Wednesday, 27 February 2008
Worries Grow for Twin Evils of 'Stagflation' -- Stagnant Economy, Lost Jobs, Surging Inflation
WASHINGTON (AP) -- It's a toxic economic mix the nation hasn't seen in three decades: Prices are speeding upward at the fastest pace in a quarter century, even as the economy loses steam.
Economists call the disease "stagflation," and they're worried it might be coming back.
Already, paychecks aren't stretching as far, and jobs are harder to find, threatening to set off a vicious cycle that could make things even worse.
The economy nearly stalled in the final three months of last year and probably is barely growing or even shrinking now. That's the "stagnation" part of the ailment. Typically, that slowdown should slow inflation as well -- the second part of the diagnosis -- but prices are still marching higher.
The latest worrisome news came Tuesday: a government report showing wholesale prices climbed 7.4 percent in the past year. That was the biggest annual leap since 1981.
"We're in a slowdown," Press Secretary Dana Perino said at the White House, where the economics talk was still upbeat until recently.
Once the twin evils of stagflation take hold, it can be hard to break the grip. People cut back on their spending as they are stung by rising prices and shriveling wages. Businesses, also socked by rising costs and declining demand from customers, clamp down on their hiring and capital investment.
That would be a nightmare scenario for Wall Street investors, businesses, politicians and most everyone else. They're already looking to the Federal Reserve for help, but the Fed's job is complicated by the situation.
The mission of Federal Reserve Chairman Ben Bernanke and his colleagues is to nurture economic growth and keep inflation under control. To brace the teetering economy, the Fed since September has been ratcheting down its key interest rate. Another cut is expected in March. However, to combat inflation, the Fed would be expected to boost rates instead.
"The Fed has its hands full. It is preoccupied with the economic slowdown at the front door, but inflation looks to be sneaking in the back door," said Greg McBride, senior financial analyst at Bankrate.com. "If that trend continues, the Fed would need to show the economy some tough love, meaning higher interest rates to keep inflation from getting out of hand."
On the other hand, Brian Bethune, economist at Global Insight, said Bernanke can fight only one war at a time, and the more pressing issue right now is to shore up the ailing economy. "That's the war that needs to be fought. The war on inflation will have to come another day," Bethune said.
Maybe things won't be so bad. Stock prices rose for the day, continuing a recent mini-rally. And Federal Reserve vice chairman Donald Kohn said in a speech that he doesn't expect the recent elevated inflation readings to persist.
"But the recent information on prices underlines the need to continue to monitor the inflation situation very carefully," he added.
Some numbers underscore the concerns:
-- Prices paid by consumers are up 4.1 percent over the past year, the biggest increase in 17 years. Those higher prices -- especially for heating homes and filling up gas tanks -- are taking an ever-bigger bite out of paychecks. Workers' weekly earnings are down 1.4 percent from a year ago when adjusted for that inflation.
-- Oil prices galloped past $100 a barrel to close at a record $100.88 on Tuesday. Those lofty energy prices are a double-edged sword: They can spread inflation through the economy by boosting the prices of lots of other goods and services, and they can leave people with less money to spend on other things, thus slowing overall economic activity. There are signs high energy prices are causing some damage on both of those fronts.
People are hunkering down. Earlier this month, nervous shoppers handed the nation's retailers their worst January in almost four decades. High gas and food prices, the toll of the housing bust, the credit crunch and a tougher job market all were to blame. Disappointing sales were widespread, hitting discounters like Wal-Mart Stores Inc. and upscale merchants like Nordstrom Inc.
Wary employers eliminated jobs in January, the first nationwide loss of jobs in more than four years.
With the economy on the edge of a recession -- if it hasn't toppled over already -- the Fed for the near term is much more likely to keep lowering rates. Yet, with its own forecast revised last week to show even slower growth this year as well as higher inflation and higher unemployment than previously anticipated, Bernanke and his colleagues have made clear they'll need to stay nimble.
Can a serious bout of stagflation be avoided? Many economists believe the Fed's aggressive rate cuts along with tax rebates for people and tax breaks for businesses will lift the economy in the second half of the year.
Until then, analysts warn that it could feel like country is suffering through a mild case of stagflation-- even if technically that is not the case. "It could feel like a bad flu," said Bethune.
In the past stagflation episode in the 1970s and early 1980s, inflation sometimes hit double digits -- much higher than the current rate. And unemployment was higher, too. In 1975, for instance, the jobless rate zoomed to 8.5 percent, which at the time was the highest since the early 1940s. Last year, by contrast, the jobless rate averaged 4.6 percent.
"In the real economy, activity looks slow but not disastrous," Alice Rivlin, former vice chair of the Federal Reserve, told Congress Tuesday. But she added: "Uncertainty remains great. ... The risks are mainly on the downside and gloomier forecasts are not hard to find."
Tuesday, 26 February 2008
Joining us on the program this year is Dr. Marc Faber, he’s the editor of The Gloom, Boom & Doom Report.
And Marc, I want to start out with something you said in your January newsletter, and you quote Lao Tzu, the 6th Century Chinese poet, where he said: Those who have knowledge don’t predict; those who predict don’t have knowledge. Isn’t this going to be one of those difficult years to predict where the markets are going? It just seems like there are too many crosscurrents this year.
MARC FABER: I don’t think that it is all that difficult to predict markets, but we have to understand that you can’t give a target for, say, the Dow Jones because you essentially have a manipulated market. Manipulated by the Federal Reserve, in the sense that if the Fed cuts interest rates to say zero percent or one percent, as they’ve done after 2001, then stock prices can be supported. But obviously a cut of interest rates at this stage of the cycle where we clearly have inflationary pressure would obviously increase the rate of inflation and probably weaken the dollar further – certainly against a hard asset such as gold and other precious metals. So let’s say someone said the Dow will go up to, oh, I don’t know, double. Say for argument’s sake, from 13,000 to 26,000. We would have to measure that increase –this doubling of the Dow Jones – in a hard currency such as either a foreign currency or in gold. And if the Dow doubles because of money printing by the Fed to 26,000, it wouldn’t mean necessarily that economic conditions improved, but it would mean maybe that inflation picked up dramatically and that the gold price goes up three times. [2:52]
JIM: You also quote Peter Bernstein the economist and strategist and he said that:
The current scene bears no resemblance to a typical economic peak or to conditions usually preceding a slowdown in business activity. Those kinds of conditions feature excesses in the business sector. But the business sector at the present time has a relatively clean bill of health. There are no signs of the usual boom in capital spending that leads to a cyclical top and leaves an overhang of capacity.
I’d like to get your thoughts on the current condition of business. Is this the one saving grace that we have in the US economy right now?
MARC: I think that it is difficult to say that we don’t have, let’s say, excesses in capital spending because we live in a globalized world. In other words, capital spending may not have been excessive in the United States – although I could argue that home building is some kind of capital investment; the whole commercial real estate market is some kind of capital investment. And what we have is we have excesses in capital spending in other countries such as in China and in other emerging economies. So basically, the US has outsourced largely it’s production, and that’s where the excesses in capital spending are occurring.
Moreover, in a business cycle you just don’t only look at capital spending. I think the biggest excess was in consumption in the United States, where consumption as a percent of the economy has increased from around 60% in 1980 to now over 70%. So in an economy where you essentially have maladjustments as a result of easy monetary policies the excesses do not necessarily have to be in capital spending. The excesses can be in asset markets, such as the housing market, in stocks, in commodities and they can be in consumption. [5:04]
JIM: Let’s talk about consumption, because the big question everybody has here –and there is such an emphasis in the US economy on consumption – and that’s the US consumer. And we’ve got a situation now where you know they can’t take out money out of their mortgages like they used to and use them as an ATM machine. We’ve seen a bit of a slowdown in the fourth quarter with consumer spending. Do you think this is the time that the US consumer finally goes on hold. I mean, they’ve been counting the US consumer out for years and decades, but it’s like the Energizer Bunny: They keep on spending.
MARC: Yes, I agree that there has been a lot of let’s say apprehension about the ability of the consumer in the US to continue to consume, but I think the important question here is the Federal Reserve and also the Treasury have encouraged, in the US, consumption. And does consumption lead to the creation of wealth? Or if you have a table full of food and you just eat the whole food away does it lead to a reduction of wealth? That is really the issue here. And I think that in the US the excessive consumption which was driven by asset markets, in other words by increasing asset prices – stocks until 2000, and after that by the real estate market – have essentially led to an economy that is starved [of] savings and starved of capital spending and characterized by excessive consumption which is on evidence from the growing trade and current account deficits. And now the goldilocks apostles they will always say, “well, the trade and current account deficits do not matter.” But they do matter in the sense that there has been a huge transfer of wealth to foreign countries, and now foreign countries have these sovereign funds which they invest globally; and there has been a huge creation of wealth, in particular in the resource-producing countries; and also there has been extended US dollar weakness. And so the current account deficit and the excessive consumption does matter to some extent for the well-being of the US. [7:33]
JIM: One thing that we’re starting to hear in the US, we’ve heard it from Hank Paulson and the President in December (we’ve seen it recently – the White House convened last Friday), they’re talking about some kind of stimulus package coming out from Washington. Whether it’s going to help people that are under duress right now because of mortgage resets – but some kind of fiscal spending program – who knows? Maybe we get some kind of helicopter drop. What about the US government combined with fiscal stimulus and monetary stimulus as it appears right now that the Fed is probably going to get more aggressive in its rate cutting.
