This is usually a slow time of the year for farm sales. It's past prime planting season. Yet, Sam Kain, Des Moines area manager for land sales at Farmers National, is busy. He has 3 auctions this week. Most of the 30 or so bidders who show up will be farmers. But an increasing number of people buying land these days have no intention of planting seeds, at least not themselves. They are investors and a growing number of them are getting interested in farmland.
Just how hot is American farmland? By some accounts the value of farmland is up 20% this year alone. That's better than stocks or gold. During the past two decades, owning farmland would have produced an annual return of nearly 11%, according to Hancock Agricultural Investment Group. And that covers a time period when tech stocks boomed and crashed, and housing boomed and crashed. So at a time when investors are still looking for safety, farmland is becoming the "it" investment.
Source: Grant's Interest Rate Observer, 5/20/2011 edition. Worth considering for financial & risk planning.
The former vice-chairman of the Federal Reserve has said he "deeply regretted" the pain caused to millions of people around the world from the financial crisis, admitting that "the cops weren't on the beat".
Don Kohn's apology for the actions of Federal Reserve in the run-up to the financial and economic crisis goes significantly further than the limited responsibility taken by his former boss, Alan Greenspan.
Speaking to British MPs at a confirmation hearing on Tuesday, Mr Kohn nevertheless said his experience would be valuable for the Bank of England, where he has been appointed to a new committee with powers to guide UK financial stability.
"I believe I will not make the same mistake twice," he said.
Mr Kohn has been appointed to the Bank's new Financial Policy Committee, which will soon have powers to change system-wide UK financial regulations and even limit borrowing by households and companies if it thinks there are threats to financial stability.
Having been a strong advocate of the Greenspan doctrine not to burst asset bubbles but to mop up any mess after a crash, Mr Kohn recanted much of his previous view in front of MPs. He said he had "learnt quite a few lessons - unfortunately" from the financial crisis, including that people in markets can get excessively relaxed about risk, that risks are not distributed evenly throughout the financial system, that incentives matter even more than he thought and transparency is more important than he thought.
A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges.
They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.
Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly how they and other top Goldman executives, including David Viniar and Thomas Montag, defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn't leave much doubt: Goldman Sachs should stand trial.
This article appears in the May 26, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive May 13.
The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history -- "a million fraud cases a year" is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin's small, 15-desk office of investigators -- details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department -- stands as the most important symbol of Wall Street's aristocratic impunity and prosecutorial immunity produced since the crash of 2008.
Until this week, only one topic was off-limits for questions to Warren Buffett at Saturday's annual gathering of Berkshire Hathaway shareholders in Omaha: how serious is the Dave Sokol affair?
On Wednesday, however, the company issued an 18-page report from its audit committee about the former star executive's trading in shares in Lubrizol, a chemicals group later bought by Berkshire, and declared open season for all questions to Mr Buffett.
Here are my seven:
1. How serious is the Dave Sokol affair?
You are the world's most famous long-term investor. Recently, Berkshire's shares have lagged behind the S&P 500, but your record of outperformance over more than four decades speaks for itself. Even big, conservative bets, such as the 2009 investment in Burlington Northern Santa Fe railway, have been well timed. But Mr Sokol was a frontrunner to succeed you as chief executive. You lauded him regularly in your annual letter to shareholders. His abrupt resignation and the circumstances surrounding it seem to suggest that this is more than just a blip.
2. Do you love some of your managers too much?
No matter how many of his Fed presidents claim they are not to blame for the high price of oil, the real problem starts with Ben Bernanke. The fact is that when you flood the market with far too much liquidity and at virtually no interest, funny things happen in commodities and equities. It was true in the 1920s, it was true in the last decade, and it's still true today.
Richard Fisher, president of the Dallas Federal Reserve, spoke in Germany in late March. Reuters quoted him as saying, "We are seeing speculative activity that may be exacerbating price rises in commodities such as oil." He added that he was seeing the signs of the same speculative trading that fueled the first financial meltdown reappearing.
Here Fisher is in good company. Kansas City Fed President Thomas Hoening, who has been a vocal critic of the current Fed policy of zero interest and high liquidity, has suggested that markets don't function correctly under those circumstances. And David Stockman, Ronald Reagan's Budget Director, recently wrote a scathing article for MarketWatch, titled "Federal Reserve's Path of Destruction," in which he criticizes current Fed policy even more pointedly. Stockman wrote, "This destruction is, namely, the exploitation of middle class savers; the current severe food and energy squeeze on lower income households ... and the next round of bursting bubbles building up among the risk asset classes."
There is a lot more to taxes than simply paying the bill. Taxpayers must spend significantly more than $1 in order to provide $1 of income-tax revenue to the federal government.
To start with, individuals and businesses must pay the government the $1 in revenue plus the costs of their own time spent filing and complying with the tax code; plus the tax collection costs of the IRS; plus the tax compliance outlays that individuals and businesses pay to help them file their taxes.
In a study published last week by the Laffer Center, my colleagues Wayne Winegarden, John Childs and I estimate that these costs alone are a staggering $431 billion annually. This is a cost markup of 30 cents on every dollar paid in taxes. And this is not even a complete accounting of the costs of tax complexity.
Like taxes themselves, tax-compliance costs change people's behavior. Taxpayers, whether individuals or businesses, respond to taxes and tax-compliance costs by changing the composition of their income, the location of their income, the timing of their income, and the volume of their income. So long as the cost of changing one's income is lower than the taxes saved, the taxpayer will engage in these types of tax-avoidance activities.
A friend and former colleague of mine, Paul McCulley, once made the distinction between those who were "responsibly irresponsible" and those who were "irresponsibly irresponsible". The two notions explain why more unsatisfactory last-minute policy compromises are now likely, despite President Barack Obama's impressive speech on how America must move forward to tackle its debt ceiling, and its wider problem of budgetary reform.The radical right and the US state by Martin Wolf:
Mr Obama proposed cutting $4,000bn from deficits over the next 12 years, reducing government outlays to Medicare and Medicaid healthcare programmes, and even considered tax increases. His speech therefore provides an important opportunity to advance this debate, but a much broader context is still needed if it is to succeed in overcoming both domestic political stalemates and growing concerns abroad.
Back in the final quarter of 2008 and the beginning of 2009, it was right for the US to behave responsibly irresponsible. At that moment every available part of the public sector balance sheet, from the Federal Reserve's to the Federal budget, had to be used to avoid an economic depression. And it worked.
What does the rise of libertarianism portend for the future of the US? This is not a question of interest to Americans alone. It matters almost as much to the rest of the world. A part of the answer came with the publication of a fiscal plan, entitled "Path to Prosperity", by Paul Ryan, Republican chairman of the house budget committee. The conclusion I draw is the opposite of its author's: a higher tax burden is coming. But that leads to another conclusion: much conflict lies ahead, with huge implications for politics, federal finance and the US ability to play its historic role.
An analysis of the Ryan plan by the Congressional Budget Office makes the point. Its "extended-baseline scenario" assumes that current law remains unchanged. Under that assumption, revenue would rise from 15 per cent of gross domestic product to 21 per cent in 2022 and on to 26 per cent in 2050. Spending would rise substantially, too, from 23¾ per cent of GDP in 2010 to 30¼ per cent in 2050. As a result, the deficit would fall from today's levels while debt held by the public would rise to 90 per cent of GDP in 2050.
As the CBO makes plain, this is an optimistic scenario. Current law includes, most notably, the assumption that the 2001 and 2003 tax cuts will expire, as legislated. Together with the impact of fiscal drag from economic growth and inflation, this generates the rising share of revenue in GDP. On the side of spending, the share of social security in GDP rises modestly, from 4¾ per cent of GDP in 2010 to 6 per cent in 2050. The share of all other spending (including defence), apart from that on health, is assumed to fall to close to its long-run average of 8 per cent of GDP. But health spending explodes, from 5½ per cent of GDP in 2010 to 12¼ in 2050.
The US government is about to be shut down in the next 24 hours over the federal budget impasse. Here are the only numbers you need:Related:
Federal spending is approx. $3.7 trillion, the deficit this year alone is projected at $1.4 trillion - and the politicians are squabbling over spending cuts amounting to $33-40 billion; that's 1% of spending and 2.9% of the deficit. You gotta be joking, right?
just got back from a very interesting but hectic week in New York and Washington, followed by two days at a conference in Hangzhou. During my meetings I noticed that much of the discussion, and many of the questions I was asked by both government officials and investors, focused on debt levels and reforms in the Chinese financial system. I have written a lot about rising debt in China and am glad that analysts and policymakers seem to be spending a lot more time thinking about balance sheet issues. Every case of rapid, investment-driven growth in the past century, as far as I can make out, has at some point reached a stage in which debt levels rose to unsustainable levels and precipitated either a debt crisis or a long grinding adjustment period.
The reason debt levels always seem to grow unsustainably, I suspect, is that in the initial stages of the growth model much if not all of the investment is economically viable as it pours into building necessary infrastructure whose profits and externalities exceed the cost of the investment. The result is real growth. At some point, however, the combination of subsidies, distorted incentives (in which investment benefits accrue to those making the investment while costs are shared broadly through the banking system), and very cheap financing costs leads inexorably to wasted investment and debt rising faster than asset values. This is when the debt burden begins to rise in an unsustainable way.
In a glass box in the middle of a PepsiCo marketing department, five people are staring at a huge bank of screens showing a constantly updated river of tweets, "likes", praise and damnation from consumers of Gatorade, the company's sports drink.
"Doing it in a glass room means every single person in the marketing organisation is seeing the insights brought to life in real time. It reminds them how important it is to know the heartbeat of the consumer," says Bonin Bough, global director of digital and social media at PepsiCo. "I really feel like it is the future of marketing."
A similar scenario is playing out in marketing departments around the world. A survey of members of the World Federation of Advertisers, a grouping of multinational brands, by Millward Brown found that 96 per cent were spending more of their budgets managing Facebook pages, Twitter accounts and other social media, racing to accrue fans, retweets and that elusive but ubiquitous quality: engagement.
However, the research also found that few knew why they were doing it - half were "unsure" of the returns they were getting from their efforts, while more than a quarter found the payback was "just average or poor".
At the end of June, the Federal Reserve will no longer be the biggest buyer of US Treasuries. But one notable investor has already said Hasta la vista.
Pimco's flagship $237bn total return fund, managed by Bill Gross, whose status as bond king has been synonymous with the 25-year bull market in Treasury debt, pulled the plug on holding US government related securities in February, it emerged this week. Last month his fund eschewed holding US government related debt, having had 12 per cent of the fund's portfolio in Treasuries in January.
Given the record of Mr Gross, one cannot ignore the decision. Since the total return fund began in 1987, it has generated an average annual return of 8.42 per cent versus the 7.27 per cent gain in its benchmark, the Barclays Capital US Aggregate index.
The move is a bold one. Given that the Barclays Aggregate has a Treasury weighting of 40 per cent, the decision by Mr Gross to exclude government holdings means he is seriously underweight his benchmark, or "bogey".
Long seen as a place of safety in times of turmoil, the dollar may be losing its haven appeal.
Soaring oil prices, driven by upheaval in the Middle East, falling equities and elevated volatility have all made investors uneasy. A flight to the dollar usually accompanies increased risk aversion.
This time, though, while the traditional havens of the Swiss franc and the yen have benefited, the US currency has suffered.
"It seems the dollar's haven status has vanished," says Steve Barrow at Standard Bank. "And, even for long-term dollar bears like ourselves, this is a worry."
The main reason for the dollar's underperformance, say analysts, is concern about the effect of rising oil prices.
The dollar has dropped to a record low against the Swiss franc and fallen 2 per cent to Y81.82 against the yen in the past two weeks, just shy of the all-time low of Y79.7 it hit against the Japanese currency in 1995. It has also lost ground against the euro and sterling.
The fear is that higher oil prices will lead to a transfer of funds from oil-importing countries to the sovereign wealth funds of oil-exporting nations.
Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.
"Everything's _______ up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."
I put down my notebook. "Just that?"
"That's right," he said, signaling to the waitress for the check. "Everything's ______ up, and nobody goes to jail. You can end the piece right there."
Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth -- and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.
Did the financial crisis change very much? That was my question as I went to the annual meeting of the World Economic Forum in Davos last week. The answer is: yes. Above all, it has accelerated the arrival of our future. Even for the winners, this is quite a shock.
It is three and a half years since the financial crisis began and a little more than two years since it reached its worst. Bob Diamond, chief executive of Barclays, gave the financial sector's thanks to governments for the rescue. Now the mood is one of wary optimism. According to the International Monetary Fund's World Economic Outlook update, global output grew in 2010 by 5 per cent, at purchasing power parity, and 3.9 per cent, at market exchange rates. This contrasts with declines of 0.6 per cent and 2.1 per cent, respectively, in 2009. The IMF expects growth to slow only slightly to 4.4 per cent at PPP and 3.5 per cent at market exchange rates, in 2011. Optimism continues to reign.
