chairman will continue to raise rates for a multiplicity of reasons. That would be consistent with the history of new Fed Heads who have entered their positions with a hawkish bias. This implies that the Fed likely will continue to raise interest rates until there is a financial accident.

As for earnings, we remain in �show me� mode, believing that earnings are in the process of regressing to the mean, implying single-digit earnings growth sometime next year. Likewise, we (that means me) believe the economy is also in mean-reverting mode and will produce a sub-3% year/year GDP growth rate in some quarter next year. And that brings us to VALUATIONS. Ladies and gentlemen, in the envisioned decelerating earnings environment, accompanied by rising interest rates, where P/E multiples should compress, it is difficult for us to envision much more than single-digit gains for major market indices. Meanwhile, there is an �even money� chance that 2006 could be pretty challenging if the �consensus call� is wrong and this is not the mid-cycle slowdown, followed by an economic reacceleration, that everybody is expecting. This is why we are continuing to avoid �indexing� portfolios and have focused on thematic/sector-specific investing and attempted to trade around those themes near the various markets� inflection points.

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Now, as for the long-term, let's see what the investment jocks have to say

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RT: I think we can officially proclaim the boom economy is here.

Sorry dems, American wins again - and you lose.

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DJIA 10,805.87 -82.29 -0.76%
Nasdaq 2,232.82 0.11 0.00%
S&P 500 1,249.48 -8.00 -0.64%
S&P/TSX 10,824.14 -118.49 -1.08%
Bovespa 31,916.76 265.21 0.84%
.S. Fed Funds Rate 4.00 0.00
U.S. Fed Target Rate 4.00 0.00
Canadian 10-Year Bond 4.06 0.02
U.S. 10-Year Treasury 4.48 0.01
U.S. GDP* 11/30 4.3%
U.S. Unemployment 11/04 5.0%
Canadian Unemployment 11/04 6.6%
Brazilian Unemployment 11/24 9.6%
*Quarterly rate annualize

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Looks like cherry picking figures to me.

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It Keeps Going, and Going ...
December 1, 2005; Page A16

We interrupt your daily doom-and-gloom programming with a word from the real economy: It's even better than advertised. October's estimate of 3.8% third-quarter GDP growth was revised upward yesterday to 4.3%, which means the expansion was moving fast enough in late summer to blow right past Hurricane Katrina.

This represents the fastest expansion since the first quarter of 2004, as well as the 10th consecutive quarter of growth averaging close to 4% on an annual basis. So much for those predictions of recession we heard in the spring, and again in September. In fact, has there ever been a U.S. expansion this robust that has been accompanied by so much disbelief and predictions of imminent collapse? Not since the 1980s, we'd guess.

The third-quarter GDP revisions were especially notable for showing strength nearly across the board. Durable-goods orders were particularly strong, increasing at an annual rate of 10.5% and up 6% from the third quarter of 2004. Gross private investment grew at 5.8%, real equipment and software spending at nearly 12%. In other words, business investment has been a major growth driver, contrary to the conventional wisdom that consumers have been sustaining growth only by emptying their "over-extended" wallets. This bodes well for future growth, even as the housing market continues to cool.

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Those risks aside, last quarter's GDP numbers show that the U.S. economy can withstand natural disasters, rising interest rates, $70 oil, $4 gasoline -- and the relentless pessimism of elite forecasters who said today's prosperity could never happen.

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Where are you "pudding" your investments today?

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That said, I am very sympathetic to the reason why you might want to make the comparison. Thus, I am quite happy to give this report a solid "B" as long as everyone understands that a nice long string of "B"s and "C"s without any "F"s is a pretty good achievement indeed. Stable, sustainable growth gets a "B" or a "C" on this scale, but stable and sustainable growth is exactly what we want.

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The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living. GDP is intended to be a measure of particular types of economic activity within a country. Nothing about the definition of GDP suggests that it is necessarily a measure of standard of living. For instance, in an extreme example, a country which exported 100 per cent of its production would still have a high GDP, but a very poor standard of living.