MARC: Yes. I’m sure that they will implement a stimulus package, but I think the stimulus package will be an ill-fated attempt to revitalize the economy. If you look at the problem of the economy, it’s been excessive credit growth that came from easy monetary policies. And what they want to do now is essentially to implement another set of monetary policies and other measures to stimulate consumption, when consumption precisely has been the problem of the United States – the excessive consumption. And I think a stimulus package may be useful if it were directed at the stimulation of capital spending and at the encouragement of saving at the expense of consumption. And that can only lead to essentially a readjustment period in the economy. Readjustments – basically what the US needs is a recession. And only a recession can redress the excesses that have taken place. And if you superimpose another bubble on the existing bubble you create more maladjustments in the economy and more ill-fated measures that eventually lead to a total breakdown of the system. [9:42]
JIM: You know, unfortunately here in the US, whether you’re watching both parties – the Republicans or the Democrats – they’re talking about ways to increase consumption because they’re worried by a slowdown in consumer spending. And nobody in a presidential election year seems to want to take the pain to go through a recession and redress a lot of the imbalances or cleanse the system because of the imbalances we see right now – whether it’s mortgages, excess consumption and indebt[edness]. So in the end, could you see a scenario, Marc, something like this: In the first quarter we see economic weakness as we’ve been seeing, we see more write offs coming from the financial system (there’s talk about Citigroup maybe writing off $16 billion), also there’s going to be a slowdown in corporate earnings, and then we get a massive response from the Federal Reserve that temporarily probably stimulates the markets. So let’s say, in between, if you think of an Oreo cookie, a hard first quarter, a creamy filling in the second and third, and by the fourth quarter higher interest rates and inflation come back to bite us again.
MARC: Well, personally, I think that the US, if you measure economic statistics properly –and the government is lying blatantly – the US went into recession 3 months ago. And I’m saying the government is lying blatantly, because they take nominal GDP and then they fiddle around with inflation figures. I mean none of your listeners have an inflation rate of less than 5 to 6% per annum. You just can’t exclude food and energy prices and healthcare costs from the CPI, from the cost-of-living increases. So nominally the US economy may still be growing, but inflation adjusted –in other words, in real terms – we’re already in a recession. And most US households, except for the super rich, are today no better off than they were five or seven years ago. Their income gains have all been eaten up by cost increases by inflation.
Now, some people have benefited from asset inflation in the sense that their houses in which they live have appreciated in value but that has been precisely because of easy monetary policies and the debt growth that have now brought about problems.
And all I can say is that corporate profits in my opinion began to contract in the third quarter of last year and they will continue to contract, because corporations now –and this is important to understand – corporations are facing cost increases. So the margins are going to be squeezed. And whereas the valuation of the stock market is not unbelievably high in the sense that stocks are not selling at 50 to 80 times earnings like in Japan in 1989, if you exclude say the energy sector from the S&P which is selling at 12 times earnings or 10 times earnings, then the S&P valuation is over 20 times earnings. If you’re faced with declining earnings then basically the S&P is not a great bargain here. [13:14]
JIM: Let me just continue on that inflation theory, because what you are talking about in the fourth quarter the GDP deflator, if I recall, was falling from the second, third and fourth quarter last year; and I know in the third quarter the GDP deflator was the lowest since Eisenhower was president. So could you get statistically, and I’m just looking forward in an election year, maybe we get the lowest inflation rates since Calvin Coolidge was president. So in nominal terms as reported by the government we get this slow growth figure that they’re talking about – one to two percent – in those terms, we avoid a recession even though in real terms we are in one.
MARC: Well, basically, that would be a form of stagflation. And I mean it’s very difficult to measure GDP in the first place, and what you have to look at is essentially standards-of-living increases in an economy. And I don’t think that there are many standards-of-living increases in the United States at the present time, nor for that matter in Western Europe. We have huge standard-of-living improvements in emerging economies where a middle class is being created and where even workers or farmers are doing better than say a couple of years ago. But my point is simply that the government is lying. And they will continue to lie because they don’t want to admit that they created an unbelievable economic mess. Nor will the Fed admit that their ill-conceived monetary policies led to the crisis that we have today in the financial markets. [15:01]
JIM: What about the theory that’s being bandied about, even though the US economy slows down as we are now seeing that –they call the decoupling theory – that the rest of the world (whether it’s Europe, Asia, emerging markets) will continue to be strong? So therefore, if you are let’s say a large cap international company where you get a good majority of your sales overseas – and a good example would be, for example, DuPont this week beat estimates. They get 60% of their business overseas and because of that business doing very well their earnings were higher than expected. Do you subscribe to the decoupling theory, or do you think a slowdown in the US will have some effect on Europe and the rest of the world?
MARC: Well, basically, we have to first of all distinguish between an economic decoupling and a financial decoupling. In other words, can some countries grow when the US is say in a no-growth mode or in a recession mode? I think that this is possible because if you look at basically the US economy over the last two hundred years, occasionally you had a recession in one state, say, Texas in the early 1980s (when the oil price started to go down), and you had expansion in another state like New England (which benefited from lower oil prices); or in the early 1990s, you had a recession in California but other states they were expanding. So in an economy which is very complex, where you have different regions and you have different sectors – industrial sectors and service sectors – it is conceivable that one sector is in recession and other sectors or other regions are not; that is entirely possible. But I would argue that over the last seven years we had an unprecedented global economic boom where essentially every country has been growing with the exception of Zimbabwe, because you have a money printer in Zimbabwe who essentially should be joined by Mr. Bernanke. He would fit very well with Mr. Mugabe in that country.
Now, what happens if the US no longer grows is that the trade and current account deficits of the US shrink. In other words, we had during the excessive consumption period 1998-2006, a current account deficit in the US that increased from 2% of GDP to over 7% of GDP, and at the end was supplying the world with $800 billion annually. And this river flows into the world through the American current account deficits, and essentially provided the world with the so-called excess liquidity and created booms in everything from art prices to commodities, stocks, bonds, real estate, what not. And once the US no longer has this growing current account deficit, but a shrinking current account deficit, you have essentially a relative illiquidity coming up in the world. It is not that it’s tight money, but the rate of growth of liquidity shrinks and it does have obviously an impact on the economies and on the asset markets. And it is conceivable that say the US goes into a recession, Europe goes into a recession and that China does not go into a recession but into a growth slowdown, say from 8 to 10% GDP growth down to 3 to 6% of GDP growth. But this decline in the growth rate is still very uncomfortable for China, as well as for India. So I’m not a great believer in this decoupling theory.
Moreover, I don’t believe that financial markets will be decoupled. In fact, I would argue: If you look at look at the last four years, 2002 to today, then emerging markets have been the big bubble. The US markets have not been a gigantic bubble in the sense that US equities, especially large cap stocks, are not terribly expensive by world standards because the dollar has gone down so much. And so the big bubble is probably in emerging markets; and these markets, obviously if the S&P goes down, will be hit very hard. And I would argue, if someone puts a gun to my head, and says, “Marc, you must buy stocks,” as much as I dislike saying this but I would probably rather buy US stocks today, than say some of the emerging markets that are selling at 30 to 50 times earnings. [20:08]
JIM: You bring up an interesting point about liquidity in the world which has a genesis in much of the US trade deficit. As we look around the globe today, Marc – I have a screen on my Bloomberg that has year-over-year money supply growth rates around the globe and what is surprising as I look at this table is to see double digit money supply growth around the globe out of 18 of the top 20 central banks. I think Europe reported last week it’s money supply is growing at over 12%, yet Trichet is talking about being tough on inflation. You know, the inflation rates that we’re seeing here in the United States, are they not global in nature? Are you finding that, for example, in China where you have the inflation rate going at 6 or 7%, that this is a global phenomenon?
MARC: Yes, I mean that’s the point. I mean when recently people were very negative about the US dollar and so forth – and of course, long term you cannot be optimistic about the US dollar – but the US dollar has declined quite substantially, especially against the euro in the last couple of years; and the Europeans are also good money printers. It’s not just Mr. Bernanke that is the chief money printer. The others are not much better either. So basically, you have this excess liquidity being created in order to support asset markets and so forth.