With the crisis fading into memory, how will historians assess its legacy? Journalists do not have the luxury of distance. So here are my guesses. I will start with possible turnrounds.
The crisis was neither the beginning of a depression nor the end of capitalism. But it has caused a tightening of financial regulation, particularly of banks, though this has occurred within the pre-existing intellectual and institutional framework. After three decades of deregulation, movement is in the opposite direction, though not without resistance.
For sheer, toe-curling embarrassment, it's hard to choose between last year's populist attack on Goldman Sachs by the US Securities and Exchange Commission and this week's cringe-worthy response from the investment bank.
Last April, when the SEC filed suit against Goldman, the bank could have fought back. The suit complained it had sold fancy mortgage securities without disclosing that a hedge-fund manager, John Paulson, was betting that those same securities would blow up. To which Goldman could have answered: so what? Any time an investment bank sells any derivative, it should be obvious to the buyer that somebody somewhere must be taking the other side. The SEC's assertion that Goldman had misled customers about the nature of Paulson's involvement was potentially more damaging, except that the SEC produced no evidence to make this charge stick.
It was surely not beyond the wit of Goldman's publicists to communicate these simple points. Banks cannot be held responsible for the profits or losses of their clients, since middle-men necessarily have customers who lose as others win. But after one vain attempt to explain market making at a belligerent Senate hearing, Goldman's boss, Lloyd Blankfein, gave up. He settled with the SEC, even though most lawyers think he could have beaten the charges. Then he ordered up an elaborate cleansing ritual to relaunch the firm of Goldman Sachs.
Several months later, the fruits of Goldman's sun salutations are out. A 67-page manifesto of self-purification proclaims that "our clients' interests always come first," and that "if we serve our clients, our own success will follow." But these pieties misrepresent the true nature of an investment bank just as surely as the SEC did.
Under the Christmas tree, some of us will hopefully find a great Iphone 4 32G, an amazing 9.7 inch Ipad 3G, a Dell netbook, a Sony PSP® or a Nokia N8 smartphone. On the user manual, it shall be written how to handle it but certainly not how it has been made. Today, La Vie French magazine publishes a long story (including side boxes here and here) about life at Foxconn, main Apple's supplier. Sorry, it's only in French but let me propose you my comment in English.
Despite tragic suicides (14 officially - one last November, yet much lower than in others fims like France Telecom but when it comes to very young people in such a guarded area, it raises questions) and several promises for pay rises, Foxconn is still compared by Hong-kong ngo Sacom, as a "labour camp". How come?
So I went there in May and then back again lately, to check what really changed during this 6 months period of time. Salary is now high, better than any other factory around, but happiness is still not here, whatever swimming pool or tennis court you might have seen on tv, owing to Foxconn p.r. Is it due to Foxconn's military discipline (typically taiwanese, i have been told) ? to a rather hostile environnement (huge dorms, huge factory) that doesn't match with young workers expectations?
Ebenezer Scrooge came into the room slowly. He was, to my surprise, much as Charles Dickens had described him. How, I wondered, could he have changed so little over 170 years? It must be the benefit of being a literary character, I decided.
"Good morning, Mr Scrooge," I remarked politely. "I have come to interview you about your best-selling new book Scroogenomics - or How to Do Well out of Doing Good."
Scrooge smiled. "Yes," he responded, "I had to show that Joel Waldfogel's Scroogenomics, cleverly reviewed by your John Kay, merely portrayed my unenlightened self. But Dickens, albeit a talented writer, was just a sentimental fool. He never understood what my change over that Christmas was about. I learnt, above all, to appear benevolent. That, with my business acumen, turned Marley & Scrooge into a global enterprise. Fortunately, that philanthropy has become less painful, since my charities are tax deductible. What can be less painful for a miser than state-subsidised charity?"
I was shocked by his candour. He must have drunk too much at the book party earlier. After the abstinence described by Dickens, one drink would have a big effect.
Scott Cleland is one tough Google (GOOG) critic.
From his office in McLean, Va., as founder and president of research firm Precursor, Cleland routinely fires off pages of analysis whenever news on Google's market dominance hits the media.
Cleland's words have irked Google, which is engaging in an unusual behind-the-scenes effort to counter Cleland's views. The case is spotlighting the issue of how companies should deal with critics on the public stage.
Diesel and jet fuel are usually made from crude oil. But with oil prices rising even as a glut of natural gas keeps prices for that fuel extraordinarily cheap, a bit of expensive alchemy is suddenly starting to look financially appealing: turning natural gas into liquid fuels.
A South African firm, Sasol, announced Monday that it would spend just over 1 billion Canadian dollars to buy a half-interest in a Canadian shale gas field, so it can explore turning natural gas into diesel and other liquids. Sasol's proprietary conversion technology was developed decades ago to help the apartheid government of South Africa survive an international oil embargo, and it is a refinement of the ones used by the Germans to make fuel for the Wehrmacht during World War II.
The technology takes "a lot of money and a lot of effort," said Michael E. Webber, associate director of the Center for International Energy Environmental Policy at the University of Texas, Austin. "You wouldn't do this if you could find easy oil," he said.
The great and the good who sit on the board of San Francisco's prestigious Asian Art Museum are grappling with problems that run deeper than reviving recession-hit visitor numbers or repairing a dented endowment fund.
A financial derivative gone bad is threatening to become the last straw that tips the museum into bankruptcy - unless a stand-off involving the city and two prominent US financial institutions can be resolved within the next two weeks.
The museum's problems have touched off a war of words in recent days. Dennis Herrera, San Francisco's city attorney, fired off letters last week to JPMorgan Chase and bond insurer MBIA, accusing them of taking millions of dollars in fees from the city while washing their hands of the problems to which they have contributed.
"The city's involvement is not just for the city attorney to write a letter and say it's everyone else's problem," retorted Mitchell Sonkin, chief portfolio officer at MBIA. The city itself had short-changed the museum in recent years, forcing it to draw more heavily on its endowment, and should take part in a rescue.
Sunshine doesn't hurt after all. Bank shares leapt Wednesday despite the Federal Reserve's detailed disclosure of who got $3.3 trillion of emergency lending during the crisis. That is hardly what investors might have envisaged, given dark warnings from the Fed that such disclosure could endanger financial institutions. The central bank released the data only because of a provision in the Dodd-Frank financial-overhaul bill.
True, it will take time for investors to comb through all the gory details of about 21,000 transactions by multiple emergency Fed lending facilities. And some details may leave firms with egg on their face: Goldman Sachs, which insisted it would have survived the crisis without government assistance, tapped one special Fed facility 84 times to borrow nearly $600 billion in overnight money. Morgan Stanley tapped the facilities more than 200 times.
Even if individual details of the programs aren't that surprising, the breadth of companies that accessed them is notable. The disclosure shows how far the Fed went in attempting to prop up just about every part of the financial markets, with users ranging from the biggest U.S. and international banks to small firms that peddled complex and often toxic securities, as well as industrial companies such as General Electric, Harley-Davidson and Verizon.
In the midst of the biggest green car push in automotive history - what with Chevrolet touting its extended-range electric Volt as the greatest thing since sliced bread while crossing green swords with Nissan, which is shouting similar missives from the rooftops about its all-electric Leaf - it has become readily apparent that the vast majority of the American consumer public couldn't be bothered. As in they couldn't care less. That is unless someone - i.e., Washington - is throwing money at them to care.
Hybrid sales in this market are going to finish the year down again, which will mark three straight years of decline, and this includes the $4.00+ per gallon spike in the late spring-summer of 2008, when fuel economy hysteria took hold in the U.S. for four solid months. It seems that the Shiny Happy Green Sensibilities Act - or whatever you want to call the ongoing "shove-it-down-the-American-consumer-public's-throats-and-they-will-learn-to-lilke-it" mentality that pollutes the political brainiacs/stumblebums in Washington and Northern California - is going nowhere.
As a matter of fact our illustrious leaders in Washington used a considerable chunk of money from the 2009 economic stimulus package to buy up hybrids from various auto manufacturers to prop-up hybrid vehicle sales, couching it as a noble attempt at improving the overall fuel-efficiency of the government fleet, when in fact the real reason was to not only - hopefully - jump-start American consumer thinking into accepting these vehicles as being mainstream choices, but to help the vehicle manufacturers who were battered and bullied to build the vehicles in the first place to keep the production lines going.
But alas, this is the pattern we find ourselves in as a nation at the moment. A minority of the citizenry in an absolute lather about climate change - aided and abetted by maliciously clueless politicos with an axe to grind and an agenda that has more to do with their personal ambitions than it does with such quaint ideas as "being good for the country" - dictating to the majority of the American public how it's going to be.
JUDGING by the callers on a late-night BBC radio programme, the British public is none too enthusiastic about the country's participation in the Irish bailout. The standard reasoning was "Why are we giving money to Ireland when we haven't got any ourselves?" Perhaps similar sentiments were being expressed on Radios Luxembourg, Belgium and Portugal.
But of course, the money isn't being given to Ireland, it's being lent. And even if the eventual rate is below the market level of 8%, the new debt may still carry a rate of 5% or so. Well, Britain is still paying 3.3% for 10-year money. So this is a profitable gig, borrowing at 3.3% to lend at 5%. Perhaps the government should sell the scheme to the public as the ultimate carry trade, turning Britain into a hedge fund like LTCM.
Despite a stubbornly sour national economy congressional members' personal wealth collectively increased by more than 16 percent between 2008 and 2009, according to a new study by the Center for Responsive Politics of federal financial disclosures released earlier this year.
And while some members' financial portfolios lost value, no need to bemoan most lawmakers' financial lot: Nearly half of them -- 261 -- are millionaires, a slight increase from the previous year, the Center's study finds. That compares to about 1 percent of Americans who lay claim to the same lofty fiscal status.
And of these congressional millionaires, 55 have an average calculated wealth in 2009 of $10 million or more, with eight in the $100 million-plus range.
Municipal bonds had their biggest one-day sell-off yesterday since the height of the financial crisis, prompting some borrowers to delay financing plans.
The yields on triple A 10-year bonds rose 18 bps to 2.93 per cent, the largest one-day rise since October of 2008, according the MMD index, which is owned by Thomson Reuters.
Absolute yields, however, remain well below crisis-era levels.
The $2,800bn "muni" bond market where states and municipalities raise money has been under pressure over the past week amid a rise in the yields of benchmark US Treasury bonds, heavy bond sales and uncertainty about federal support for the market.
The market declines have made investors, who are mostly wealthy individuals benefiting from tax breaks on muni debt, nervous about an uptick in defaults. Munis historically have been a relatively safe place to invest, but budget deficits and underfunded public pensions have created widespread concern that local entities could struggle to pay their debts.
German officials, concerned that Washington could be pushing the global economy into a downward spiral, have launched an unusually open critique of U.S. economic policy and vowed to make their frustration known at this week's Group of 20 summit.
Leading the attack is Finance Minister Wolfgang Schäuble, who said the U.S. Federal Reserve's decision last week to pump an additional $600 billion into government securities won't help the U.S. economy or its global partners.
The Fed's decisions are "undermining the credibility of U.S. financial policy," Mr. Schäuble said in an interview with Der Spiegel magazine published over the weekend, referring to the Fed's move, known as "quantitative easing" and designed to spur demand and keep interest rates low. "It doesn't add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank's printing presses, artificially lower the value of the dollar."
At an economics conference in Berlin Friday, Mr. Schäuble said the Fed's action shows U.S. policy makers are "at a loss about what to do."
Mr. Schäuble hit back at critics in the Der Spiegel interview. "Germany's exporting success is based on the increased competitiveness of our companies, not on some sort of currency sleight-of-hand. The American growth model, by comparison, is stuck in a deep crisis," he said. "The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base. There are many reasons for America's problems--German export surpluses aren't one of them."
Brazil, the country that fired the gun on the so-called "currency wars", is girding itself for further battle.
Brazilian officials from the president down have slammed the Federal Reserve's decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.
"It's no use throwing dollars out of a helicopter," Guido Mantega, the finance minister, said on Thursday. "The only result is to devalue the dollar to achieve greater competitiveness on international markets."
At a joint press conference with president-elect Dilma Rousseff, outgoing president Luiz Inácio Lula da Silva said on Wednesday he would travel to the G20 summit in Seoul with Ms Rousseff, ready to take "all the necessary measures to not allow our currency to become overvalued" and to "fight for Brazil's interests". "They'll have to face two of us this time!" he said.
At the end of last week's letter on the whole mortgage foreclosure mess, I wrote:
"All those subprime and Alt-A mortgages written in the middle of the last decade? They were packaged and sold in securities. They have had huge losses. But those securities had representations and warranties about what was in them. And guess what, the investment banks may have stretched credibility about those warranties. There is the real probability that the investment banks that sold them are going to have to buy them back. We are talking the potential for multiple hundreds of billions of dollars in losses that will have to be eaten by the large investment banks. We will get into details, but it could create the potential for some banks to have real problems."