The argument in favour of using GDP is not that it is a good indicator of standard of living, but rather that (all other things being equal) standard of living tends to increase when GDP per capita increases. This makes GDP a proxy for standard of living, rather than a direct measure of it.

There are a number of controversies about this use of GDP.

Controversies
Although GDP is widely used by economists, its value as an indicator has also been the subject of controversy. Criticisms of GDP include:

GDP doesn't take into account the black economy, where the money spent isn't registered, and the non-monetary economy, where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services (I helped you build your house ten years ago, so now you help me).
Very often different calculations of GDP are confused among each other. For cross-border comparisons one should especially regard whether it is calculated by purchasing power parity method or current exchange rate method.
Quality of life is determined by many other things than physical goods (economic or not).
In 'poor' countries, it may just be that everything is cheap, except for a few western goodies. So one may have little money, but if everything is cheap that evens out nicely. Thus, the standard of living may be quite reasonable, it's just that there are, say, fewer TV-sets, meaning people have to share them (which may actually increase the quality of life in a social sense).
If many products are of low quality in terms of durability then people will have to (unnecessarily) buy them again and again, thus boosting GDP without increasing their satisfaction. (On the other hand, if products were very durable then that would hamper innovation because people would be less inclined to buy new products, giving producers less of an incentive to develop them.) Similarly, if many products are of low quality in terms of usability and people don't know beforehand which products are the best choice for them, then they will either have to make do with an inferior product or buy again and again until they find something more satisfying. Furthermore, if products have a short lifespan in the market (eg because of fast innovation or fashion) then this process starts all over again when people need a replacement. Note that in a capitalist society these factors working together can easily cause a very high GDP combined with low customer satisfaction.
GDP doesn't measure the sustainability of growth. A country may achieve a temporary high GDP by over-exploiting natural resources or by misallocating investment. Oil rich states can sustain high GDPs without industrializing, but this high level will not be sustainable past the point that the oil runs out. Economies experiencing a housing bubble or a low private saving rate tend to grow faster due to higher consumption, at the expense of reduced pensions in future.
GDP counts work that produces no net change. For instance, a hurricane destroying thousands of homes would not be counted by GDP, but the rebuilding of those homes would be. A good recent example would be the aftermath of 2005 Katrina hurricane, which is poised to become the most expensive hurricane in history. GDP would capture the rebuilding activity and suggest a rising living standard, but we're only working toward restoring what was lost for the most part. Therefore, GDP growth would over-estimate the increase in the standard of living. See Negative externalities.
As a measure of actual sale prices, GDP does not capture the economic surplus between the price paid and subjective value received.
the annual growth of real GDP is adjusted by using the "GDP deflator", which tends to underestimate the objective differences in the quality of manufactured output over time. (The deflator is explicitly based on subjective experience when measuring such things as the consumer benefit received from computer-power improvements since the early 1980s). Therefore the GDP figure may underestimate the degree to which improving technology and quality-level are increasing the real standard of living.
Some economists such as Herman Daly consider GDP to be a poor measure even of material well being, especially in developed countries. They argue that GDP only measures production and consumption, not however the level of utility people gain from producing and consuming. This idea is expressed in the theory of uneconomic growth, which states that GDP growth above a certain "economic limit" actually decreases material well being. An extreme example of this is a major war. Historically, GDP growth was often boosted in war time while material living standards fell considerably.

GDP {ALSO}does not take inequality into account.
Some economists have attempted to create a replacement for GDP called the Genuine Progress Indicator (GPI), which attempts to address many of the above criticisms.

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WHAT'S WRONG WITH THE GDP?
Since its introduction during World War II as a measure of wartime production capacity, the Gross National Product (now routinely measured as Gross Domestic Product�GDP) has become the nation's foremost indicator of economic progress. It is now widely used by policymakers, economists, international agencies and the media as the primary scorecard of a nation's economic health and well-being.