But the point about this excess liquidity is that an eternal boom is out of the question. So what the Fed and the other central banks can do is kind of stimulate, through easy monetary policies, credit growth; but the private sector if it becomes, say, risk adverse can withdraw liquidity and a) not lend and people can also refuse to borrow, and so the credit does not accelerate but actually contracts. And that leads to what I call a relative illiquidity (it’s not an absolute illiquidity, it’s a relative illiquidity) and that then has some negative implications on some asset markets. But to come back to the first question you raise about making predictions, I think the difficulty today is that under normal conditions, say under a gold standard, we would be in a massive deflationary recession at the present time. Now, the central banks are all intent to prevent that and they print money like crazy and throw liquidity at the system by cutting interest rates and taking extraordinary measures. And so the question arises: How did you measure really economic growth and how do you measure your wealth? Say, as I mentioned, if the Dow goes from here to 26,000 – it doubles in value – if at the same time the gold price goes up 5 times, you lost out by being in financial assets. And I think this is what has happened since year 2000. In year 2000, as you know, you could buy with one Dow Jones, 44 ounces of gold. And now you can buy less 15 ounces of gold.
Now, I’m not saying that gold cannot have a meaningful correction, but I think that the central banks have created actually a state which I would almost call a hyperinflation where asset prices go up very substantially and they don’t make you really richer. I mean say in 1980, there were six billionaires in the world, and today you have thousands of billionaires in the world, everywhere. And money – the value of money – the purchasing power of money has depreciated very considerably. And I’m not speaking here of the US, because I was recently in New York and I saw that the price level in New York is actually quite reasonable compared to, say, the price level in Europe and in other countries. But usually when you have a situation like the US that has achieved relatively low prices levels through currency devaluations – and the US has pursued a policy to lower the value of the dollar – what usually follows (and not every time – usually what follows) is high and accelerating inflation rates. And the US government of course they will understate inflation, but the pocketbook of the consumer will notice this increase in inflation and what you will then get is essentially prices going up and the standards of living of people going down – in other words, stagflation. [25:08]
JIM: Isn’t this one of the signals that gold is giving to the financial markets? When you look through this period of time where we have seen nominal increases in assets and stock markets around the globe, yet if you look at the summer of 2001 when gold was at 255, and here we’re looking at gold heading towards $900 – do you think this is what is being recognized around the globe, that everybody knows that money is dying, it’s losing its value so gold is becoming the ultimate currency to hold?
MARC: Basically, my view is this: Normally, the safest investments in a society is cash, deposited in a bank or in Treasury bills. But the Western democracies and governments in general have created over time an environment where actually cash is a disastrous investment because you’re losing out to inflation like in the 70s as a result of consumer price increases or in the last couple of years as a result of asset price increases. Now, I’m not suggesting that there cannot be times – three months, six months, one year – when cash does better than, say, stocks or better than real estate. Say, in the last nine months it was better to be in cash than in stocks that depreciated or in real estate that depreciated. But basically, if you print money like the Fed or other central banks do, the value of money – of paper money – goes down and then it’s reflected in an increase in the value of assets such as gold that cannot be multiplied at the same rate. I mean someone could say, “oh, the gold price has gone up a lot since 2001.” I can turn around and say: “No, the gold price is the same. It’s the dollar the dollar that has collapsed against the price of gold.” And why did the dollar collapse against the price of gold. You call up Mr. Greenspan and Mr. Bernanke and you ask them about it. Of course, they will never give an answer. Each time Ron Paul asks them a sensible question they just evade the question and they move on to something else because, as I explained, they are a bunch of liars. And actually, if there was a court for honest money, both Mr. Greenspan and Mr. Bernanke should be hanged. [27:44]
JIM: You know, it was interesting – you mentioned Congressman Ron Paul. The last time Bernanke was on Capitol Hill, he asked him about curing inflation with more inflation, and asked him about what was happening to the dollar. And Mr. Bernanke responded – which I was horrified – and he said, “well, actually if you live in the United States and you pay for things with dollars it really doesn’t affect you.”
MARC: He’s out of his mind. Go to Zimbabwe and ask the citizens there: If you pay in Zimbabwe dollars it affects you that the currency has collapsed? Of course it affects you.
JIM: There’s a situation I want to move on to in the financial markets. A lot of the risks that we’ve seen erupt last year, whether it was in February with intermediate lenders or August with the collateralized debt obligations, something that has not gotten much attention and I think could even be a bigger issue and that is credit default swaps, which are now estimated to be somewhere in the neighborhood of 45 trillion. I think there have been a lot of people, Marc, in the hedge fund community and the banking community during this period when we were inflating between 2003 and 2006, they were writing these credit default swaps on corporate bonds because it was almost like free money. Now, if the US economy has gone into a recession –even though we’re not saying it formally – when you go into a recession companies have greater difficulties making their earnings, earnings slow down, cash flow slows down. And what happens if you start getting a bunch of corporate bond defaults? I think this is an issue with these credit default swaps that nobody is looking at. A few people have talked about it; Bill Gross saying it could be somewhere in the neighborhood of $250 billion losses. This is another issues that could surface this year that could throw chaos into the markets.
MARC: Well, I think you’re touching on something very important. I think that over the last 25 years we had numerous financial innovations. And I have to say is, the Federal Reserve had the power to control the financial innovations but actually they encouraged it and led to the excesses we had recently. And I think that the problem that occurred in subprime lending is a symptom of a much wider problem, and that the subprime lending crisis infects obviously other credit markets and so forth and that it will spread like a bush fire through the economy, especially if an economy was essentially driven by excessive credit growth. I mean in the last seven years GDP increased by $4.2 trillion and total credit between 2000 and 2007 increased by $21.2 trillion. In other words, debt has been growing much faster than the nominal GDP.
And I think that now we are in a process of deleveraging – of credit contraction, basically – but the Fed and the Treasury will do everything to restimulate the credit growth that led to the problems in the first place. That’s why I’m arguing that the policies of Mr. Greenspan, of Mr. Bernanke and Mr. Hank Paulson are totally misguided. Totally. And I believe, you know, the financial stocks, every bull market I’ve seen since 1970 when I started to work was accompanied by strength in financial stocks. When you have weakness in financial stocks something is wrong. And therefore, I don’t believe that this bull market that we had since October 2002 to the Summer of 2007 that this will come back. I rather believe that we are in a period of high volatility like in the 70s, when the Dow moved up and down every year by 20%, and in 1982 the Dow was still no higher than we were in 1964. So I think we can have a lot of fluctuations here. And at times the Fed, through rate cuts, can manipulate equity prices higher and so forth. And at times we will have disappointing earnings, disappointing results. And I would suppose that we will have massive bankruptcies as well where financial firms become illiquid and insolvent and are forced to the wall. And so the market environment for financial assets is not going to be particularly good. [32:46]
JIM: Let’s talk about a couple of investment themes among this volatility that we’re seeing. A couple of things that stand out or strike me, Marc, is energy which has been on a roll – and I happen to subscribe to the peak oil theory. I mean we have not made any major discoveries, we’re not replacing what it is that we consume, we have more people consuming energy today. That is one theme that I can see. And along those lines and something similar – you cover this in your current newsletter – is you’ve got a little over 1% population growth in the world, the acreage for growing crops isn’t expanding. In fact, in certain areas like China it’s being turned into parking lots – like Joni Mitchell’s song – or buildings. What about the theme of energy, food and precious metals if you wanted to be in this market as a long term investor?
MARC: Yes, I think that’s a very good point. In general, I believe that you should be in assets that cannot be multiplied easily, such as commodities (whether it’s copper or zinc or nickel or oil or precious metals), or food items (wheat, corn, soybeans, sugar and so forth). But the commodity markets had a very big move and the price of oil has gone up essentially almost 10 times since 1998 from $12 a barrel to now close to $100 a barrel. And in an environment of slowing growth in the world, I would be somewhat careful of investing now in industrial commodities whose demand depends essentially on strong economic growth. So I would not be surprised to see – as has already happened in some commodities like nickel – that prices correct meaningfully. And all I can say to investors is I’m bullish about gold in the long run, but don’t buy anything –whether it’s a house or stocks or precious metals – if you are not prepared to ride through say a 20% correction, because we have higher volatility. We will get more corrections along the way up. I mean I remember the great bull market of the Taiwanese stock market, 1984 to 1990. The market went from an index of less than 500 to 12,500, but we had in 1987 a 50% correction, in 88 a 40% correction, in 89 a 30% correction until we reached a final peak. So investors have to get accustomed to higher volatility. And someone who cannot live with this volatility because he is leveraged, is going to be forced to the wall.