Real problems indeed. Seems the Fed, PIMCO, and others are suing Countrywide over this very topic. We will go into detail later in this week's letter, covering the massive fraud involved in the sale of mortgage-backed securities. Frankly, this is scandalous. It is almost too much to contemplate, but I will make an effort.
As my reference to the Japanese yen might suggest, I am pretty skeptical about the likelihood of this happening, at least with some of the more excited predictions. So, by the way, is the ADB, whose recent report (“The Future Global Reserve System — An Asian Perspective”), suggests that by 2035, the RMB may comprise about 3 to 12 per cent of international reserves. This is a pretty reasonable prediction, in my opinion, and far from the more feverish claims we see reported almost daily.
If the renminbi ever becomes a major trading or reserve currency, it is going to take a long time for this to happen and will require a radical transformation of the Chinese economy and the role of the government. This may seem like a surprising statement. After all nearly every week we see reports about a new breakthrough for the renminbi, and almost every day someone important somewhere speculates publicly about what the world will be like when (never if) the renminbi displaces the dollar.
But away from all “qualitative” arguments about why this is unlikely, and there are many, I think there is a problem with the arithmetic of reserve currency accumulation. If the rest of the world is going to use the renminbi as a reserve or trading currency, clearly it needs a mechanism by which to accumulate renminbi. This is something on which a surprisingly large share of people who talk about the future of reserve currencies don’t seem to focus.
The US is going to win this war, one way or the other: it will either inflate the rest of the world or force their nominal exchange rates up against the dollar. Unfortunately, the impact will also be higgledy piggledy, with the less protected economies (such as Brazil or South Africa) forced to adjust and others, protected by exchange controls (such as China), able to manage the adjustment better.Moahmed El-Erian has more.
It would be far better for everybody to seek a co-operative outcome. Maybe the leaders of the group of 20 will even be able to use their “mutual assessment process” to achieve just that. Their November summit in Seoul is the opportunity. Of the need there can be no doubt. Of the will, the doubts are many. In the worst of the crisis, leaders hung together. Now, the Fed is about to hang them all separately.
If the world is on the brink of an out-and-out currency war, a variety of battalions has been out on manoeuvres in the past few weeks. The Bank of Japan, after six years off the battlefield, has launched a fusillade of intervention to hold down the yen in foreign exchange markets. Brazil used the guerrilla tactic of doubling taxes on capital inflows to stop the real surging. India and Thailand warned that they too might bring heavy ordnance into play.
The main combatants, the US and China, continued to exchange rhetorical salvos. Washington (and Brussels) identified undervalued currencies such as the renminbi as a prime cause of global macroeconomic imbalances. Beijing retorted that such aggression risked bringing mutual destruction upon the great economic powers.
On Monday Dominique Strauss-Kahn, managing director of the International Monetary Fund, voiced his concern. “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” he said. “Translated into action, such an idea would represent a very serious risk to the global recovery.”
“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.” This complaint by Guido Mantega, Brazil’s finance minister, is entirely understandable. In an era of deficient demand, issuers of reserve currencies adopt monetary expansion and non-issuers respond with currency intervention. Those, like Brazil, who are not among the former and prefer not to copy the latter, find their currencies soaring. They fear the results.
This is not the first time for such currency conflicts. In September 1985, now 25 years ago, the governments of France, West Germany, Japan, the US and the UK met at the Plaza Hotel in New York and agreed to push for depreciation of the US dollar. Earlier still, in August 1971, the US president Richard Nixon imposed the “Nixon shock”, levying a 10 per cent import surcharge and ending dollar convertibility into gold. Both events reflected the US desire to depreciate the dollar. It has the same desire today. But this time is different: the focus of attention is not a compliant ally, such as Japan, but the world’s next superpower: China. When such elephants fight, bystanders are likely to be trampled.
Here there are three facts, relevant to today’s currency wars.
My new article, Insider Trading Inside the Beltway, has been posted to SSRN. Now it just needs to find a nice law review home somewhere in the top 50.
Abstract: A 2004 study of the results of stock trading by United States Senators during the 1990s found that that Senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to – and were using – material nonpublic information about the companies in whose stock they trade.
Under current law, it is unlikely that Members of Congress can be held liable for insider trading. The proposed Stop Trading on Congressional Knowledge Act addresses that problem by instructing the Securities and Exchange Commission to adopt rules intended to prohibit such trading.
As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.
Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy. The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."
Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).
Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.
If we need any further illustration of the potential threats to our own economy from uncontrolled borrowing, we have only to look to the struggle to maintain the common European currency, to rebalance the European economy, and to sustain the political cohesion of Europe. Amounts approaching a trillion dollars have been marshaled from national and international resources to deal with those challenges. Financing can buy time, but not indefinite time. The underlying hard fiscal and economic adjustments are necessary.
As we look to that European experience, let’s consider our own situation. We are not a small country highly vulnerable to speculative attack. In an uncertain world, our currency and credit are well established. But there are serious questions, most immediately about the sustainability of our commitment to growing entitlement programs. Looking only a little further ahead, there are even larger questions of critical importance for those of less advanced age than I. The need to achieve a consensus for effective action against global warming, for energy independence, and for protecting the environment is not going to go away. Are we really prepared to meet those problems, and the related fiscal implications? If not, today’s concerns may soon become tomorrow’s existential crises.
I referred at the start of these remarks to my sense five years ago of intractable problems, resisting solutions. Little has happened to allay my concerns. But, of course, it is not true that our economic problems are intractable beyond our ability to react, to make the necessary adjustments to more fully realize the enormous potential for improving our well-being. Permit me a note of optimism.
A few days ago, I spent a little time in Ireland. It’s a small country, with few resources and, to put it mildly, a troubled history. In the last twenty years, it took a great leap forward, escaping from its economic lethargy and its internal conflicts. Responding to the potential of free and open markets and the stable European currency, standards of living have bounded higher, close to the general European level. Instead of emigration, there has been an influx of workers from abroad.
Congress looked serious about finance reform – until America's biggest banks unleashed an army of 2,000 paid lobbyists.
t's early May in Washington, and something very weird is in the air. As Chris Dodd, Harry Reid and the rest of the compulsive dealmakers in the Senate barrel toward the finish line of the Restoring American Financial Stability Act – the massive, year-in-the-making effort to clean up the Wall Street crime swamp – word starts to spread on Capitol Hill that somebody forgot to kill the important reforms in the bill. As of the first week in May, the legislation still contains aggressive measures that could cost once- indomitable behemoths like Goldman Sachs and JP Morgan Chase tens of billions of dollars. Somehow, the bill has escaped the usual Senate-whorehouse orgy of mutual back-scratching, fine-print compromises and freeway-wide loopholes that screw any chance of meaningful change.
The real shocker is a thing known among Senate insiders as "716." This section of an amendment would force America's banking giants to either forgo their access to the public teat they receive through the Federal Reserve's discount window, or give up the insanely risky, casino-style bets they've been making on derivatives. That means no more pawning off predatory interest-rate swaps on suckers in Greece, no more gathering balls of subprime shit into incomprehensible debt deals, no more getting idiot bookies like AIG to wrap the crappy mortgages in phony insurance. In short, 716 would take a chain saw to one of Wall Street's most lucrative profit centers: Five of America's biggest banks (Goldman, JP Morgan, Bank of America, Morgan Stanley and Citigroup) raked in some $30 billion in over-the-counter derivatives last year. By some estimates, more than half of JP Morgan's trading revenue between 2006 and 2008 came from such derivatives. If 716 goes through, it would be a veritable Hiroshima to the era of greed.
Given the tragic events in Greece and the financial contamination of other eurozone peripheral countries, most people now recognize that sovereign risk matters and it matters a great deal. Unfortunately, the recognition lag has already caused significant damage, including forcing the current approach to European integration to an historical juncture.
What is less well understood at this stage is that the externalities, negative and positive, are not limited to Europe. It is only a matter of time when this issue, too, becomes a driver of policies and market valuations and correlations.
The general context is critical here, and should never be forgotten. As argued in my March 11 FT commentary, the sovereign debt explosion in industrial countries involves a regime shift with consequential long-lasting effects. And what is happening in Europe is yet another illustration how, in our highly interconnected world, previously unthinkable phenomena can become reality in a surprising and highly disruptive manner.
Rather than just observe, other countries are well advised to understand the debt dynamics at play. They should draw the appropriate policy implications given their own debt burdens, maturity profiles and funding sources.
They must also go well beyond this.
800 years of financial crises - Carmen Reinhart, co-author of This Time is Different, talks about the history of financial crises and their patternsVideo.
The drive up to Coalmont, Grundy County, Tennessee, winds through beautiful countryside – hardwood forests, open meadows, meandering creeks. The land also bears the scars of decades of poverty – collapsed chicken houses, signs advertising “wood for sale”, a faded placard taped to a mailbox printed with the words “Indoor yard sale”. The roadsides are littered with posters for forthcoming local elections; around here, a $50,000 salary as county clerk makes a person part of the economic elite.
This is hardly Silicon Valley or Wall Street, but I am in Coalmont to interview a captain of industry, one of the county’s biggest employers, someone you might even call a visionary – the owner of what must be the world’s only vertically integrated worm factory. Silver Bait LLC produces fishing worms by the millions. But that’s only the beginning of what it produces. The walls of the 170,000sq ft worm factory are made of giant concrete blocks that the company produces onsite. Likewise, the pre-stressed concrete columns and beams in the building. Silver Bait also produces its own corrugated metal roofing on a machine the company’s founder, Bruno Durant, designed and built.
French-born, 50-year-old Durant grows 300 acres of corn here, to feed his worms, and he harvests it with second-hand machinery he renovated in his onsite equipment- maintenance building. He invented his own machinery to harvest the worms and he is about to complete work on a device that will mechanise most of the rest of the worm-culture process.
He’s also about to put in place a full-scale packing line (designed by himself and built in his onsite machine shop). The worms are dispatched for sale in small plastic containers made in his onsite injection-moulding machine and are delivered to his customers – bait wholesalers across the eastern US – in his company’s refrigerated trucks. He does purchase peat from Canada as the growing medium for his worms. But that’s about all he buys in.
“To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown – the first instinct is to eliminate these distressing states. First principle: any explanation is better than none… The cause-creating drive is thus conditioned and excited by the feeling of fear…” Friedrich Nietzsche
“Any explanation is better than none.” And the simpler, it seems in the investment game, the better. “The markets went up because oil went down,” we are told, except when it went up there was another reason for the movement of the markets. We all intuitively know that things are far more complicated than that. But as Nietzsche noted, dealing with the unknown can be disturbing, so we look for the simple explanation.
“Ah,” we tell ourselves, “I know why that happened.” With an explanation firmly in hand, we now feel we know something. And the behavioral psychologists note that this state actually releases chemicals in our brains that make us feel good. We become literally addicted to the simple explanation. The fact that what we “know” (the explanation for the unknowable) is irrelevant or even wrong is not important to the chemical release. And thus we look for reasons.
How does an event like a problem in Greece (or elsewhere) affect you, gentle reader? And I mean, affect you down where the rubber hits your road. Not some formula or theory about the velocity of money or the effect of taxes on GDP. That is the question I was posed this week. “I want to understand why you think this is so important,” said a friend of Tiffani. So that is what I will attempt to answer in this week’s missive, as I write a letter to my kids trying to explain the nearly inexplicable.
It's hard to believe it's been two years this month since this column first revealed that speculators were running riot in the oil futures market. I pointed out that unrestrained commodities speculators were causing the oil price climb we were seeing, which would send the cost of crude to a peak of $147 a barrel by the summer of 2008. At the time most "experts" quoted in the media were saying that oil prices were skyrocketing because world supplies couldn't keep up with demand, or because we had passed the point of Peak Oil. Neither position was true, of course; just looking at tanker shipments and worldwide oil supplies on hand, those concepts were obviously invalid.
Many of the columns I wrote for BusinessWeek in the spring and summer of 2008 debunked all the excuses being given for oil prices' suddenly doubling. Today it has come to be considered common knowledge, even common sense, and that's good for my track record.
Unfortunately for the country's track record, however, knowing the truth hasn't changed a thing.
Hegel, Call Your Publicist
Last October, in a follow-up column for BusinessWeek, "How Wall Street Will Kill the Recovery," I pointed out how investment banks were again profiting from taxpayer-funded bailout benefits.
They were taking those near-zero-interest loans and, instead of using the money to restart lending (and thus, it's hoped, the economy), they were pumping much of it into equities and commodities. There they were profiting from the ever-rising paper prices caused by the huge influx of cheaply borrowed money.
"The OECD rates Canada's banks as the safest in the world - the United States comes in fortieth, two places behind Botswana."
-- From I.O.U., by John Lanchester
There's always a pile of new books near my desk; currently, most of them deal with the history of the financial crisis. When time allows I open a couple more, read them and mark key points with highlighters for easier reference. It's always gratifying to find a passage in which a well-regarded economics writer makes the same points I have in my work, but I like books even better when they teach me things I did not already know.