Yet the GDP was never intended for this role. It is merely a gross tally of products and services bought and sold, with no distinctions between transactions that add to well-being, and those that diminish it. Instead of separating costs from benefits, and productive activities from destructive ones, the GDP assumes that every monetary transaction adds to well-being, by definition. It is as if a business tried to assess its financial condition by simply adding up all "business activity," thereby lumping together income and expenses, assets and liabilities.

On top of this, the GDP ignores everything that happens outside the realm of monetized exchange, regardless of its importance to well-being. The crucial economic functions performed in the household and volunteer sectors go entirely ignored. The contributions of the natural habitat in providing the resources that sustain us go unreckoned as well. As a result, the GDP not only masks the breakdown of the social structure and natural habitat; worse, it actually portrays such breakdown as economic gain.

GDP TREATS CRIME, DIVORCE AND NATURAL DISASTERS AS ECONOMIC GAIN
Since the GDP records every monetary transaction as positive, the costs of social decay and natural disasters are tallied as economic advance. Crime adds billions of dollars to the GDP due to the need for locks and other security measures, increased police protection, property damage, and medical costs. Divorce adds billions of dollars more through lawyer's fees, the need to establish second households and so forth. Hurricane Andrew was a disaster for Southern Florida. But the GDP recorded it as a boon to the economy of well over $15 billion.

GDP IGNORES THE NON-MARKET ECONOMY OF HOUSEHOLD AND COMMUNITY
The crucial functions of childcare, elder care, other home-based tasks, and volunteer work in the community go completely unreckoned in the GDP because no money changes hands. As the non-market economy declines, and its functions shift to the monetized service sector, the GDP portrays this process as economic advance. The GDP also adds the cost of prisons, social work, drug abuse and psychological counseling that arise from the neglect of the non-market realm.

GDP TREATS THE DEPLETION OF NATURAL CAPITAL AS INCOME
The GDP violates basic accounting principles and common sense by treating the depletion of natural capital as income, rather than as the depreciation of an asset. The Bush Administration made this point in the 1992 report of the Council on Environmental Quality. "Accounting systems used to estimate GDP" the report said, "do not reflect depletion or degradation of the natural resources used to produce goods and services." As a result, the more the nation depletes its natural resources, the more the GDP goes up.

GDP INCREASES WITH POLLUTING ACTIVITIES AND THEN AGAIN WITH CLEAN-UPS
Superfund clean-up of toxic sites is slated to cost hundreds of billions of dollars over the next thirty years, which gets added to the GDP. Since the GDP first added the economic activity that generated that waste, it creates the illusion that pollution is a double benefit for the economy. This is how the Exxon Valdez oil spill led to an increase in the GDP.

GDP TAKES NO ACCOUNT OF INCOME DISTRIBUTION
By ignoring the distribution of income, the GDP hides the fact that a rising tide does not lift all boats. From 1973 to 1993, while GDP rose by over 50 percent, wages suffered a decline of almost 14 percent. Meanwhile, during the 1980s alone, the top 5 percent of households increased their real income by almost 20 percent. Yet the GDP presents this enormous gain at the top as a bounty to all.

GDP IGNORES THE DRAWBACKS OF LIVING ON FOREIGN ASSETS
In recent years, consumers and government alike have increased their spending by borrowing from abroad. This raises the GDP temporarily, but the need to repay this debt becomes a growing burden on our national economy. To the extent that Americans borrow for consumption rather than for capital investment, they are living beyond their means and incurring a debt that eventually must be repaid. This downside of borrowing from abroad is completely ignored in the GDP.


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WHAT IS THE GENUINE PROGRESS INDICATOR�GPI?
The Genuine Progress Indicator (GPI) is a new measure of the economic well-being of the nation from 1950 to present. It broadens the conventional accounting framework to include the economic contributions of the family and community realms, and of the natural habitat, along with conventionally measured economic production.