So my advice is to be prudent. And yes, I like energy. I think energy stocks are actually quite inexpensive. But if the oil price for one reason or another drops to say $70, then obviously energy stocks will be down. And all I notice is when I started to like commodities in the year 1999 to 2002, it was not a widely accepted investment theme. And today, the investment theme is much more well known, and there are many more speculators in the market place. So I’m still positive in the long run but cautious say for the next six months. And I would also add, as of today – you see, if I remember, well, in 1980, after 10 years of consumer price inflation in the US, everybody thought that consumer price inflation would continue forever. And what then happened after 1980 is that consumer price inflation slowed down and we had a period of disinflation. Today, if there is one consensus it is that paper money will become worthless and that asset prices will continue to go up. And I would still think that it’s not very likely that Robert Prechter is going to be right with his deflationary bias –with everything, with gold prices collapsing to the Dow going down and so forth – but I would still think that there is still a small probability that we could have actually a period of deflation in the near future, which then will lead the central banks to print money like crazy. But in this period of deflation that I would not rule out we would have big declines in asset markets – big declines. [38:09]
JIM: Let’s say we start to get deflation. I mean certainly we’re seeing falling housing prices in the US and other places of the world. Do you think that we get preemptive strikes and perhaps they just throw all caution to the wind? Like right now, the latest consensus is when the Fed meets January 30th it’s going to be 50 basis points; and there’s even talk within the markets that they don’t wait until January 30th if things begin to deteriorate. I know there’s a lag effect to all kinds of things, whether it’s raising interest rates or lowering interest rates. If this deflationary period that could possibly erupt, do you believe it would be short-lived?
MARC: Yeah, very good question. I am quite sure the Fed will cut by 50 basis points; and if not by 50 at least by 25. But as you know, in Japan they cut rates dramatically to essentially zero and we still had deflation. I mean we cut interest rates from 6.5% on the Fed funds rate in January 2001, to 1% in 2003, and yet the NASDAQ still went down. So whether interest rate cuts and even a stimulus package – fiscal package – will help much remains to be seen. We could be in an unusual situation where it doesn’t help much. It’s possible because the public or the household suddenly starts to save; in other words, the savings rate goes up and people become risk adverse. As I said, I don’t know how the world will look like in a year’s time. I’d rather be in gold than in the Dow Jones, whereby maybe for the next three months the Dow Jones could outperform gold for a while. But in general, it’s very, very difficult to make any kind of predictions that make sense simply because you don’t know how irresponsible Mr. Bernanke and Mr. Hank Paulson will be. We just don’t have any idea. As you say, they can do a lot of things to try to support the asset markets. And Mr. Bernanke has written and spoken about this: that you cannot identify bubbles but when they burst you should step in with extraordinary measures. We just don’t know how extraordinary his measures will be. I mean the best for Mr. Bernanke, the best extraordinary measure would be to resign and say: “We failed. We are incompetent.” [40:54]
JIM: But you know, Marc, if you take a look at his study of the Great Depression and people might recall the comment he made at Milton Friedman’s birthday where he said to Mr. Friedman: “You know, you were right, we made the mistake. We caused the Great Depression. I assure you, it will never happen again.” Basically saying, according to Mr. Bernanke’s view and study of the Great Depression, the reason we had it was the Fed didn’t print enough money. Had they been able to do so the Depression would never have occurred. So it almost gives you an insight in terms of his thinking, which is along the lines with Mr. Greenspan in the sense that anytime there’s a problem in the economy or the financial markets massive liquidity seems to be the response and answer.
MARC: Yes, that is correct and I’ve written about this. And I think that the entire analysis of the Great Depression, especially by Mr. Bernanke, is totally wrong. The causes of the Depression were not tight monetary policies by the Fed, but easy monetary policies by the Fed. And Paul Warburg, who was at that time a Fed member, later on commented about this; that the Fed should have pursued tighter monetary policies in the years leading to 1929. And I’d just like to mention one point: In 1929, the PE on the Dow Jones was just about 13 times earnings. We didn’t have a massive stock market bubble in terms of valuation, but what we had is an earnings bubble and half the earnings collapsed. And I think today we don’t have, you know, like 50 times earnings on the stock market like we had in Japan. But I think we have an earnings bubble and that the earnings will disappoint very badly. But I’m just convinced that in a democracy, especially in a country like the United States, the politicians will print money. And whether or not it will always help to support asset markets is very questionable.
The one thing I can assure you is that money printing doesn’t create wealth. That is important to understand. And at some point, as my friend Barry Bannister pointed out, you reach with credit growth the zero hour. In other words, you print money, credit grows, but the economy doesn’t respond. And I think we are already in that situation. And what the outcome will be, hyperinflation or deflation, that is the difficulty to judge. But I think personally as an investor, I would be positioned to some extent in gold because in a deflationary environment I happen to believe that gold would outperform other asset classes because things will get so bad that people will run into gold as a safe haven. And at the same time, I would hold essentially some cash and I would probably deleverage. In other words, I wouldn’t hold a lot of debt in the present environment. If there is hyperinflation, to hold a lot of debt is the right thing to do; but just in case we have deflation, like now in housing and now probably also in commercial properties (that is the next shoe to drop), that in such an environment you’re better off by not holding too many debts. [44:40]
JIM: I want to cover a point in your January newsletter and just let our listeners know, if you don’t subscribe to Marc’s newsletter you’re really missing out on some good thinking.
MARC: Well, it is very kind of you.
JIM: You had a gentleman who has written pieces for your newsletter in the past, his name is Michael O’Higgins, he’s author of Beating The Dow – a very sharp money manager, and I’m going to quote from your newsletter here, and he goes:
So where does one find value in today’s investment world? In my view, given that the main focus of the current US Federal Reserve board remains one of fighting deflation, investors should avoid bonds entirely and concentrate on investments that can protect them from a rising inflation rate i.e. stocks and commodities. With these two categories we have our portfolios equally invested among four investment themes: dogs of the Dow; dogs of the world; precious metals and mining; and energy.
What do you think of that?
MARC: Well, basically, I agree with Michael and I think that if you buy today at 10 years the US Treasury, or 30 year US Treasury, you’re flirting with disaster because they will only perform well in an environment of total deflation, given the low yields they provide at the present time. But as I said, the concept of inflation and deflation is very complex because you can have an economic system where some assets are inflating and some assets are deflating. Like in the US, say in the last 12 months, you would have been better off in US Treasuries than say in the housing market, which has declined in value. So in general, I of course agree with Michael to be in stocks in the long run and to be in precious metals and in energy in the long run and so forth. I’m not sure whether that is the right medicine for, say, the next three to six months. I mean I’m very cash rich here. I’m cash rich US dollars. I think the US dollar does not have a significant downside risk against the euro. In other words, if you put a gun on my head and said, “Marc, you have to choose one currency today, for the next three months: the euro or the US dollar,” I think I would choose the US dollar. Although, I’m very negative about the US dollar in the very long run. But just for the next three months I think the dollar will hold because the current account deficit is now shrinking, the trade deficit is no longer expanding and so forth and so on; and the dollar is relatively inexpensive vis a vis the euro. Would the question be: put all your money into US dollars cash, or put all of your money in gold? As of today, that would be a very tough question because the gold market in my opinion is now somewhat overbought and could undergo easily a 10 to 20% correction. [47:59]
JIM: I’m sensing, Marc, as we’ve had this discussion and also from reading your newsletter, that you’re very cautious at this point. The fact that you’re holding larger amounts of cash and in the dollar is that because of the amount of uncertainty? And what would cause you to move out of cash?
MARC: Well, I think that as an investor – and I’m not a mutual fund manager or hedge fund manager that needs to show performance every week or every month – I’m a believer that occasionally the markets create an unusual opportunity. The unusual opportunity of the last 10 years was really commodities in the years 1999 to 2001, and emerging economies following the Asian crisis. They provided a lifetime buying opportunity. Now that the whole world is captivated with investments, and buying this and selling that and moving here and moving there and performance, I sometimes feel I want to actually be on the sidelines and just give it some time until I make the next major bet. I mean I’m involved quite heavily in gold. Would I put now all my money tomorrow into gold? I doubt it. And I want to be diversified. And all I can say: investment opportunities arise again and again. I mean, I suppose if Citigroup went down to $5, I’d be tempted to look at it. I’m not particularly interested here at the 27 to $30 level, because the financial excesses we had that were built over the last 25 years will take time to kind of correct. And if you have a boom sector, say, like the oil sector in the 70s, afterwards for 20 years oil was unattractive and the drillers were unattractive. And so financial stocks, after a bubble burst in that sector may not provide the leadership in the future and may be unattractive for many, many years to come. But I’m convinced, like I wrote about in my last report about Cambodia, I think there are some countries in the world whether it’s Cambodia or Ukraine or Belarus or parts of China or parts of India, or parts of Russia that can have strong economic growth even in a weakening global environment and provide investors with unusual opportunities. [50:50]
JIM: Marc, you do a lot of traveling around the globe and I think that gives you a different perspective than let’s say some analyst that stays in his office all the time. As you have been traveling over the let’s say last 12 months, is there anything that stands out in your mind and things that you’ve observed?