An example: Barry Rithholtz, a market commentator, put the total cost of the current bailout in terms that most anyone can understand. It is now more than the nation spent for "The Marshall Plan, the Louisiana Purchase, the Apollo moon landings (and all costs of NASA's space flights), the Korean War, the Vietnam War, FDR's New Deal, the Invasion of Iraq and the 1980s Savings and Loan Scandal, combined and adjusted for inflation."
That statement alone should have the public up in arms, demanding smart actions that will make sure it never happens again.
The books I've been reading lately also cover the fundamental economic theories of both John Maynard Keynes and Milton Friedman. Keynes is known for promoting government deficit spending in hard times, while Friedman believes in deregulating and privatizing everything. What I now find interesting is that nobody carrying the banner of either of these two economic giants seems to get Keynes' or Friedman's fundamental economic viewpoints entirely right.
Antitrust lawyer and Open Book Alliance leader Gary Reback has been called the “antitrust champion” and the “protector of the marketplace” by the National Law Journal, and has been at the forefront of many of the most important antitrust cases of the last three decades. He is one of the most vocal opponents of the Google Books settlement. I interviewed Reback a few months ago, and Google Books was one of the topics we discussed. In the column below, Reback discusses Google Books and its ties to Google search.
This Thursday leaders of the international publishing industry will watch with bated breath as a federal judge in New York hears arguments over whether to approve the Google Book Settlement.
More a complicated joint venture among Google and five big New York publishers than the resolution of pending litigation, the proposed settlement once promised unprecedented access to millions of out-of-print books through digital sales to consumers and online research subscriptions for libraries. But with the passage of time and the ability to examine the deal more closely, the promises proved illusory. The big publishers, as it turns out, have reserved the right to negotiate secret deals with Google for the books they claim through the settlement (pdf).
Meanwhile, torrents of outrage rained down on the New York court – from authors whose ownership rights will be appropriated through the settlement’s procedures, from librarians fearful of price exploitation by Google, from privacy advocates worried that Google will monitor the reading habits of library patrons, from libertarians incensed over the use of a legal procedure to effect the widespread appropriation of property, from digital booksellers concerned about Google’s unfair advantage in the marketplace.
In 1977, a 21-year-old Steve Jobs unveiled something the world had never seen before: a ready-to-program personal computer. After powering the machine up, proud Apple II owners were confronted with a cryptic blinking cursor, awaiting instructions.
The Apple II was a clean slate, a device built – boldly – with no specific tasks in mind. Yet, despite the cursor, you did not have to know how to write programs. Instead, with a few keystrokes you could run software acquired from anyone, anywhere. The Apple II was generative. After the launch, Apple had no clue what would happen next, which meant that what happened was not limited by Mr Jobs’ hunches. Within two years, Dan Bricklin and Bob Frankston had released VisiCalc, the first digital spreadsheet, which ran on the Apple II. Suddenly businesses around the world craved machines previously marketed only to hobbyists. Apple IIs flew off the shelves. The company had to conduct research to figure out why.
Thirty years later Apple gave us the iPhone. It was easy to use, elegant and cool – and had lots of applications right out of the box. But the company quietly dropped a fundamental feature, one signalled by the dropping of “Computer” from Apple Computer’s name: the iPhone could not be programmed by outsiders. “We define everything that is on the phone,” said Mr Jobs. “You don’t want your phone to be like a PC. The last thing you want is to have loaded three apps on your phone and then you go to make a call and it doesn’t work any more.”
The openness on which Apple had built its original empire had been completely reversed – but the spirit was still there among users. Hackers vied to “jailbreak” the iPhone, running new apps on it despite Apple’s desire to keep it closed. Apple threatened to disable any phone that had been jailbroken, but then appeared to relent: a year after the iPhone’s introduction, it launched the App Store. Now outsiders could write software for the iPhone, setting the stage for a new round of revolutionary VisiCalcs – not to mention tens of thousands of simple apps such as iPhone Harmonica or the short-lived I Am Rich, which for $999.99 displayed a picture of a gem, just to show that the iPhone owner could afford the software.
If the bond vigilantes are ready to ride again, there should be little doubt who will be leading the charge.
Bond guru Bill Gross at Pimco in Newport Beach this week has ramped up his warnings to the Obama administration and the Federal Reserve about the perils of unfettered government borrowing.
In an interview in Time magazine on Tuesday, Gross suggested that Pimco, which manages nearly $1 trillion in mostly fixed-income assets, now feels more comfortable owning German government debt than U.S. Treasury debt:
"There are a number of reasons to have doubts about Treasuries, not just because of America's sovereign risk but also from the standpoint of an over-owned currency [the dollar]. . . . At Pimco we would probably try and substitute for our Treasuries with sovereign bonds of potentially higher quality. Germany looks interesting to us. Germany has problems, but it's in a much better budget situation than the U.S. because of a constitutional amendment three months ago that forces a balanced budget in four years."
”Whoever you are, I have always depended on the kindness of strangers”. The last line of Tennessee Williams’ A Streetcar Named Desire – uttered by its desperate heroine to the doctor taking her to a mental asylum – is an apt summary of the US financial sector in 2009.
As the crisis abated, banks took maximum advantage of the kindness of taxpayers and regulators to return to their core business: making money for shareholders and employees.
Ultra-low interest rates, dwindling competition and pent-up demand for their services sparked a renaissance in profits and share prices of the financial institutions that emerged from the turmoil in reasonable shape.
The question is whether history will repeat itself, or even just rhyme, this year. Here are my ten, utterly personal and non-exhaustive, predictions for the year ahead in US finance.
1) Strangers will be a lot less kind. With banks boasting about their new-found health, regulators will pull the plug on most of the measures they introduced to drag the financial industry back from the brink. A host of acronyms (Tarp, Talf, PPIP, TLGP) will be forgotten but not missed.
Asking to delay repayment on your debt - or defaulting, as the world’s press is carefully not calling it - has turned out not to be a good way for Dubai’s Sheikh Makhtoum to win friends and influence lenders to Nakheel, the property arm of the state-owned conglomerate Dubai World. Markets have tumbled worldwide; investors, reminded that governments can be subprime too, have dumped the debt of other dodgy-looking economies (including Greece); and in Dubai… everyone is on holiday.
What is surprising here is not that Dubai is on the verge of default. It is that anyone was willing to lend them ludicrous sums of money in the first place. Calculated Risk points out that Sir Win Bischoff, then at the (US) state-controlled Citi and now, appropriately enough, at the (British) state-controlled Lloyds Banking Group, was raving about raising $8bn of loans for Dubai last year and as recently as December chose to go public with a “positive outlook on Dubai”. Another non-surprise: state-controlled Royal Bank of Scotland was Dubai World’s biggest loan arranger. In the UK, Dubai World has been buying up a long list of property, according to Anita Likus at The Source; the assumption is it will shortly be selling.
Now to the regional takeaway from our trip
We believe that few trust the United States. This is obvious in private conversation. And it is clear to all that confidence in the dollar is low. This is mostly mentioned only in private.
In public there is quiet response when the Treasury Secretary of the United States utters words about a strong dollar. Asians have heard that for years and with the many different accents of the various Treasury Secretaries. Geithner would serve the country better by ceasing to mouth the same words that his predecessor Snow and others used. He is not believed. Frankly, in some circles he is actually seen as an incompetent political hack. He is blamed by some for the insufficiency of the New York Fed under his presidency to supervise the primary dealers that failed – Countrywide, Bear Stearns, and Lehman. And the ethics issues surrounding the NY Fed under his tenure are viewed as appalling; this continues to surface in private conversations. Some folks are puzzled about why Obama maintains his support for Geithner. Some just attribute it to the President’s inexperience as a leader.
My takeaway is that our present Secretary of the Treasury is seriously and sustainably injuring the image of the United States. He has lost credibility. His actions are real and they impact markets. My conversations with those who are attempting to market GSE securities to Asians and getting rebuffed are validation enough for me on this point. When the Fed stops buying GSE mortgage backed securities, this reality will hit the markets in a re-pricing of that asset class. Spreads are going to widen.
The American federal budget deficits are worrisome everywhere. Policy promises from Washington to reduce them are greeted with great skepticism. Often they are privately described as American arrogance. Publicly, Asians are very polite and do not often subject their guests to embarrassing criticism. Privately they are quite candid. In my view they are correct: America is arrogant and seems to pretend that it is still the best and most trustworthy financial and capital market in the world. There is no basis for the US to have such a view of itself. We have squandered our reputational capital as a financial center leader.
What is so important about H.R. 1207: the Federal Reserve Transparency Act of 2009 aka the ‘Audit the Fed’ bill? This bill “To amend title 31, United States Code, to reform the manner in which the Board of Governors of the Federal Reserve System is audited by the Comptroller General of the United States and the manner in which such audits are reported, and for other purposes.” may not sound terribly exciting, but in addition to making the Fed accountable for its quasi-fiscal activities, it could well set an important precedent for the enhanced accountability of operationally independent central banks everywhere.
The Finance Committee of the US House of Representatives has just passed this bill, which is an amendment sponsored by Representatives Ron Paul (Republican) and Alan Grayson (Democrat) to Representative Barney Frank’s HR 3996, the “Financial Stability Improvement Act of 2009″. The amendment allows the US Government Accountability Office to conduct a wide-ranging audit of the financial activities of the Federal Reserve Board. Specifically (and quoting from the RonPaul.com website):
The Paul/Grayson amendment:
As credit card companies face rising public anger, new regulation from Washington and staggering new rates of default and bankruptcy, FRONTLINE correspondent Lowell Bergman investigates the future of the massive consumer loan industry and its impact on a fragile national economy.
In The Card Game, a follow-up to the Secret History of the Credit Card and a joint project with The New York Times, Bergman and the Times talk to industry insiders, lobbyists, politicians and consumer advocates as they square off over attempts to reform the way the industry has done business for decades.
"The card issuers could do anything they want," Robert McKinley, CEO of CardWeb.com, tells FRONTLINE of the industry's unchecked power over consumers. "They could change your interest rate. They could impose an annual fee. They could close your account." High interest rates along with more and more penalty fees drove up profits for the industry, Bergman finds, as the banks followed the lead of an aggressive upstart: Providian Bank. In an exclusive interview with FRONTLINE, former Providian CEO Shailesh Mehta tells Bergman how his company successfully targeted vulnerable low-income customers whom Providian called "the unbanked."
"They're lower-income people-bad credits, bankrupts, young credits, no credits," Mehta says. Providian also innovated by offering "free" credit cards that carried heavy hidden fees. "I used to use the word 'penalty pricing' or 'stealth pricing,'" Mehta tells FRONTLINE. "When people make the buying decision, they don't look at the penalty fees because they never believe they'll be late. They never believe they'll be over limit, right? ... Our business took off. ... We were making a billion dollars a year."
As US President Barack Obama glided through China, a chorus erupted in New York and Washington: the problem with the global economy is China's exchange-rate policy, and Obama's No 1 job is to slay it. It's sad that these people actually believe what they are saying: the same "logic" got the world into the current mess. In the feverish hallucination of salvation, they think that moving China's currency policy would right all wrongs.
The US Federal Reserve is the biggest currency manipulator in the world. Not only does it keep the short-term interest rate at zero through its vast purchase programme for mortgage-backed securities, it also keeps credit spreads and bond yields artificially low. Its manipulation stops money, bond and credit markets from pricing either the Fed's policy or the US economic plight. All the firepower is packed into the currency market, giving speculators a sure bet on a weaker dollar and everything else rising. Here comes the biggest carry trade ever: the Fed is promising no downside for shorting the dollar.
The US Treasury writes an annual report, judging if other countries are manipulating their exchange rates. It should look in the mirror. Even though the Fed is not directly intervening in the currency market per se, its manipulation is equivalent to pushing down the dollar by non-market means.
As US President Barack Obama glided through China, a chorus erupted in New York and Washington: the problem with the global economy is China's exchange-rate policy, and Obama's No 1 job is to slay it. It's sad that these people actually believe what they are saying: the same "logic" got the world into the current mess. In the feverish hallucination of salvation, they think that moving China's currency policy would right all wrongs.
The US Federal Reserve is the biggest currency manipulator in the world. Not only does it keep the short-term interest rate at zero through its vast purchase programme for mortgage-backed securities, it also keeps credit spreads and bond yields artificially low. Its manipulation stops money, bond and credit markets from pricing either the Fed's policy or the US economic plight. All the firepower is packed into the currency market, giving speculators a sure bet on a weaker dollar and everything else rising. Here comes the biggest carry trade ever: the Fed is promising no downside for shorting the dollar.
The US Treasury writes an annual report, judging if other countries are manipulating their exchange rates. It should look in the mirror. Even though the Fed is not directly intervening in the currency market per se, its manipulation is equivalent to pushing down the dollar by non-market means.