The GPI takes into account more than twenty aspects of our economic lives that the GDP ignores. It includes estimates of the economic contribution of numerous social and environmental factors which the GDP dismisses with an implicit and arbitrary value of zero. It also differentiates between economic transactions that add to well-being and those which diminish it. The GPI then integrates these factors into a composite measure so that the benefits of economic activity can be weighed against the costs.

The GPI is intended to provide citizens and policy-makers with a more accurate barometer of the overall health of the economy, and of how our national condition is changing over time.

While per capita GDP has more than doubled from 1950 to present, the GPI shows a very different picture. It increased during the 1950s and 1960s, but has declined by roughly 45% since 1970. Further, the rate of decline in per capita GPI has increased from an average of 1% in the 1970s to 2% in the 1980s to 6% so far in the 1990s. This wide and growing divergence between the GDP and GPI is a warning that the economy is stuck on a path that imposes large�and as yet unreckoned�costs onto the present and the future.

Specifically, the GPI reveals that much of what economists now consider economic growth, as measured by GDP, is really one of three things: 1) fixing blunders and social decay from the past; 2) borrowing resources from the future; or 3) shifting functions from the community and household realm to that of the monetized economy. The GPI strongly suggests that the costs of the nation's current economic trajectory have begun to outweigh the benefits, leading to growth that is actually uneconomic.

If the mood of the public is any barometer at all, then it would seem that the GPI comes much closer than the GDP to the economy that Americans actually experience in their daily lives. It begins to explain why people feel increasingly gloomy despite official claims of economic progress and growth.

The GPI starts with the same personal consumption data the GDP is based on, but then makes some crucial distinctions. It adjusts for certain factors (such as income distribution), adds certain others (such as the value of household work and volunteer work), and subtracts yet others (such as the costs of crime and pollution). Because the GDP and the GPI are both measured in monetary terms, they can be compared on the same scale.

I. CRIME & FAMILY BREAKDOWN
Social breakdown imposes large economic costs on individuals and society, in the form of legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses as additions to well-being. By contrast, the GPI subtracts the costs arising from crime and divorce.

II. HOUSEHOLD & VOLUNTEER WORK
Much of the most important work in society is done in household and community settings: childcare, home repairs, volunteer work, and the like. These contributions are ignored in the GDP because no money changes hands. To correct this omission, the GPI includes, among other things, the value of household work figured at the approximate cost of hiring someone to do it.

III. INCOME DISTRIBUTION
A rising tide does not necessarily lift all boats�not if the gap between the very rich and everyone else increases. Both economic theory and common sense tell us that the poor benefit more from a given increase in their income than do the rich. Accordingly, the GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases.

IV. RESOURCE DEPLETION
If today's economic activity depletes the physical resource base available for tomorrow's, then it is not really creating wellbeing; rather, it is just borrowing it from future generations. The GDP counts such borrowing as current income. The GPI, by contrast, counts the depletion or degradation of wetlands, farmland, and non-renewable minerals (including, oil) as a current cost.

V. POLLUTION
The GDP often counts pollution as a double gain; once when it's created, and then again when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as measured by actual damage to human health and the environment.

VI. LONG-TERM ENVIRONMENTAL DAMAGE
Climate change and the management of nuclear wastes are two long-term costs arising from the use of fossil fuels and atomic energy. These costs do not show up in ordinary economic accounts. The same is true of the depletion of stratospheric ozone arising from the use of chlorofluorocarbons. For this reason, the GPI treats as costs the consumption of certain forms of energy and of ozone-depleting chemicals.

VII. CHANGES IN LEISURE TIME
As a nation increases in wealth, people should have increasing latitude to choose between more work and more free time for family or other activities. In recent years, however, the opposite has occurred. The GDP ignores this loss of free time, but the GPI treats leisure as most Americans do�as,something of value. When leisure time increases, the GPI goes up; when Americans have less of it, the GPI goes down.

VIII. DEFENSIVE EXPENDITURES
The GDP counts as additions to well-being the money people spend just to prevent erosion in their quality of life or to compensate for misfortunes of various kinds. Examples are the medical and repair bills from automobile accidents, commuting costs, and household expenditures on pollution control devices such as water filters. The GPI counts such "defensive" expenditures as most Americans do: as costs rather than as benefits.