MARC: Well, I mean people talk about the housing bubble in the United States and the downturn in housing prices in the US. What stands out to me –and I never experienced that before and I’ve been traveling extensively since the 1960s – is wherever you go you encounter boom conditions. And some boom conditions are bigger than others. Say three years ago there was a boom in Dubai. Two years ago the boom was a bit bigger; a year ago it was a bit larger; and now, it’s difficult to imagine how the boom could become bigger to what it is right now. And the same happens in many other countries. Everywhere you have essentially a forest of cranes building; and we have an unbelievable construction boom everywhere in the world. And my view is simply: If you have a synchronized global economic boom as we have had, then the consequence is one day a global synchronized bust, because in the past usually booms were concentrated in one sector, say oil in the 70s or NASDAQ, I mean technology in the late 1990s, or Japan (1985-1990). So that was just one sector of the global economy that was booming and the others weren’t. But now I can assure you: Everywhere you have a colossal boom; and I think this will give way to colossal bust. If it’s this year or next year, who knows? But I don’t want to be caught in this colossal bust. And if someone says, “oh, we can make a lot of money over the next 12 months until it happens,” then good luck to him. I just don’t want to be overly exposed to this boom at the time when, say, cyclically I can see that there is this relative illiquidity coming up and where it is difficult to build much on the existing boom. And besides from that, if you really have boom conditions, that doesn’t guarantee that equities go up. Sometimes you have strong economic conditions and stocks go down like in the Middle East in 2006, early 2007. We had boom conditions but stocks still dropped 50 percent. [53:41]
JIM: Well, you know, Marc, I think it’s in the next week or so you meet with the Barron’s roundtable group. I’m sure I think your views are going to be much, much different than the roundtable. They usually are. Do you expect optimism to be expressed there. I mean one of the standard things that we see today, slow growth, rising markets, even though earnings are going down, interest rates are going down, so we could see multiple expansions. What do you expect your group of peers to be saying?
MARC: Well, basically, the interview took place last Monday and the group by and large is bearish on the economy. But they are in denial about the stock market. They all think that stocks will be okay, but they are bearish on the economy. And that’s what I think is happening throughout essentially the money management establishment. People are kind of cautious on the economy. The economists predict, say, a soft landing and the analysts are essentially actually quite positive because they predict the S&P earnings to grow by 12 percent this year. And so there is this environment of what I would call self-delusion. And my view is that the markets won’t perform well. But equally, as I said, if someone said you must own stocks, I think the emerging stock markets today are more vulnerable than the Dow Jones. And so if I had to own stocks, probably I would be in the Dow Jones – whereby I’d prefer not to own any stocks. [55:15]
JIM: Well, Marc, I want to thank you for joining us on the Financial Sense Newshour. You’ve been very generous with your time. I know it’s late there in Thailand where you join us. If our listeners would like to find out more about your work –and by the way, my compliments, it’s probably one of the best written newsletters out there. It’s always full of interesting aspects or thoughts on investing – tell them how they could do so.
JIM: Marc, I want to thank you so much for joining us on the program. I want to wish you a happy, prosperous and healthy new year.
MARC: Well, thank you very much for having me.
Declines of more than 10 percent in the majorover the past few months, along with the growing expectation of a recession, have set off a massive investor call to action.
By action I mean the urge to flee stocks for the apparent safety of bonds or cash. For the vast majority of investors, that move can be a costly mistake.
There Will Be a Test
At the same time that many people are overreacting to the recent market volatility, they're underreacting to other facets of their financial lives. The same fear that causes someone to bail out of a stock fund when the markets slip causes them to not act when faced with bills they don't think they can pay.
Be it a credit card statement or an impending mortgage reset, the tendency is to do nothing, and that inaction ends up costing a ton in the long run. Fear is natural, but there's a right way and a wrong way to handle fear when it comes to finances. Knowing when to act and when not to act is one of the keys to financial security.
Right now, we're all being put to the test. The choices you make in today's volatile market environment and slowing economy are going to have a huge impact on your financial health years from now.
When to Stay Put
First things first: Those of you who are active day traders, stop reading right now. My advice is not, and never has been, geared to you. I'm concerned with the millions of Americans who invest for the long term via theirand IRAs, and are scared by the recent declines in their portfolios.
For these long-term investors, the best advice is to do nothing. Yes, nothing. If you have a well-diversified portfolio that's focused on building value over the next few decades, it doesn't make sense to overreact to a few months of volatility and bail out on stocks. It's no fun watching your portfolio fall, but you need to focus on a bigger problem: If you put all your money into super-low-risk investments such as money markets or, you increase your risk, too -- the risk that your portfolio won't grow enough over time to build a hefty retirement account.
I know what you're thinking: When the market rebounds, I'll jump back in and ride the next bull run. Nice theory. But the truth is that it's ridiculously hard to be a consistently correct market timer. What tends to happen instead is that we react too late on both sides of the market by bailing out after our portfolios have already taken a sizable hit, then getting back in after we've seen the markets rebound -- in other words, well after the bull has started its run. That's a losing strategy.
Fear and Greed
If your investment time horizon is 10, 20, or 30 years, stay invested in your stock funds and ETFs. Over time (meaning decades, not weeks), stocks have consistently outperformed other types of investments. That includes periods when the stock markets fall. Doing nothing is going to net you better long-term results than doing something.
In fact, right now, sticking with your automaticinvestments is a great move. Because prices are lower, your money buys more shares. When the markets rebound, the more shares you have the more money you make.
If you need some encouragement to stay the course, how about a littlewisdom? As Buffett has said, "Try to be fearful when others are greedy and greedy when others are fearful." Right now, there's a whole lot of fear. Keep adding to your stock investments rather than bailing out and you'll position yourself well for the next upturn.
When to Get Moving
As quick as people are to react when their investments start to slide, they do just the opposite when dealing with debt. When faced with bad news about debt, the typical reaction is to freeze and want to do nothing.
I'm talking about ignoring your credit card bill because you know you can't afford to pay it off, or ignoring a big interest rate jump on your card balance. Or, when you know your mortgage rate is going to reset, and you know it's going to be too expensive to handle, you don't get proactive before the lender starts breathing down your neck.
Inaction is inexcusable when dealing with cash flow issues. You need to do something right away -- the longer you let the situation fester, the worse off your finances will be. Inaction just leads to big problems down the line.
Now, Not Later
If your problem is, the best first step is to simply pay the minimum amount due on time. By paying just the minimum, you'll keep the credit card company off your back and have a good chance of not hurting your credit score. That's important, because the next step is to see how you can reduce your credit card costs.
If you have a record of on-time payments and a here.of 700 or so, you've got a good shot at getting your interest rate reduced simply by calling up the card issuer and asking. If that doesn't work, your next step is to shop around for a balance transfer to a card that gives you a better rate deal; just be sure you understand the transfer costs. You can learn more about transfers and better card management
Those of you facing an unaffordable mortgage reset also need to take action; sitting tight is just not going to cut it. I'm not going to sugarcoat this -- the odds of your lender working out some sort of deal with you aren't exactly great, but to have any chance you need to be proactive. That means contacting the lender to talk about any restructuring options long before the reset hits. If you wait until your situation is dire -- that is, when the reset kicks in and you fall behind on your payments -- the lender has lost a whole lot of motivation to work with you.
Monday, 25 February 2008
A survey has found that
By Mak Mun San
CONFIDENT. Assertive. Practical. Not into mind games. That's what 21st-century Singaporean women are, right?
All efficiency in their smart suits, they have rolled up their sleeves and proven their mettle, earning good money as they show their savvy in the workplace, flood into top universities and make their point in politics.
But not when it comes to dating, it would seem.
Whether shopgirl or career gal, these Miss Independents turn into pampered princesses who expect the mere male of the species - as they view him - to be at their beck and call.
That's according to a recent survey of 200 singles by the Social Development Service, which found that women's expectations of their male dates are more like they are going out with Prince Charming than a real, live man.
Get this: The survey found that they expect their men to pay for their dates, deposit them safely home afterwards, initiate celebrations and dress up on special occasions, meet them at least twice a week, open doors to cars and restaurants and - oh - some even expect guys to carry their handbags for them.
The survey didn't say if they were trendy It handbags that can be the size of a chunky briefcase.
But the image of a specimen of today's manhood clutching some huge neon pink, tasselled girl-bag as he stumbles alongside his hot date does seem a strange one.
Indeed, senior marketing and communications consultant Lu Minru, 36, says that such mindsets and expectations set the feminist movement back 50 years.
'Some women are hypocritical as they demand to be taken seriously and treated equally, but when it comes to dating etiquette, they expect their boyfriends to attend to their every need,' she says.