The financial crisis hasn't been kind to General Electric Co. Its stock has lost almost half its value, the government has stepped in to prop up its enormous financial arm, and sales have slumped in core industrial businesses.
But Chief Executive Jeffrey Immelt now has his eye on a huge new pool of potential revenue: Uncle Sam's stimulus dollars. Mr. Immelt, a registered Republican, quips about the shift in thinking in the nation's corner offices: "We're all Democrats now."
GE has high hopes for the strategy. It says that over the next three years or so it could bring in as much as $192 billion from projects funded by governments around the globe, such as electric-grid modernization, renewable-energy generation and health-care technology upgrades.
The company is just starting to see a payoff. Last month, for example, President Barack Obama announced $3.4 billion in government-stimulus grants for power-grid projects. About one-third of the recipients are GE customers. GE expects them to use a good chunk of that money to buy its equipment.
The government has taken on a giant role in the U.S. economy over the past year, penetrating further into the private sector than anytime since the 1930s. Some companies are treating the government's growing reach -- and ample purse -- as a giant opportunity, and are tailoring their strategies accordingly. For GE, once a symbol of boom-time capitalism, the changed landscape has left it trawling for government dollars on four continents.
Too much debt got us into this mess, and too much debt will see us out of it. Socialize the risk of a new cycle of open-throttle lending and cling to the monetary system that assures a repeat crisis. Such, approximately, is the global policy-making consensus. Central bankers and finance ministers have achieved an uncommon meeting of the minds. The cure for what ails us is the hair of the dog that bit us, they prescribe, though not in exactly those words.
It's no small thing that China is especially enamored of the shot-and-a-beer-for-breakfast approach. Nothing about China is small or insignificant nowadays, since the Chinese economy is actually growing. It might, indeed, account for 74% of worldwide GDP growth in the three years to 2010, the International Monetary Fund estimates. Since 2005, China has generated 73% of the global growth in oil consumption and 77% of the global growth in coal consumption. By the looks of things, it accounts for a fair share of the growth in worldwide luxury-car consumption, too:
When I was 14, Warren Buffett wrote me a letter.
It was a response to one I’d sent him, pitching an investment idea. For a kid interested in learning stocks, Buffett was a great role model. His investing style — diligent security analysis, finding competent management, patience — was immediately appealing.
Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company’s annual meeting. I was hooked. Today, Buffett remains famous for investing The Right Way. He even has a television cartoon in the works, which will groom the next generation of acolytes.
But it turns out much of the story is fiction. A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.
Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.
To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. (Click chart to enlarge in new window)
It will be business as usual for Goldman Sachs this morning. The bank will annoy a lot of people.
Goldman, the institution that came through last year’s financial crisis best – arguably the only pure investment bank left standing – will say how much money it made in the third quarter (a lot) and how many billions it has stored for bonuses (about $5.5bn towards a likely 2009 bonus pool of $23bn).
For believers in Goldman’s ethical standards and way of doing business, these are difficult times. Although it avoided the mistakes that brought down Bear Stearns and Lehman Brothers, forced Merrill Lynch into Bank of America’s arms, and prodded Morgan Stanley further into lower-risk retail broking, Goldman has become a whipping boy.
There is outrage that, having taken government money to survive the crash, Goldman is in such rude health that it will hand out billions in bonuses. Matt Taibbi, a Rolling Stone writer, caught the mood memorably by describing Goldman as “a giant vampire squid wrapped around the face of humanity”.
Such is Goldman’s importance to Wall Street and regulation that I am devoting a pair of columns to it. Today, I will discuss the Goldman problem (different and less egregious to what Mr Taibbi believes, but still a problem). Next week, I will suggest what should be done about it by regulators and the bank itself.
Goldman executives were wounded by how seriously Mr Taibbi’s piece was taken despite their riposte that vampire squids are small creatures that present no danger to humanity. He accused it of profiting from bubbles such as the US internet and housing booms, and of repeatedly “selling investments they know are crap” to retail investors.
This, they toss off with the certainty of wine-fuelled genius, also explains the rise in the gold price.Bank spreads are at record levels. Their cost of funds is nearly 0, while they lend it out at 4.99% or (much) greater. Plus, the fees.
Actually, I do not think that is how the bank risk paradox will play out.
There are going to be much larger write-offs and reserves taken at all the big banks, with the peak in reported bad news probably coming next year. However, the taxpayer will not be asked for more capital, and the Federal Reserve and Treasury will gradually dismantle the temporary support structures, just as they say.
How is this possible? Because the public will pay through usury, not taxation. There is a big difference, of course. Usury is less visible, and you cannot effectively vote against it.
Blood will flow, but it will do so not as a catastrophic bath for the banks, but as a gradual transfusion to them from their customers.
There will be headline risk for the banks' management and public securities, which is why I think that their CDS protection is too cheap at the moment.
One source of headline risk is the spectre of Federal Government reform of the financial system. God knows there is a good case to be made for de-cartelising the industry, but that is not going to happen.
"By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn’t put money directly into the stock market, but he didn’t have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. The dollars he cranked out didn’t go into the hard economy, but instead into tradable assets."
— "The Bernanke Market," Wall Street Journal, July 15, 2009
"In the last week alone, the European Central Bank allocated the record sum of $619 billion to 1,1,00 financial institutions – at a paltry 1 percent interest rate. And yet the money is not going where the central banks want it to go, namely into the pockets of businesses and consumers – at least not at reasonable interest rates."
— "How German Banks are Cashing In on the Financial Crisis," Der Spiegel, July 1, 2009
Two weeks ago, in meetings with their North Texas dealers, both Toyota and Honda voiced concern about how the economic recovery was going to hold up over the next few quarters. It wasn’t public news yet in the States, but Japanese executives already knew that their imports and exports had fallen sharply through the summer. And, while our business media were cheerleading because the Dow Jones was once again flirting with 10,000, in Japan their exports had just fallen 36 percent; metal shipments to the U.S. were down by more than 80 percent, automobile shipments by 50 percent. This was a problem here, too: In August America’s dealers seriously needed Japanese vehicles to restock their depleted inventories.
Toyota and Honda took different tacks for the fourth quarter. Toyota said it will spend $1 billion in advertising to move the retail market. Honda, always more cautious in difficult times, said it would spend nothing during the same period. Honda added that it will keep dealer inventories at a 30-day supply of unsold vehicles, half the inventory considered normal.
President Barack Obama reminds me of Felix the Cat. One of the best-loved cartoon characters of the 1920s, Felix was not only black. He was also very, very lucky. And that pretty much sums up the 44th president of the US as he takes a well-earned summer break after just over six months in the world’s biggest and toughest job.
His stimulus bill has clearly made a significant contribution to stabilising the US economy since its passage in February. His cap-and-trade bill to reduce carbon dioxide emissions passed the House of Representatives in June. He has set in motion significant overhauls of financial regulation and healthcare. Considering the magnitude of the economic crisis he inherited, his popularity is holding up well. His current 56 per cent approval rating is significantly better than Bill Clinton’s (44 per cent) at the same stage in his first term and about the same as George W. Bush’s.
Consider the evidence that the economy has passed the nadir of the “great recession”. Second-quarter gross domestic product declined by only 1 per cent, compared with a drop of 6.4 per cent in the first quarter. House prices have stopped falling and in some cities are rising; sales of new single-family homes jumped 11 per cent from May to June. Credit spreads have narrowed significantly and the big banks are recovering, some even making enough money to pay back Tarp bail-out funds. The S&P 500 index is up nearly 48 per cent from its low in early March. Best of all, the economy lost fewer jobs in July than most pundits were expecting. Non-farm payrolls declined by just 247,000, half the number that were disappearing each month in the spring. The unemployment rate has actually declined slightly to 9.4 per cent.
William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.
William White had a pretty clear idea of what he wanted to do with his life after shedding his pinstriped suit and entering retirement.
White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.
Then, after 15 years in the world's most secretive gentlemen's club, White decided it was time to step down. The 66-year-old approached retirement in his adopted country the way a true Swiss national would. He took his money to the local bank, bought a piece of property in the Bernese Highlands and began building a chalet. There, in the mountains between cow pastures and ski resorts, he and his wife planned to relax and enjoy their retirement, and to live a peaceful existence punctuated only by the occasional vacation trip. That was the plan in June 2008.
When I was starting up in China, many experts cautioned me on what I would encounter. “It’s not a free market and there’s no rule of law, they told me. “The government controls the courts, the companies and the banks. Central planners in Beijing, not the marketplace, decide what goods to produce and which companies should produce them.”
“Decisions are made for political, not economic reasons,” they went on to explain. “The heads of China’s state-owned enterprises serve at the pleasure of the Party, the banks are told what loans to make, and making a profit is secondary to ensuring employment. That’s the reason why China’s banks are a mess and full of non-performing loans.”
Occasionally, I would push back, noting the economic progress that China had made since Deng Xiaoping opened the economy in 1978. “You don’t believe the government’s numbers, do you?” they would ask incredulously. “Everyone knows they’re manufactured to convey whatever message the government wants. And, when it comes to financial statements, forget it. Chinese companies have at least three sets of books, and you can’t believe any of them.”
The news came to us at HBR just after our newest issue went to the printer; that issue contains, sadly, the last article he wrote for our pages. Because it is the July-August issue, and will arrive on newsstands two weeks hence, it will seem strange to many readers that the byline makes no note of his passing -- and worse, that the editor's letter is mute on the many accomplishments of his rich and long life. Such are the perils of print publishing, and for that we apologize.
But here let it be said that, when work began last January on envisioning the July-August issue -- a special, double-sized issue devoted wholly to exploring how the business landscape would be transformed by the financial crisis and recession -- Peter Bernstein's voice was the first we sought to include. He was the master at explaining issues of financial risk, and there has scarcely been a time when the world needed his kind of clear analysis more.
In response to a vaguely worded invitation from us (deliberately so, in the interests of giving Peter full license to address what he felt needed to be addressed), he came back with a tightly crafted essay called "The Moral Hazard Economy."
The bear market in Treasuries will worsen, because of a glut of government bonds. Instead, consider high-yielding mortgage securities and certain munis. (Video)
We're talking about U.S. Treasury securities, not housing. At the end of 2008, risk-averse investors poured into Treasuries, driving down yields to the lowest levels in decades. The 30-year Treasury bond fetched less than 3%, and short-term T-bills carried yields of zero.
Since then, the economy has shown signs of bottoming, the credit markets are functioning more normally, and the stock market has roared back from its March lows. Treasuries now are in a bear market, while bullish enthusiasm has taken hold in other parts of the credit market, including corporate bonds, municipals and mortgage securities, all of which had fallen from favor late last year. The 30-year Treasury, for instance, has risen to a yield of 4.10% from 2.82% at the end of 2008, cutting its price by 20%.
Barron's called a top in Treasuries and a bottom in the rest of the bond market in an early 2009 cover story ("Get Out Now!" Jan. 5). We weren't alone in recognizing some of the nutty year-end developments. Warren Buffett highlighted the sale in late 2008 by his Berkshire Hathaway of a Treasury bill for a negative yield. Buffett wrote in Berkshire's annual letter in February that when "the financial history of this decade is written...the Treasury-bond bubble of late 2008" may rank up there with the housing bubble of the early to middle part of the decade. - How does the market look now? Treasuries still look unappealing for several reasons. Yields are very low by historical standards, the government is issuing huge amounts of debt to fund record budget deficits, and the massive federal stimulus program ultimately may lead to much higher inflation.
Ron Grassi says he thought he had retired five years ago after a 35-year career as a trial lawyer.I noticed this Wachovia building recently and thought the sunset scene was, perhaps appropriate.
Now Grassi, 68, has set up a war room in his Tahoe City, California, home to single-handedly take on Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. He’s sued the three credit rating firms for negligence, fraud and deceit.
Grassi says the companies’ faulty debt analyses have been at the core of the global financial meltdown and the firms should be held accountable. Exhibit One is his own investment. He and his wife, Sally, held $40,000 in Lehman Brothers Holdings Inc. bonds because all three credit raters gave them at least an A rating -- meaning they were a safe investment -- right until Sept. 15, the day Lehman filed for bankruptcy.
“They’re supposed to spot time bombs,” Grassi says. “The bombs exploded before the credit companies acted.”
As the U.S. and other economic powers devise ways to overhaul financial regulations, they have yet to come up with plans to address one issue at the heart of the crisis: the role of the rating firms.
One unhappy hallmark of the Great Recession is a dramatic spike in financial distress. Moody's predicts that the default rate on corporate debt--which helps foretell bankruptcies--will be three times higher this year than in 2008. Home foreclosures are already at record highs, and going higher. Defaults on credit cards and other consumer debt will crest right behind mortgages.
The Obama administration is on the case, bailing out banks and homeowners and aiding dozens of industries either directly, through a financial-rescue scheme that could top $2 trillion, or indirectly, through the $787 billion stimulus bill. Automakers, furniture companies, real estate developers, and even porn magnates have their hands out.