IX. LIFESPAN OF CONSUMER DURABLES & PUBLIC INFRASTRUCTURE
The GDP confuses the value provided by major consumer purchases (e.g., home appliances) with the amounts Americans spend to buy them. This hides the loss in well-being that results when products are made to wear out quickly. To overcome this, the GPI treats the money spent on capital items as a cost, and the value of the service they provide year after year as a benefit. This applies both to private capital items and to public infrastructure, such as highways.

X. DEPENDENCE ON FOREIGN ASSETS
If a nation allows its capital stock to decline, or if it finances its consumption out of borrowed capital, it is living beyond its means. The GPI counts net additions to the capital stock as contributions to well-being, and treats money borrowed from abroad as reductions. If the borrowed money is used for investment, the negative effects are canceled out. But if the borrowed money is used to finance consumption, the GPI declines.

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The GDP Myth
Why "growth" isn't always a good thing
By Jonathan Rowe & Judith Silverstein
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George Orwell really did see it coming. "As soon as certain topics are raised," he wrote, "the concrete melts into the abstract." Nowhere does it melt more quickly than in economics. Public discussion of the economy is a hothouse of evasive abstraction. Opinionators and politicians rarely name what they are talking about. Instead they waft into generalities they learned in Economics 101.

The President's State of the Union Address was a case in point. The President boasted of the "longest peacetime expansion of our history." That's how pols always talk. It sounds like truly wonderful news. But what actually has been expanding? A lot of things can grow, and do. Waistlines grow. Medical bills grow. Traffic, debt, and stress all grow. We can't know whether an "expansion" is good or not unless we know what it includes. Yet the President didn't tell, and the media hordes didn't ask, which was typical too.

A human economy is supposed to advance well-being. That is elementary. Yet politicians and pundits rarely talk about it in those terms. Instead they revert to the language of "expansion," "growth," and the like, which mean something very different. Cut through the boosterism and hysterics, and growth means simply "spending more money." It makes no difference where the money goes, and why. As long as the people spend more of it, the economy is said to "grow."

The technical term for this is "Gross Domestic Product" or GDP, which gives the proceedings an atmosphere of authority and expertise. But it doesn't take a genius to smell the fish. Spending more money doesn't always mean life is getting better. Often it means things are getting worse. This is exceedingly hard for most commentators to grasp. It simply does not fit with the story line we learned in the economics texts. A number of writers have argued, for example, that things are much better than Americans realize, and that only a jaundiced and elitist media obscures this fact. Yes, there is a Cassandra industry of issue groups on both Left and Right that raise money on dire warnings. Yes, the media gets more attention with bad news than with good. But that doesn't mean Americans are wrong when they tell pollsters that they are concerned abut the direction of the nation, even though their own economic fortunes are pretty good. When one looks at what is actually growing in America today, that view makes a lot of sense. Consider a few examples.

The Flab Factor
To put this delicately, Americans are becoming quite ample. Over half of us are overweight. The portion of middle-aged Americans who are clinically obese has doubled since the 1960s; it is now one out of three. The number that is grossly overweight - that is, can't fit into an airline seat - has ballooned 350 percent over the past thirty years.

That's a lot of girth, and a prodigious source of growth. Food is roughly a $700 billion industry in the United States, counting agriculture, supermarkets, restaurants and the rest. Unfortunately, a good deal of that industry ends up inside us Americans. The result is flab, and a diet and weight loss industry of some $32 billion nationwide and - yes - growing. Richard Armey, the House majority leader and an economist, has opined that "the market is rational and the government is dumb." Here's a bit of rationality for him. The food industry spends some $21 billion a year on advertising to goad us to eat more. Then we spend that and half again trying to rid ourselves of the inevitable effects.

When diets and treadmills don't work, which is often, there's always the vacuum pump or knife. Cosmetic surgery is another booming sector, and much of it aims to