Someone who prefers what some would call a little old-fashioned courtesy is bank clerk Choy Yuanling, 31.
She dryly recalls one disastrous first date. After the meal, the guy she was with glanced at the bill and asked her: '$24 divide by two, how much, ah?'
Sure, his mathematics inability astonished her. But what she felt was worse was his stinginess.
She did hand her share over to her date, but tells LifeStyle: 'I'm fine with going dutch (sharing the bill), but not on the first date. I think it is basic courtesy that the guy should foot the bill.'
And assistant human resource officer Eunice Ling, 32, says she expects men to do everything listed in the survey though she does draw the line at them carrying her handbag.
'If not, what's the point of having a boyfriend? I might as well hang out with my girlfriends,' she says.
For some men, already stressed with the practicalities of fighting bright, clever women at the workplace, it must seem bewildering.
And for others, it must simply seem out of touch with reality.
Mr Joseph Wong, 36, an account director at an advertising firm, declares that
'Some of them are a bit of a nightmare and expect too much from men,' he says.
'There should be give and take in a relationship. If they are always piling on the pressure on men to do this and do that, they'd just put them off.'
Mr Wong, who is married with a baby daughter, adds that he has no problems with opening car doors and paying during dates.
'But if I am expected to do all that, then I feel it is a chore. It should come from my heart,' he says.
Regional sales manager Andy Ow, 37, feels that some women just want to have their cake and eat it, too.
'Women set standards selectively,' he says. 'In certain areas, they want us to perform to their expectations. Yet at other times, they want to have their say. They are sending mixed signals and they confuse us sometimes.'
But spoilt or not, luckily for demanding
Take civil servant Ben Chin, 27. He says he is more than willing to carry a woman's handbag to make her feel 'respected and loved'.
'Yes, women are more independent these days, but in their hearts, they just want to be loved even though they might not say it out loud,' he says.
Indeed, while the survey found that 80 per cent of women expect their boyfriends to pay during dates, interestingly, 92 per cent of men polled said they would pay.
Still, Dr Ilya Farber, 39, an assistant professor of social science and philosophy at
Women lazy or what?
'If those are the most important items on most people's date checklists, then the human race is doomed,' he says, adding that the results seem to reflect the traditional image of women as fragile creatures who need to have everything done for them.
'This is rather disappointing, since getting rid of that image has historically been an important step in establishing equal opportunity for women - in education, in the workplace and in government.'
Some would argue that differences still exist between men and women, from physical make-up to earning power.
According to the Department of Statistics, average monthly earnings for men in 2006 were $4,081 compared to just $2,966 for women.
Etiquette and image consultant Teo Ser Lee, 42, feels that women who expect men to pay during dates and escort them home safely are not being archaic, but simply being real.
'These are basic social graces,' she says, adding that she expects her boyfriends to open car doors for her 'even though it is faster to open them myself'.
'I consider myself a modern woman. I'd fight for a contract, tooth and nail. But when it comes to relationships, I will take the submissive role and let the man wear the pants.'
The founder of dating agency Lunch Actually Violet Lim, 28, tells LifeStyle she has come across many female members who declined to go on a second date with a guy despite finding him witty and intelligent because he did not pay for her share.
'No matter how financially independent a woman is, ultimately, most would want to know that the guy is willing to provide for them should there be a need. Hence, seemingly small things like opening doors and paying during dates are tell-tale signs of their future to many women,' she says.
On the other hand, marketing consultant Ms Lu, whose husband is Australian, says that while they were dating as students in
'Both of us were equally in love and wanted to spend time to get to know each other, so I thought it was unfair that he foot all bills,' she says.
Still, whether a woman is all for dutch treats or else like the survey singletons and prefers date treats, some women LifeStyle spoke to nixed the idea of tote-toting guys.
Ms Sue Yeo, the 33-year-old owner of dating agency Drinks At Eight, says: 'Not only do the men look ridiculous, I absolutely do not see how doing this proves an act of love and concern. If women are too lazy to take care of their personal belongings, then don't carry a bag.'
Meanwhile, Ms Mika Fujii, 41, managing director of an advertising firm here, does not understand all the fuss.
'In Japan, many women of my generation don't expect men to do anything special for them. It's nice if he opens doors for me, but I'm physically capable of opening them myself. If he's very rich, he can settle the bill but I will be equally fine with going dutch.
'In fact, I wouldn't allow a man to send me home unless I already know him very well. What if he turns out to be a pervert?' she says.
Sunday, 24 February 2008
The most accurate definition is proffered by the National Bureau of Economic Research (NBER) that frames it this way:
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale – retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”
One observes that until recently recessions have been a normal conclusion to the business cycle. As seen, however, recently this has not been the case. In past missives I have railed at the central banks, as well as the politicians, for their continuing efforts to prevent the normal business cycle from playing. They did it again last week when the Federal Reserve panicked and cut interest rates by 75 basis points with a concurrent $150 billion economic stimulus package from the politicos. And if this is a typical recession, such maneuvers will likely ameliorate the downturn. But, what if this isn’t “your father’s typical recession?”
Consider this: typically a recession follows a tightening cycle by the central banks causing the entire interest rate spectrums’ yields to rise sharply. Clearly, this has not been the case. Moreover, recessions tend to occur in a high “real” interest rate environment where interest rates are higher than the inflation rate. Currently, when you compare the nominal, or headline, inflation rate to any of the government complex of interest rate yields (Fed Funds, 2-year T’bill, 10-year T’note, etc.), you find “negative” real interest rates. Ladies and gentlemen, negative real rates have always sewn the seeds of economic recoveries. Further, recessions are accompanied by soaring unemployment reports, and hereto this is just not happening. The final ingredient of the typical recession is a huge buildup of inventories, but given the current record low inventory-to-sales ratio, this too doesn’t “foot.” Therefore, if we are entering a recession, it is probably a financially-induced recession and not your father’s typical recession, begging the question, “Will the typical remedies work?”
How we got into this mess can be directly traced to the “powers that be” attempting to stave off the normal business cycle via the engineering of a too-low Fed Funds interest rate (1%), too much liquidity (pumping up the money supply), and a financial complex that spun the situation into a spider web of leverage resulting in an enormous abuse of credit. See if you can follow this, too many fancy loans were made to people who could not afford them (No Doc Loans, 125% Mortgages, Option Arms, etc.). These loans were then packaged into residential and commercial mortgage-backed securities (RMBS/CMBS). The RMBS/CMBS were repackaged into collateralized loan obligations (CLOs), which after receiving some sort of insurance, were then hedged using credit default swaps (CDSs). And, these complex securities were sold into even more complex vehicles like Structured Investment Vehicles (SIVs). At each step, more and more leverage (read: debt) was employed, leaving the entire mess looking like an inverted pyramid with the lonely mortgagee at the bottom, causing economist Hy Minsky to note, “All panics, manias and crises of a financial nature have their roots in an abuse of credit.”
Panic, indeed, for when the poor mortgagees stopped paying their loans, the inverted pyramid toppled right when the financial community was closing their year-end “books,” which is why we have seen so many writeoffs in the new year, as well as why the equity markets have been in a selling stampede. And, it looked like the equity markets were on their way to completing the stampede with a pornographic panic plunge last Tuesday morning -- until the Fed panicked and cut interest rates by 75 bps before the opening bell.
At the time my firm was speaking to The Wall Street Journal and remarked, “While Mr. Bernanke is clearly a very smart man, he seems to lack the market savvy of Paul Volcker in an era gone by.” To wit, if Mr. Volcker were still at the helm of the Fed, we think he would have let the markets plunge 500, 800, or even 1000 points so that they would reach a downside “cleaning price” on their own accord. When they hit that low, stabilized and started to “lift,” then and only then would Tall Paul have cut interest rates to “seal in” that low and put the wind at the back of the markets for a sustainable rally. What Mr. Bernanke did was best summarized by one old Wall Street wag who exclaimed, “He’s used the last aspirin in the bottle, yet we still have the headache!” That headache spilled over into Wednesday’s session, which found the DJIA off over 300 points early in the session, but then righted itself to close up nearly 300 points. That volatility gave us the second largest daily point swing in history and suggested a short-term trend change for the markets. Was it perfect? Not really, because we never got the “I think I am going to be sick type of downside panic hour” so often associated with selling climax lows. It did, however, come on day 18 of the envisioned 17-25 session selling stampede, so the timing was right, and we recommended committing a modicum of capital to stocks. Thursday’s session rewarded that strategy (DJIA +108), but Friday’s Fade (-171) did not.