[See a tally of the bailout efforts so far.]
Those efforts ought to help soften a sharp recession. But the unprecedented aid to the private sector may also unleash new problems, the way antibiotics have generated stronger strains of bacteria. "There's something fundamental about the need for failure," says Syd Finkelstein, a professor at Dartmouth's Tuck School of Business and author of Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You. "We're tinkering with the genetic DNA of a capitalist society."
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we're running out of time.
Brief remark - from early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount - the remainder being "non-recourse" financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.
Last week, the Federal Reserve announced its intention to purchase a trillion dollars worth of Treasury debt by creating the little pieces of paper in your pocket that have “Federal Reserve Note” inscribed at the top. In effect, the Fed intends to monetize the Treasury debt in an amount that exceeds the entire pre-2008 monetary base of the United States.
Apparently, the Fed believes that absorbing part of the massively expanding government debt and maybe lowering long-term rates by a fraction of a percentage point will increase the capacity and incentive of the markets to purchase risky and toxic debt. Bernanke evidently believes that the choice between a default-free investment and one that is entirely open to principal loss comes down to a few basis points in interest. Even now, the expansion of federal spending as a fraction of GDP has clear inflationary implications looking a few years out, so any expectation that long-term Treasury yields will fall in response to the Fed's buying must be coupled with the belief that investors will ignore those inflation risks.
John Thain is giving us a tour of what is soon to become America’s most infamous office, with its $87,000 rug, $68,000 sideboard, $28,000 curtains – all part of a $1.2m redecoration scheme. This was early December, a little under two months before Thain would be fired in the same room by his new boss, Ken Lewis, chief executive of Bank of America.
For now, before a price tag had been placed on every item in his office, the 53-year-old chief executive of Merrill Lynch was in high spirits. The worst year on Wall Street in nearly a century was coming to an end, and Thain could rightfully claim to have saved his bank from ruin. Over a weekend in mid-September, as Lehman Brothers collapsed into bankruptcy, Thain pulled off a coup: he persuaded BofA, one of the few financial giants in the US that didn’t need government money to survive, to pay $29 per share for his own firm, even though Merrill was days away from following Lehman into bankruptcy.
Thain had taken over as Merrill chief executive nine months before that weekend deal. Now, he appeared to be one of the few Wall Street leaders who grasped the enormity of the credit crisis. Thanks to his analytical approach to the marketplace, it seemed, Merrill shareholders could look forward to a stake in Bank of America. “I have received thousands of e-mails saying, ‘Thank you for saving our company’,” Thain told us that day. And yet he admitted that the decision to sell Merrill Lynch – a 94-year-old institution that was always “bullish on America” – had been painful. “This was a great job. This was a great franchise. Emotionally, it was a huge responsibility.”
celand’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown. by MICHAEL LEWIS April 2009
Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to Reykjavík to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”
My friend professor Uwe E. Reinhardt of Princeton University presented ECONOMIC TRENDS IN U.S HEALTH CARE: Implications for Investors, at J.P. Morgan's annual healthcare conference on Tuesday, January 13 2009. The first half of the presentation (46 slides!) deals with macroeconomic and financial issues in Uwe's inimitable style - equal portions of wit and insight. The second half deals with the embarrassing mess known as health care in the US.
Seven of the top ten debtor nations are included in the world’s top ten economies. Not surprising. This is largely a result of widespread availability of affordable credit, and relatively large middle classes in these countries, and consequently a large ratio of home/property owners. Most popular rhetoric on the topic would claim that wealthy countries have grown accustomed to being wealthy and they are enthralled by consumerism – it could be argued that this high level of debt could be a result of a culture that is used to and willing to buy now, and pay later…even if it means with interest.
According to our data, Japan has the highest positive income (in gross terms) at US $2,892 Billion. Similarly, the US economy is $1,594 Billion. At the other side of the spectrum, Great Britain’s income to debt ratio is a US -$7,677 Billion, and that of France is -$1,890 Billion. But what do these statistics mean on an individual level? Well, if you were to boil down what each person in this country contributed to the nation’s income vs. debt ratio, the results would be startling. We would have to take into consideration the nation’s population to better understand this. And some may be surprised to see that the US does not fare quite as bad as imagined, comparatively:
The Fed's highly leveraged balance sheet will make it hard to fight inflation.
IF THE FEDERAL RESERVE BANK WERE A COMMERCIAL LENDER, it would be a candidate for receivership, based on its capital ratios. Bank examiners generally view any lender with a ratio below 2% to be dangerously undercapitalized. The Fed's current capital ratio, or capital as a percentage of assets, is 1.9%.
The Fed has provided so many loans and emergency credits -- to banks, brokers, money funds and foreign countries -- that its balance sheet, viewed one way, is as leveraged as any hedge fund's: Its consolidated assets amount to 53 times capital. Only 11 months ago, its leverage on this basis was a more modest 25 times, and its capital ratio 4%. A caveat: Many of the loans are self-liquidating facilities that will disappear in a few months if the financial crisis eases.
Although the Fed's role as a central bank is much different from the role of a private-sector operation, the drastic changes in the size and shape of its balance sheet worry even some long-time Fed officials. Its consolidated assets have swelled to $2.2 trillion from $915 billion in about 11 months, and contain at least a half-dozen items that weren't there before. Some, like a loan to backstop the purchase of a brokerage, Bear Stearns, are unprecedented. (See table for highlights.)
Someone once said there are certain things that cannot be adequately explained to a virgin, either by words or pictures. It is therefore with some trepidation that I attempt to outline our investment policy. We are bullish on agriculture and bearish on the financial community. For 10 years we have contended that equity markets can, and do, stagnate for periods as long as a quarter of a century. Accordingly, we have refused to follow the market, choosing instead to invest in unleveraged sectors which have endured long bear markets.
However, there are complicating cycle considerations. A process of debt liquidation is under way that resembles a turning point heralding weaker global growth. This undermines almost all risk taking, including agriculture, and for this reason we presently favour only government bonds.
According to Prada: "There is a rejection of fakeness - the fake avant-garde." And the inflation scare that took the price of oil to almost $150 per barrel, and created a hawkish central banking community, was perhaps the biggest head-fake of all. Certainly, the market for 10-year government bonds is beginning to think so. It is trading near a record high.
And today, even those regional Fed governors and hawkish European central bankers seem to see it as well. As I say, this is the time to own government bonds. But we are aware of just how out of sync we are with our heroes. Can the combined intellectual weight of Mark Faber, George Soros and James Grant all be wrong? Why do they insist on shorting Treasuries during the worst financial crisis since the Depression? I blame the Romans.
A former chief executive officer of Goldman Sachs Group Inc. does not mingle with boat dealers; he mingles with investment bankers; and the first rule, before handing out taxpayer money, is to have mingled with the people you want to hand it to.(That way they know whom they owe). I admire your ability to recognize your “circle of competence” and live within it.
Still, I do feel that in me, and my little literary business, there is opportunity for you, and your $700 billion. Allow me to explain why.
1) By giving the money to me, instead of someone less deserving, you will make the world a fairer place.
As much as I admire all of your decisions I can’t help but notice that the main qualification of the bankers to whom you have been giving money, so that they might make smart loans, is that they have gone almost bankrupt by making stupid loans.
As your mind is subtle, I can only assume that you secretly believe that the American economy right now needs not smart loans, but more stupid ones -- and thus that you have targeted the bankers who have proven they can make them.
I, unfortunately, have not flirted with bankruptcy, or made any stupid loans. But here’s my point: I haven’t been given the chance! Allow me to prove my financial ineptitude to you. I swear to you that when I return for my second round of assistance I will have proven myself fully qualified to receive it.
To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital--to decide who should get it and who should not. Believe me when I tell you that I hadn't the first clue.
I'd never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous--which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people's money, would be expelled from finance.
When I sat down to write my account of the experience in 1989--Liar's Poker, it was called--it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.
Nissan’s announcement last week that it would offer a stripped-down version of its Versa model for under $10,000 -– a Sub-Versa, if you will -– occasioned a lot of media attention and interest, as if there was something to celebrate. To me it sounds like 1.6 liters of boredom, a mouthful of sand to thirsty car-buyers. Please. Ten grand? I can put you in automotive paradise for $10,000. Walk this way.
Go to www.motors.ebay.com and follow the link to “Cars & Trucks.” Don’t specify a make or model but simply order the 50,000 or so listings by price, and use the advanced search function to specify items with a “Buy It Now” price. What you’ll discover is an Elysian field of depreciation as the awesome rides of yesteryear -– in some cases cars that dominated automotive buff book covers just a couple of years ago –- are dispensed with for a fraction of their original sticker. With the recent spike in gas prices and the downturn in the economy, people are eating their cars -– “literally!” as Joe Biden would say.
Yes, these cars are a little older, but if you were to compare, wheel-to-wheel, the new Versa with, say, a 1991 BMW 850i –- a 12-cylinder supercoupe on 18-inch Hamann wheels and with only 47,120 miles on the clock –- well, your head would explode. The Bimmer has more technology in its ashtray.
For writers who seek to influence public affairs, timing plays a paramount role. And few writers have had better timing than Adolf Augustus Berle.Fascinating.
In the summer of 1932, with America trapped in the greatest financial crisis in its history, Berle published “The Modern Corporation and Private Property,” a scholarly yet readable analysis of America’s largest companies and their managers. Berle is largely forgotten today, yet with that book he succeeded in persuading Americans to see their economic system in a new way — and helped set the stage for the most fundamental realignment of power since abolition.
The stock market had plunged vertiginously three years earlier, and by 1932 Americans were desperate to reverse the much wider collapse that had ensued — and to make sure it wouldn’t happen again. The New Republic was soon hailing “The Modern Corporation” as the book of the year, while The New York Herald Tribune pronounced it “the most important work bearing on American statecraft” since the Federalist Papers. Louis Brandeis would cite its arguments in a major Supreme Court ruling on corporate power. Running for president, Franklin Delano Roosevelt recruited Berle — a Republican Wall Street lawyer who had supported Hoover — to join his “brain trust,” and that fall entrusted him with drafting what became the most important speech of the campaign. After the election, Berle remained in New York, yet his connection to the president he audaciously addressed as “Dear Caesar” was such that Time would characterize “The Modern Corporation” as “the economic bible of the Roosevelt administration.”
A few years ago, senior officials at the Bank for International Settlements started ringing alarm bells about the scale of leverage that was quietly building up in the financial system. Back then, though, it was fantastically hard to get American policymakers - let alone bankers - to listen.
In the go-go days of the credit bubble, Washington policymakers blithely assumed that the Western financial system had plenty of capital to cope with any potential risks. Consequently, as one former BIS official admits: "Worrying about leverage wasn't fashionable at all - no one wanted to hear."
Fast-forward a couple of years and, my, how those Western financiers are having to eat humble pie (even to the point of accepting a helping hand from the once-ailing Japanese). After all, the events of the past year have now made it patently - horrifically - obvious that the Western banking system has become dangerously undercapitalised in recent years, to the point where even the Federal Reserve is having to shore up its defences.
Moreover, it is now also clear that Western policymakers are belatedly trying to correct this state of affairs. The days when high leverage, mega bonuses and wacky instruments were equated with financial virility have gone; instead a more humble, back-to-basics and slim-line approach is what investors are demanding. Thus, deleveraging is now all the rage - in whatever form it might take.
Why did banks become so overexposed in the run-up to the credit crunch? A risk manager at a large global bank--someone whose job it was to make sure that the firm did not take unnecessary risks -- explains in his own words
IN JANUARY 2007 the world looked almost riskless. At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.
As risk managers we were responsible for approving credit requests and transactions submitted to us by the bankers and traders in the front-line. We also monitored and reported the level of risk across the bank's portfolio and set limits for overall credit and market-risk positions.
"You have to worry about things you can do something about. I worry about people not being there and I want to make them aware." We should be mistrustful of knowledge. It is bad for us. Give a bookie 10 pieces of information about a race and he’ll pick his horses. Give him 50 and his picks will be no better, but he will, fatally, be more confident.
We should be ecologically conservative – global warming may or may not be happening but why pollute the planet? – and probablistically conservative. The latter, however, has its limits. Nobody, not even Taleb, can live the sceptical life all the time – “It’s an art, it’s hard work.” So he doesn’t worry about crossing the road and doesn’t lock his front door – “I can’t start getting paranoid about that stuff.” His wife locks it, however.
He believes in aristocratic – though not, he insists, elitist – values: elegance of manner and mind, grace under pressure, which is why you must shave before being executed. He believes in the Mediterranean way of talking and listening. One piece of advice he gives everybody is: go to lots of parties and listen, you might learn something by exposing yourself to black swans.
I ask him what he thinks are the primary human virtues, and eventually he comes up with magnanimity – punish your enemies but don’t bear grudges; compassion – fairness always trumps efficiency; courage – very few people have this; and tenacity – tinker until it works for you.
Apparently, Britney has some shaky assets on her balance sheets. Well, don’t worry Britney. You’re not the only one.A Bailout, for Everyone by Steven Pearlstein:
In an announcement that has sent produced a large and varied reaction, the FED has announced that they will attempt to bail out banks by letting them use mortgage-backed securities as collateral for loans. This move is unprecedented in the Fed’s history. For the first time, they are entering the mortgage business. Since its inception, the Fed has used open market operations (the buying and selling of treasury bonds) to expand or contract the monetary policy. A good detailed discussion is here, at interfluidity. Simplistically, the Fed’s balance sheet looks like:
Last week, it was a $200 billion cash-for-bond swap for the banks.
This week, it was a $200 billion bond-for-bond swap for the big investment houses.
If they keep this up, pretty soon you'll be able to walk into any Federal Reserve bank and hock that diamond brooch you inherited from Aunt Mildred.
Forget all that nonsense about the Bernanke Fed being too timid or behind the curve. In the face of what is turning into the most serious financial market crisis since the Great Depression, the Fed has been more aggressive and more creative in using its limitless balance sheet -- in effect, its ability to print money -- than at any time in history.
We can argue till the cows come home about whether this is a bailout for Wall Street. It is -- but only to the extent that it is also a bailout for all of us, meant to prevent a financial and economic meltdown that drags everyone down with it. In broad strokes, we're going through a massive "de-leveraging" of the economy, wringing out trillions of dollars of debt that had artificially driven up the price of real estate and financial assets, and, more generally, allowed Americans to live beyond their means. The Fed's goal has not been to impede that process, simply to make sure that it proceeds in an orderly fashion. But even that has required central bank intervention that is unprecedented in scale and scope. And despite yesterday's huge rally in the stock market, Fed officials warn that this de-leveraging is nowhere near finished.
First off, I’m not excusing auto dealers. Or lenders.From the LA Times article:
They have a moral and business responsibility to try to stop their customers from doing something stupid, such as buying a vehicle with a sticker price that will stick them with an oppressive debt.
But customers have responsibilities, too. It is their purchase, their money and their car payments. It is up to them, more than anyone else, to know their financial limitations and not cross them.
Yet, so many consumers today buy too much vehicle. Then, when the financial squeeze becomes eye-popping, they look for someone to blame. The dealership and lender make nice targets. Seldom do the debt-ridden blame themselves.
I pondered that while reading a Los Angeles Times article headlined, “New Cars That Are Fully Loaded – With Debt.”
The story tells how some Americans of average means roll over an existing loan on an expensive vehicle in order to get another expensive vehicle. They end up with two loans in one, when they couldn’t afford one.
Americans haven't just been taking out risky mortgages for homes in the last few years; they've also been signing larger automobile loans for significantly longer terms than they used to.
As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.
At most holiday feasts, the second helping is more filling than the first.
That should be the case in my annual buffet of fund buffoonery, the 12th annual Lump of Coal Awards, recognizing managers, executives, firms, watchdogs and other fund-industry types for action, attitude, behavior or performance that is misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.
Last week, I highlighted 10 award winners who deserved nothing more than coal in their holiday stocking this year. Here are the rest:
Failing to get out the vote: Managers of the Blue funds. The tiny Blue funds allow Democrats to invest in companies that "act blue" and "give blue." Beyond that, management claims to be "actively engaging in shareholder resolutions and proxy voting in an effort to promote increased transparency in corporate political giving."
THE 1946 MOVIE IT'S A WONDERFUL LIFE has become a holiday favorite for many Americans. The heart-rending story of George Bailey (played by Jimmy Stewart), who in his hour of despair is vouchsafed a glimpse of what the world would be like if he'd never been born, holds great meaning for many Americans. So does the drama played out between George and his father, Peter, and their professional nemesis, rich old banker Henry Potter (Lionel Barrymore), which provides a vivid look at the dramatic changes that had taken place in American finance in the years leading up to the time the movie was made.
The recent problems in the mortgage market bring the story and its characters to life once again. The Baileys and Old Man Potter disagreed about a number of things, but principally about the credit-worthiness of what Potter calls "the riff-raff," the average citizens in their home town of Bedford Falls. The Baileys believe they are credit-worthy, and Potter generally does not.
Potter remembers the recent past, when lenders made the rules, insisting on repayment in gold coin or its equivalent, on big down payments and short terms. Most important for middle-class folks, Potter sees residential real estate as illiquid, mediocre collateral. George and Peter Bailey and their Building & Loan envision a future of suburban development, of small down payments and decades to pay. When George looks at the world had he never been born -- and sees a vacant field instead of the Bailey Park housing development financed by the Bailey Building & Loan -- he is looking at what would have been Pottersville.
Put yourself at Bernanke's shoes; better yet, get Paulson's shoes too and combine them: wear Ben's shoe on the left and Hank's on the right. The goal is to try and walk a straight and narrow a line for the economy, without embarrassing yourself. I submit that this is, in fact, impossible.
On the one foot, the Fed is getting screamed at to lower interest rates by at least another 200-250 basis points: PIMCO, Greenspan, The Conference Board, every bank and broker in town and abroad - they all demand and expect cheaper money for a variety of reasons, all immediately and extremely mercenary. The bond fund managers are salivating at the potential of capital gains from short and medium treasurys, the banks and brokers need the massive cash bailout to stanch the bloodletting from their toxic paper and real estate portfolios, the businessmen need the consumer to keep spending and Greenspan wishes above all to remain relevant - even in retirement.
It is a pleasure to be here this evening. I am under strict instructions from the rector of Grace Church, Brooklyn, not to let down the Episcopal side. Uphold the highest standards of the Episcopalian intellectual tradition, he told me. What that tradition might be, he couldn't say, and neither can I. But I'll do my level best.
My subject is Benjamin Graham: his life, his investment philosophy, his writings and his Jewishness. About his love life, I will say little, as my time this evening is limited—just three hours, I believe. Some years ago, Fortune Magazine, in a squib it published on the occasion of Graham's induction into the U.S. Business Hall of Fame, said that the thrice-married father of value investing "leaped from blonde to blonde like an Alpine goat springing from peak to peak."
I am a frankly worshipful admirer of Graham's. I love him for his heart as much as for his head. Between 1929 and 1932, his investment partnership lost 70% of its value. Not until 1936 did it recoup all it relinquished since the Crash. Yet Graham persevered and, along with his partner, Jerry Newman, went on to achieve a brilliant long-term investment record—not excluding those three disastrous years. We have all heard the platitude, "The first rule of investing is not to lose money and the second rule is not to forget the first." Very helpful. Well, Graham shows that a debilitating loss is no reason to give up. . . . Never quit.
Occam's Rule: Sometimes the truth is so simple that even as it stares us in the face we are blind to it.
The Federal Reserve cut its Fed Funds benchmark rate by 50 bp to 4.75%, more than most analysts' expectations. Already there have been trillions of pixels written to explain why, but none that I have seen follow the time-honored Occam or KISS principle (Keep It Simple, Stupid).
Here is a chart that explains the FRB's move; for the non-professional there is an explanation after it.
THE subprime mortgage crisis of 2007 is, in fact, a credit crisis — a worldwide disruption in lending and borrowing. It is only the latest in a long succession of such disturbances. Who’s to blame? The human race, first and foremost. Well-intended public policy, second. And Wall Street, third — if only for taking what generations of policy makers have so unwisely handed it.Grant writes the excellent "Grant's Interest Rate Observer".
Possibly, one lender and one borrower could do business together without harm to themselves or to the economy around them. But masses of lenders and borrowers invariably seem to come to grief, as they have today — not only in mortgages but also in a variety of other debt instruments. First, they overdo it until the signs of excess become too obvious to ignore. Then, with contrite and fearful hearts, they proceed to underdo it. Such is the “credit cycle,” the eternal migration of lenders and borrowers between the extreme points of accommodation and stringency.
Significantly, such cycles have occurred in every institutional, monetary and regulatory setting. No need for a central bank, or for newfangled mortgage securities, or for the proliferation of hedge funds to foment a panic — there have been plenty of dislocations without any of the modern-day improvements.
Late in the 1880s, long before the institution of the Federal Reserve, Eastern savers and Western borrowers teamed up to inflate the value of cropland in the Great Plains. Gimmicky mortgages — pay interest and only interest for the first two years! — and loose talk of a new era in rainfall beguiled the borrowers. High yields on Western mortgages enticed the lenders. But the climate of Kansas and Nebraska reverted to parched, and the drought-stricken debtors trudged back East or to the West Coast in wagons emblazoned, “In God we trusted, in Kansas we busted.” To the creditors went the farms.
Back in 1998, that now infamous quant fund really did melt down, not only liquidating, but shaking the entire global financial system. Long-Term used complex computer models that failed to anticipate some severe once-in-a-lifetime market events, and it was shockingly leveraged — it was using $100 of borrowed money for every dollar of its own capital — which magnified its losses. It was also run by some of the smartest people on Wall Street. “When Geniuses Fail” was the apt title to Roger Lowenstein’s fine book about that fiasco.Ritholtz has more here and here.
Ever since, whenever quant funds stumble, it’s “When Geniuses Fail Redux.” Wall Street wags begin to wonder if those losses will lead to something truly cataclysmic, while newspaper reporters take a certain undisguised glee in reporting on really smart people losing money. Even now, there’s enough Luddite schadenfreude in the air that rumors continue to circulate that AQR is continuing to absorb substantial losses — which is the exact opposite of the truth, Mr. Asness says.
don't know whether this is a "correction in a bull market" or the "start of a bear market," but I am far more persuaded by the latter case. After ten years on Wall Street, however, I can promise you this: No one else knows either. Go ahead and listen to the parade of smart guests on Bubblevision--their reasoning ranges from impeccable to hilarious--but just don't let yourself get seduced into betting big one way or the other. Because no one knows. (We have 50/50 odds, though, so half of us will be "right").
One thing we do know: Based on correctly calculated long-term valuation trends (cyclically adjusted P/E), the stock market is still extremely expensive (close to the peak levels of 1929, 1966, and 1987, and only below the all-time peak of 2000). I expect that this will eventually revert to the mean, and that one of these days we will see the "start of a bear market" that could take us below the 7700 trough on the DOW in 2002. This could be it (and if it is, this is just what it will look like). And given the housing market, credit crunch, oil prices, etc., it's not hard to see how we would get there. But anything is possible, and long-term valuation trends are nearly useless for near-term timing calls.
This bit of humor has been circulating around Wall Street the past few days:Investment Dealers are excited to announce the newest structured finance product - Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees, or COLOSTOMY BAGS.
There are now an estimated 137 million internet users in China, second in number only to the United States, where estimates of the current internet population range from 165 million to 210 million. The growth rate of China's internet user population has been outpacing that of the U.S., and China is projected to overtake the U.S. in the total number of users within a few years.
The influx of tens of millions of new online participants each year can be expected to have far-reaching consequences for the Chinese population, for China itself and for the larger world. At the very least, the internet will offer ever greater numbers of Chinese a much more sophisticated information and communications world than the one they currently inhabit. And because the Chinese share a single written language, despite the multiplicity of spoken tongues, it could have a unifying effect on the country's widely dispersed citizenry. An expanding internet population might also increase domestic tensions that could spill over into China's relations with the U.S. and other countries while the difference between Chinese and Western approaches to the internet could create additional sore points over human rights and problems with restrictions on non-Chinese companies.
Stocks have been a great investment in the last 80 years, with an average return of about 10 percent a year. But have investors in the stock market done as well as stocks? Surprisingly, the answer is no. The average dollar invested in the stock market in those years has earned only about 8.6 percent a year.
The discrepancy between stock market return and investor return is examined by Ilia D. Dichev, a University of Michigan accounting professor, in a paper published in the March 2007 edition of The American Economic Review, “What Are Stock Investors’ Actual Historical Returns? Evidence From Dollar-Weighted Returns.”
To understand the difference between a stock’s return and an investor’s return, consider someone who buys 100 shares of a company at a price of $10 a share. A year later, the share price is up to $20, and the investor buys 100 more shares.
Alas, the investor’s luck has run out. By the end of the next year, the price has fallen back to $10 and the investor sells his 200 shares.
A buy-and-hold investor who bought at $10, held the stock for two years, and then sold at $10 would have had a zero return.
Our gain in net worth during 2006 was $16.9 billion, which increased the per-share book value of both our Class A and Class B stock by 18.4%. Over the last 42 years (that is, since present management took over) book value has grown from $19 to $70,281, a rate of 21.4% compounded annually.*
We believe that $16.9 billion is a record for a one-year gain in net worth – more than has ever been booked by any American business, leaving aside boosts that have occurred because of mergers (e.g., AOL’s purchase of Time Warner). Of course, Exxon Mobil and other companies earn far more than Berkshire, but their earnings largely go to dividends and/or repurchases, rather than to building net worth.