So where does this leave us? Well, the equity markets need to string together three or more “up” sessions to indicate that the selling stampede is over. And, as long as last week’s lows hold (11971 closing and/or 11634 intraday), we still have a chance of doing that. If, however, those lows fail to hold, today would be day 21 in said stampede. Worrisome is the fact that there is a ubiquitous feeling that any downside retest of last week’s lows will be successful and consequently should be bought. While we are hopeful that will be the case, if those lows don’t hold, we will be at the point of capitulation where participants throw in the towel and walk away. We are also at the point where you are going to hear whispers about a friend being in financial trouble due to too much debt. The catalyst for a further stock slide could be this week’s FOMC meeting, where despite the 47% odds of a 50 bp interest rate reduction, the Fed stands pat in front of this Friday’s employment report. Recall it was the January 4th employment report that accelerated the stock slide into a selling stampede, which we said would likely extend into tonight’s State of the Union address.
In the meantime, one theme I am certain of is “yield.” The retiring baby boomers want yield in their retirement years combined with an adequate rate of return. This is consistent with Benjamin Graham’s definition of an investment operation, which reads, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” With interest rates near historic lows, bonds may satisfy the “safety of principal” requirement, but it is doubtful they will provide an “adequate return.” The burgeoning demand by the “boomers” for yield should provide support for select dividend-paying stocks. One such name for your consideration is 7.5% yielding EV Energy Partners (EVEP).
The call for this week: The question du jour is, “Will the rate cuts, combined with the economic stimulus package, be enough to prevent the normal ending to the business cycle even if this is not your father’s typical recession?”
Evidentially, the D-J Transports think so given their 7% rally last week! Yet even if successful, the nation faces a painful deleveraging process that will take time. As John Stuart Mill wrote in 1867, “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed into hopelessly unproductive works.”
Saturday, 23 February 2008
There's no secret to losing weight. Proper diet and regular exercise are essential, especially for the modern, sedentary lifestyle. But it's so hard because most of us love pasta and chocolate cake. And speaking for myself, exercise stinks. The key, then, is discipline. That means doing things you don't want to do -- like spending 30 minutes on the treadmill -- and refraining from urges that are bad for you.
Investing is the same way. "The stock market is completely counterintuitive," IBD founder and Chairman William O'Neil has said -- more than once. So you haven't bought First Solar yet, perhaps the hottest stock in the market's hottest group, solar power companies. Its last entry was a cup-shaped base, which the stock pushed past over 123.31 in the week ended Oct. 5. It hasn't really tested its 10-week moving average since that breakout, and you're losing patience.What the heck, maybe you should just buy some right here, right? Wrong.
First Solar is nowhere near a buy point. That means you're engaging a higher likelihood of a bad trade -- despite First Solar's outrageously great fundamentals. You aren't buying the stock at that sweet spot, above which there are few sellers and many eager buyers. How many investors do you know who just go by their instincts? How are they doing? Sound investment principles are based on discipline. It's easy to memorize the buy and sell rules. But it's far harder to stick to them when emotions try to take over.
Rule No. 1: Limit your losses to no more than 8% of your buy-in price.
Exceptions? None. So if you bought that stock at 100, and it goes to 92, you must get out. But when the time comes to cut and run, you don't want to sell out, you want to buy more.
Rule No. 2: Don't buy more. Don't average down.
You should be buying solid, high-volume breakouts from valid bases, not slumping issues looking for support.
We hate to admit making mistakes, but if you want to be a serious investor, you must do just that. Regular readers know the rules by now. In addition to the two above:
Stick with stocks that boast great fundamentals.
Buy the leaders in the hottest groups.
Only buy when the broad market is in a confirmed uptrend.
Insist on sponsorship. If the big funds don't want this stock, why should you?
By: Nazy Massoud
Have you told yourself, “I know exactly what is wrong and how to fix it, but I can't?”
Have you ever blamed yourself for not having enough discipline to follow your plans?
If so, you are not alone. People think that if you don't have self-discipline, you don't have control. They forget about the fear that creeps in.
If you look at the markets, listen to the news and notice that the Dow Jones has dropped 1,000 points in a span of 8 to 10 days, it is normal to feel fear. You are glued to CNBC, Bloomberg or any other news source, listening to the bad news piling up. They bring in one expert after another with contrasting points of view. You are looking at different securities with good potential, yet their prices are falling down. Nothing makes sense and it is confusing.
You are looking at the screen and wondering what is happening. You are frozen to your screen and cannot move. You think, “Is this really happening? Is this another crash? Am I going to lose all of my money again? What did I do wrong this time?”
Does this sound familiar? What can you do in these situations?
Some get really panicky and start having knee-jerk reaction to the markets. They are not sure why they are selling or buying. The only thing they know is that the value of their portfolio is going down and they cannot sleep. As each day goes by, their stress increases more and more and they do not know what to do or think. Before they know it, their portfolio is substantially down.
So what differentiates the traders who make money in the volatile markets from the other traders? The difference is that they recognize their fears and are willing to do what most traders won't.
You might have heard that Courage is not the lack of fear. It is acting in spite of it.
So what can you do to prevent this?
1. Realize that it is not about you.
The markets do not care what positions you have and how much money you have invested. It is about your comfort zone and your exposure to the markets.
Mark Twain said, “Don't go around saying the world owes you a living. The world owes you nothing. It was here first.”
Your success is not about what is happening in the markets. It is about your reaction to these markets.
2. Take your emotions out of your trading.
Think about a football game. If a player gets injured, it creates an uncertainty in the game. The rest of the team has no time to sit around feeling sorry for themselves. They have to adjust their game plan to see how they can win.
If you think of markets as a football game and volatilities as the unpredictability of it, it is up to you to adjust your game plan and still win.
So how do you deal with your emotions? Before making any decisions, use the pause method .
Have you ever been in situations where you wanted to think about a solution, yet nothing came to you? For instance, you wanted to remember a name, but no matter how hard you thought about it, you could not remember it?
Then as soon as you left that situation or started talking about something else, the name popped up in your mind?
Well, trading is like that. If you start looking at your screen and listening to the news, you feel frozen. No answer comes to you. But when you use the pause method, you can look at things more objectively.
So what do I mean by the “ pause method ?”
* Take a break
* Get away from your screen
* Turn off your TV
* Do not listen to the news for a several minutes…
* Get out of your office
By doing this, your mind will be ready to come up with better answers.
3. Look at your portfolio objectively.
How do you do that? One way is to assume it is not your money and it belongs to a close friend of yours.
Usually when it comes to looking at situations objectively, we are much better when we give advice to others, since we do not have our emotions involved.
A client of mine was telling me that it is much easier for him to tell others what trades they should get into and much harder for himself to pull the trigger on the same trades. So just assume you are giving advice to a close friend or an apprentice.
Before giving advice, you want to find out:
* What is in their portfolio?
* Why they get into that position?
* Is the change in their portfolio due to market conditions, a change in fundamentals or both?
* What was their horizon?
* What is their risk tolerance – Is the money used for paying bills right now or for the future?
* Can they comfortably sleep or they are under a lot of stress?
After answering all the above questions, what advice would you give to your close friend?
4. Do not fight the market - work with it.
You may have heard the saying, “Do not see the market as you want to see it. See it as it is.” It is always easier to swim with the current than against the current.
In this case, find the rhythm of the market and work with it rather than fight with it. If you cannot find the rhythm, it's okay to be on the sidelines for a while. However, remember that you have to be in the game in order to win the game.
In summary, the 4 steps to maintaining discipline in volatile markets are:
1. Realize that it is not about you.
2. Take your emotions out of your trading.
3. Look at your portfolio objectively.
4. Do not fight the market and work with it.
Remember, Courage is not the lack of fear. It is acting in spite of it.
To Making Success Your Habit
So, you slogged through more than 10 years of your life to get that coveted degree.
But are you earning a decent monthly income?
Let’s define “decent” as being at least slightly more than 50% of your cohort, or what’s called the median.
If you’re getting way below the median, maybe you need to do something about it.
Based on data from the latest MOM report on the labour force (for 2007), the median gross monthly income for degree holders in their 30s is $4,880; and that for degree holders in their 40s is $7,000.
The numbers are higher for males, by more than 5%. I’m not sure why…
The gross monthly income reported includes bonuses, commissions and other allowances that can be construed as income.
The following are the median gross monthly income for the various age groups (those for males are in brackets):
- Age group 25-29: $3,250 (males $3,270)
- Age group 30-39: $4,880 (males $5,130)
- Age group 40-49: $7,000 (males $7,580)
- Age group 50-59: $7,500 (males $7,930)
- Age 60 & above: $7,250 (males $8,170)
Are you above the median?
Reference: Report on Labour Force in Singapore 2007, Ministry of Manpower.
Which are the industries that pay the highest monthly salaries?
We’ll look specifically at the industries that has the highest proportion of employees making $10k or more in monthly income.
The results are derived from recently released data from MOM.
At number 1, we have “Financial & Insurance Services”. A whopping 17.3% of employed residents working in this industry are making $10,000 & over in gross monthly income. The income includes all bonuses.