All that said, a confession about our 2006 gain is in order. Our most important business, insurance, benefited from a large dose of luck: Mother Nature, bless her heart, went on vacation. After hammering us with hurricanes in 2004 and 2005 – storms that caused us to lose a bundle on super-cat insurance – she just vanished. Last year, the red ink from this activity turned black – very black.
In addition, the great majority of our 73 businesses did outstandingly well in 2006. Let me focus for a moment on one of our largest operations, GEICO. What management accomplished there was simply extraordinary.
Well in 1962 I learned from Ben Graham how to assess businesses. He also had the cigar butt analogy for buying businesses...you can usually get one good puff out of it and it’s free. Berkshire made a lot of money after WWII (more than Pfizer and Merck) and then it steadily went downhill. Between 1955 and 1965 Berkshire went from 12 mills to 2 mills and they bought their own stock as mills closed. We bought 100,000 shares out of 1 million in 1962 at $7 3/8 and the company had $10-11/share in working capital...I knew I wouldn’t lose money because of the working capital. It was losing money but it was also liquefying assets by closing mills. Seabury Stanton was running Berkshire at the time and I went to go visit him. We had an agreement that Berkshire would tender $11-1/2 for my shares of the company. At this point, I could not buy any stock as I had inside information. A few weeks later I received a letter from Old Colony Trust containing a tender offer of $11-3/8. Early the following week, Seabury tendered the stock at 11 3/8. As result, I began buying more Berkshire. Other family members of Seabury Stanton sold their shares to me and I gained controlling interest in the company. The family members weren’t very happy with Seabury either really. We ran the mills until 1985. .
A PROPOS the Sarajevo moment, which might bring to an end this latest of age of globalisation.
It wouldn't be a political killing, I imagine, since there is no one figure whose death at the hands of a deranged assassin would turn the great powers against one another. But a terrorist strike against a cluster of essential Saudi oil installations might have the necessary economic and geopolitical repercussions.
Whatever the Sarajevo moment might be, everyone seems to be talking about it. As if we know in our hearts that these asset prices are too good.
When will the Chinese middle class push for greater political freedom to match growing economic freedom?The Wall Street Journal posted an email interview with Friedman which included a few words on China.
The $64,000 question. The extent of the ideological bankruptcy of the Chinese Communist Party is not widely understood in the U.S. It claims single party rule because it is the trustee of the 1949 Communist revolution governing democratically for China's workers and peasants. Its problem is that communism is in reverse worldwide, and under the doctrine of the "Three Represents" invented by Jiang Zemin, the party now accepts that class war is over and that it must represent all Chinese society. In which case: Why no accountability? Change came in the Soviet Union with the fifth generation of leaders; the fifth generation of leaders succeeds Hu Jintao in 2012. I don't expect any change until after then, but my guess is that sometime in the mid-to-late 2010s, the growing Chinese middle class will want to hold the Chinese official and political class to account for how they spend their taxes and for their political choices.
BP readers correctly pointed out to the change in the Goldman Sachs Commodity Index (GSCI) (Here, here and of course, here). Tim Iacono did a nice job on the details the following month.
That mid-year halving of the gasoline weighting caught quite a few people by surprise. The timing -- slashing energy futures weightings 2 months before the mid-term elections -- was stunning to say the least. The GSCI changes had wide ranging impacts, leading (indirectly at the very least) to: Amaranth's implosion, a drop in CPI / inflation rates, the market rally since the July lows, and of course, GS's record setting Q3/Q4 profits (Hey, its nice to be the House).
Suppose that, at the start of some year since the beginning of the twentieth century, you had taken $1,000,000 that you had invested in bonds and believed you would not want to touch for twenty years, and invested it insteade in a diversified portfolio of equities. (Or suppose you had been able to borrow $1,000,000 at the long-term government bond rate). And suppose you had then let both legs of that investment ride for twenty years. What would have been the results in dollars (adjusted for inflation) twenty years later?
We polled 80 strategists for their 2007 predictions, and many think tech stocks will be on top. Call it a 7% year. That's the return the 80 strategists we polled expect in 2007 for the Dow Jones industrial average and the Standard & Poor's 500-stock index. Our prognosticators overwhelmingly think technology will be the best-performing sector next year, but still come up with a forecast of only a 9% gain in the tech-heavy NASDAQ Composite. They expect the Russell 2000, an index of small-cap stocks, to lag, with just a 6% return. Strategists are listed according to their yearend Dow forecasts, from the most bullish to the most bearish
I'm pleased to offer this latest revision of the Web Video Cheat Sheet, a quick and dirty guide to sharing videos online. I'm in the process of compiling another report that examines a specific facet of the video sharing experience (more on that later). Meanwhile, I couldn't wait to get this 61-site overview out there so folks can figure out the best place to host their most memorable (drunken) holiday moments.
So Washington is full of rumours that 2007 will bring a Grand Bargain on social security reform (see Mark Thoma's take here and Vox Baby here). The Bush team's plan is to sound sufficiently conciliatory and open-minded that it becomes impossible for the Democrats not to sit down and talk. That strategy just might succeed. Stonewalling is a plausible political tactic when you are in opposition (though still shamefully shortsighted). It doesn't work so well if you are actually in charge on Capitol Hill, particularly when you announce that retirement security is one of your top legislative priorities.
Last year, we lamented the passing of M3 reporting. This broadest of money supply measures had shown a discomforting increase in liquidity, far greater than what M2 was revealing.
At the time of the M3 announcement, we suspected the Fed was attempting to cover their tracks, disguising an ongoing increase in money supply and an unstated "easing" in Fed bias. Since that time, we have learned: the Treasury Department was also adding liquidity -- a duty they have assumed, in part, in addition to the same performed by the Fed. Indeed, based on the credit growth data Doug Noland published last month (October Credit Review), it appears that the Fed has - despite increasing interest rates - actually eased over the last two years.
We are currently witnessing a phenomenon that I have not seen in my nearly 30 years in real estate brokerage. For the first time in anyone’s memory, we are seeing a noticeable slowdown in sales despite continuing record low interest rates. I’ve experienced many soft markets before; most (1980 – 1982 particularly) were far more severe than this. But all of those were precipitated by rapidly rising interest rates. This one seems to be occurring even though rates have actually fallen (that’s right, fallen) over the past 60 to 90 days by nearly two thirds of a percentage point, remaining near all time lows. At this writing, 30 year rates are around 6.375%. What’s going on?
I’ve heard many explanations offered, and many have some validity. For starters, the Federal Reserve has raised short term interest rates steadily over the last two years. This has probably led many consumers to assume that mortgage rates were rising too. They did rise a little, but not much… they’re still within a percentage point or so of their lows. It’s also true, as you see below and on the following pages, that inventories have continued to rise, leading many to assume that the market is “slow,” since they see more for sale signs than they’re used to. Perhaps most importantly, the media has been relentlessly predicting a “bursting real estate bubble” for two years now, and they’ve seized on any evidence of a slowdown to fuel the gloomy predictions. While fears of a bursting bubble are utterly unfounded, especially here (see page 2), we’re hearing that many buyers are afraid to buy, thinking that real estate has become a bad investment on which they’ll lose money. A self fulfilling prophecy if ever there was one. Add in the fact that the fall is normally the slowest time of year anyway, and the market appears just plain tired after a sizzling 5 year run.
Bogle believes investors should simply buy the lowest-cost index funds available and hold them forever. His rule of thumb is to take your age minus 10 and hold that percentage of your assets in a total bond market index fund and the rest in a total stock market index fund. For example, a 30-year old would put 20 percent in bonds and 80 percent in stocks.Bogle wrote the excellent "Battle for the Soul of Capitalism".
This strategy nearly eliminates "the two greatest enemies of equity investing -- expenses and emotions," Bogle said.
Bogle's attitudes have barely changed since he started the first index fund in August 1976.
That fund, now called Vanguard Index 500, has about $112 billion in retail assets and is the second-largest fund after American Funds' Growth Fund of America, according to Morningstar.
ON GLOBAL FINANCIAL IMBALANCES
Milken: A number of countries around the world -- the United Arab Emirates, Singapore, Norway, Taiwan -- have built up tremendous reserves relative to the size of their country. Most of them have not made the mistake of Japan, where deploying that surplus within the country through, for example superfluous road or bridge construction, caused massive increases in prices in the 1980s.
All in all, there is at least $25 trillion worth of surpluses in the world today that is invested short-term. It is pretty hard to find anything to put a trillion dollars into except U.S. government and private bonds or mortgage-backed securities.
Where do you see this capital being deployed? Do you see it just compounding away, or do you see them following the mode maybe of Singapore where the government is creating its own industrial companies?
Okay, Google gamblers. This one's going to be interesting.
On the one hand, Google's modest deceleration last quarter suggests that the company is going to once again deliver (relatively) ho-hum results and disappoint investors conditioned to expect the astounding. It takes a long time for a supertanker to change speeds or course, and, last quarter, anyway, it did seem that the Google supertanker was finally beginning to slow down. This diagnosis seemed confirmed by possible canary-in-the-coalmine announcements from advertisers who were cutting back on search spending because prices had gotten out of hand. And then there was CFO George Reyes' lucid mid-quarter explanation of why growth had slowed in Q4--because previous growth had been accelerated by a monetization program that had now run its course. This convincing explanation kneecapped the stock for the eight hours it took for the company to issue a press release that said, effectively, George was wrong.
There is a terrific PDF (warning -- its 105 pages) on the Seven Sins of Fund Management. It is a behavioural critique by James Montier, the Global Equity Strategist of Dresdner Kleinwort Wasserstein, and its full of all sorts of smart observations, backed up with data and charts.
I haven't read prior work of Mr. Montier -- but this PDF made me interested in his book, "Behavioural Finance: A User's Guide."
I may be referencing parts of the PDF in the future, but if you want an overview, here are the 7 Deadly Sins:
Sin 1 Forecasting
The folly of forecasting: Ignore all economists, strategists & analysts
Do analysts understand value: who is the greater fool?Posted by James Zellmer at 9:01 AM
Dan Drezner writes:
Given the fact that foreigners currently have a net claim on $2.5 trillion in U.S. assets, one would expect the U.S. to be paying out a lot more in interest, dividends, and profits to foreigners than Americans would receive from their investments.
The weird thing is that, so far, this hasn't been true. Last year the U.S. earned $36 billion more on their foreign investments than foreigners earned in the United States. The question is, why?
It turns out Americans both (seem to) make riskier investments and earn a higher return on investment. One extreme view (not Dan's) suggests the following:
No one else is writing this piece, so it will have to be me. I should say upfront that I'm not predicting that this will happen (yet), and I'm certainly not making a recommendation. I'm just laying out a scenario that could kneecap Google and take its stock back to, say, $100 a share.Rather ironic - and refreshing, coming from Blodget.
Google's major weakness is that it is almost entirely dependent on one, high-margin revenue stream. The company has dozens of cool products, but with the exception of AdWords, none of them generate meaningful revenue. From an intermediate-term financial perspective, therefore, they are irrelevant.
So, the question is, what could happen to AdWords, and what will happen to the company (and stock) if it does?
The Commerce Department reports a surprisingly low American savings average of under 2% and for those who are dutifully socking away 10% of their pretax income it may not be enough.
Just when folks ought to be saving more, they are saving less. Trouble ahead? You'd better believe it.
Yes, I have heard all the arguments about how the true savings rate is higher than the 1.3% calculated for 2004 by the Commerce Department's Bureau of Economic Analysis, or BEA. But don't let that distract you from the bigger issue.
In a world of disappearing company pensions, skimpy bond yields, rich stock valuations and rising life expectancies, anybody interested in a comfortable retirement should be saving a truckload of money every year -- and yet most folks aren't.
Rate debate. Among pundits, belittling the official savings rate has become something of a national pastime. Some of the arguments seem a little suspect, like the suggestion that buying televisions, cars and other consumer durables ought to be considered saving rather than spending.
and stock-market gains don't count:
Other criticisms are more valid. For instance, stock-market gains don't count toward the official savings rate, which strikes me as the right way to do it. Problem is, under the BEA's methodology, if a winning stock is sold and capital-gains taxes are paid, that tax payment reduces the savings rate.
Still, the impact isn't huge. Even in a big year for capital-gains taxes, like 2000, removing the tax impact would boost the savings rate by a mere 1.7 percentage points, calculates BEA research economist Marshall Reinsdorf.
1. There is only one long term investment objective, maximum total after tax return. More here.
Q: What is your favorite part of the stock market today?
Sauter: I think you should have some international investments. I think we are going to see foreign economies start to pick up. International funds have risks that U.S. investments don't have. I wouldn't throw caution to the wind. I would use them as a diversifier. I would include emerging markets.
Q: If you could buy only one fund, what would it be?
Sauter: Vanguard Total Stock Market Index.
For first-time investors who want one complete investment, we've got our Balanced Index fund, which is 60 percent Total Stock Market Index and 40 percent Total Bond Market Index.