In contrast, the proportion of such high earners across all industries is only 4.7%.
At number 2, we have “Professional, Scientific & Technical Services”. But only 10.4% here are making 5-figure salaries a month.
Coming in close at number 3 is “Information & Communications”, with 10.0% making $10k+ per month.
There you have it. The top 3 industries.
Does it mean that if you’re in these industries, you’ll have a higher chance of making $10k+? You think so? …
Reference: Statistical Table 58, Report on Labour Force in Singapore 2007, Ministry of Manpower (link)
This isn't your grandfather's Fed. Nor is it 's. This is 's Fed - a far more dynamic and assertive creature.
Last Wednesday, Bernanke loweredby 50 basis points, adding to the record 75 basis point drop he engineered on January 22nd. These two moves, barely a week apart, brought the Federal Fund's rate down a whopping 225 basis points -- 43% below where it stood less than five months ago. This is more aggressive than any decline that Alan Greenspan orchestrated during his almost two-decade tenure as Fed chief.
Bernanke is acting decisively and preemptively to try to stave off a recession, even though most economic indicators, including the Fed's official forecast, do not predict one. In fact, on the day of the emergency rate cut, no economic news, except for the sharp decline in, occurred.
Is Bernanke right in moving so precipitously? Or is he caving into to political pressures to stimulate the economy in an election year and to popular desire to keep stocks out of a?
At this point I'm going to give Bernanke's policy the "thumbs up." But I have my eyes on theand commodity markets. If the dollar tanks or surge, then all bets are off, and Bernanke will have to put an end to these cuts and may have to actually increase rates. But if commodity prices don't rise and a recession is avoided, this new aggressive policy may well change the way central banks steer the economy.
Past Policy Moves Too Slow
It's long been debated how fast central banks should move to forestall a recession or inflation. I frequently criticized the Fed for moving too slowly, both on the upside and downside. Certainly, Greenspan's "baby step" increases of 25 basis points per meeting from 2004 through 2006 were far too cautious, and contributed to inflating the.
But Greenspan was also too slow in cutting rates. From a peak of 6.5% in May of 2000, Greenspan had only lowered rates by one percentage point by the time the recession started in March 2001. In percentage terms, Bernanke's reduction already exceeds the reduction that Greenspan engineered in the first five months of 2001, when the economy entered a recession.
There are sound economic reasons for wanting short-term interest rates to move quickly. I've always consideredto be "shock absorbers" that should be changed frequently to offset shifts in economic growth. Faster adjustments in short rates could actually stabilize the long-term rate because long-term interest rates are influenced by both expectations of future central bank action and the state of the economy. If the central bank cuts rates too slowly, this generates market expectations of future rate cuts and pushes the long term rate down further. Moreover, this generates expectations of lower economic growth, which puts additional downward pressure on interest rates.
On the other hand, if rates rise too slowly, this puts strong upward pressure on long-term rates. As the economy started expanding in 1994, Greenspan began raising rates slowly. Long-term interest rates were clearly signaling that short rates were not moving up fast enough. This forced the Fed to raise rates in an emergency April meeting to dampen inflationary expectations and help stabilize long term rates.
In short, one could well argue that central banks should get to where they're going as quickly as possible. Although this policy will increase volatility of short rates, long-term rates are apt to be more stable. It's the long-term rates that have a very strong influence on housing and other capital spending, both important components of economic growth.
Despite the benefits of lowering rates quickly, this policy also has dangers. Bernanke must keep his watch on the dollar,, and inflationary expectations. Although central banks can smooth economic fluctuations, they cannot eliminate them altogether. Any attempt to stimulate demand when productivity and supply-side factors constrain output, can have disastrous consequences.
Throughout the 1970s the Fed overstimulated the economy, attempting to offset the drag from rising oil prices and other factors that reduced productivity. Instead of increased output, this policy lead directly to double-digit inflation, a situation that required a protracted period of tight money and two recessions to finally stamp out.
And there are other risks to moving too quickly. Part of the power of the central bank derives from investor perceptions of its ability to influence markets and the economy. If Bernanke's aggressive moves don't prevent a recession or a market decline, many will question the central bank's power. For this reason, I believe it is important to save powerful ammunition, such as a 75 basis point cut, for extreme conditions, such a the 9-11 terrorist attacks or when the stock market experienced a very serious decline, such as in October of 1987.
Markets are ruled by powerful forces, and if these forces have not yet been spent, it may be difficult for central banks to counteract them. If the central bank promises too much or uses its most powerful tools too soon, it risks losing investor confidence.
Nevertheless, Bernanke's new bold and aggressive policy stands a good chance of working. But just as the Fed chief has been aggressive on the way down, he must also be vigilant and ready to change direction quickly if inflationary forces flare up. Almost all economists are in agreement that the central banks' commitment to price stability is its most important charge, and the goal of stimulating economic growth must take back seat when inflation threatens.
Much rides on Bernanke's success or failure. It is often said that the Fed chief is the second most powerful position in the government. With the upcoming election and a lame-duck president, it can be argued that Bernanke has taken over the mantle of the world's most powerful policymaker.
Age isn't the only factor in deciding when to safeguard your retirement nest egg. You need to assess your willingness and need for risk before you can decide on when to change your investment mix.
By The Mole, Money Magazine's undercover financial planner
NEW YORK (Money) -- Question: My husband and I disagree on when it is time to diversify our retirement accounts. We are 46 and plan to work until full retirement age. Our accounts are invested mostly in mutual funds that are solely invested in stocks.
We don't want our retirement nest egg taking a hit from a market downturn at a time when we are getting ready to retire and can't wait for the market to turn back around. At what age or point does one begin to diversify accounts to include bonds?
The Mole's Answer: Answering this question is one of the most valuable services a financial planner can provide to their client. The answer is a combination of mathematical probabilities and the much more complex understanding of the emotional component. I'll explain a bit and then give you some guidelines to make the decision for yourself.
You have almost 20 years before you will need this money. Looking back over time, the worst the stock market has done is to beat inflation by 1% per year, while the worst bonds have done is to lag inflation by 3% per year. Thus, the mathematical answer tells you the odds are better if you keep your money in the stock market.
I think this historic framework is a good starting point. I also think it's important to keep in mind that history doesn't always repeat itself. For all of my clients, I make the pragmatic recommendation of keeping at least 10% of one's total portfolio in cash or fixed income. At the very least, it serves as a shock absorber for the portfolio and makes staying the course much more likely.
How much risk is right for you is dependent upon two things:
What is your willingness to take risk?
Since you have had 100% of your retirement account in stocks for some time, you probably have a high willingness to take risk. That means you can sleep at night when the market has one of those bear runs and you see the size of your nest egg shrink.
Measuring our willingness to take risk isn't easy. It's usually done by risk profile surveys, though they can be iffy. My personal results vary significantly from survey to survey, in that some say I'm the ultimate risk taker and others say I should keep everything in treasury bonds because I'm terrified of risk.
In my own practice, I ask people how they would feel if they saw their nest egg value cut in half. Most say they would stay the course and not panic and sell. I then point out that this was an intellectual exercise and the pain that is felt from actually losing half of your nest egg would be profoundly greater than any theoretical example.
A low willingness to take risk will likely be demonstrated by getting into the market when it has gone up and doing the panic-and-sell thing after it has plummeted. In the long run, a low risk taker is probably better off in bonds.
What is your need to take risk?
This is the critical question that is almost always overlooked. For example, I have a 75-year-old client who has a primary goal of making sure he has enough money to live comfortably for the rest of his life. He came to me with a large portfolio that could easily guarantee he met this goal. However, he had nearly everything in stocks.
I posed some unlikely, but not impossible, scenarios where the U.S. market could lose 50% or more of its value, causing his plan to fail. Since he had no need to take risk, we put enough of his portfolio in government-backed securities that would guarantee his success as long as the U.S. Government stays in business. We put the rest in diversified stock index funds.
The opposite example happens more frequently. When someone is nearing retirement and hasn't done so well in building a nest egg, they have a high need to take risk, in addition to acquiring some discipline to save. That bond fund isn't going to get them where they need to be.
Consider the following as general guidelines:
• The closer you are to reaching your financial goals, the more conservative you want to invest, so more fixed income is appropriate. Don't take risks if you don't need to.
• The more likely you are to change the allocation, the more conservative you want to invest because you will be influenced by fear and greed to buy high and sell low.
• Always keep at least 10% in bonds or fixed income.
• Any money you need in the next five to ten years should generally be in fixed income, as the stock market is too risky in the short term.
• Once you pick an allocation, stick to it. Don't let emotions destroy your retirement goals by swaying you to go in and out of the market.
Finally, while not for everyone, lifestyle funds can offer a single solution in that they automatically get more conservative as you approach the time you will need the money. It's the auto-pilot way to invest.