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Tuesday, 30 June 2009

The Great Recession is Over!

Dennis Kneale | CNBC Media & Technology Editor

I said it on our 8 o’clock show on Thursday and Friday and now I’ll put it in writing: This horrible Great Recession is over, right here and right now.

A spate of economic metrics supports this daunting prediction. We'll update this information and topspin it on CNBC Reports tonight at 8 p.m. I'll get to those numbers in a moment.

The more important factor, though, is how we FEEL.

I've said it before, let's put it on T-shirts: Capitalism is optimism monetized. As I put it in my "Parting Shot" on CNBC Reports on Friday night, hope is the magical elixir of capitalism.

And even here, the latest consumer sentiment numbers, out on Friday from the vaunted University of Michigan monthly survey, show that hope is on the rise.


Once we start to feel the risk of layoffs has passed, we will start spending more—consumers and companies alike. I reject the doomsday proclamations that the consumer psyche has been altered permanently; we want what we want.

That's not to say the next boom is here as yet. Growth will be poky and uneven at first. And plenty of obstacles loom, especially in the anti-business, tax-happy policy push of President Obama and his round-'em-up posse.

But if you aren't careful, the aftershocks and recriminations of this terrible tumble will cloud your vision of the rebound underway.

Skim these hopeful numbers:

Leading economic indicators have been up the past couple of reports; durable goods orders are up three of the past four months; businesses’ capital-goods orders just rose 4.8 percent, the largest increase in five years.

The four major indexes for stocks, which often rise to presage an economic rebound, are up 30 percent to 50 percent since early March.
At the end of last week stocks hit the Golden Cross—the 50-day moving average price of the S&P 500 crossed over and above the 200-day average. That often portends a 20% rise in stock prices over the ensuing year.

The Vix fear index on stock-price volatility is down over 40 percent in three months, falling to where it was just before the collapse of Lehman Brothers that set off a worldwide financial panic last fall.

On Friday personal income numbers came out, rising an encouraging 1.8 percent (albeit largely because of a $250 Social Security onetime boost to millions). Personal savings AND consumer spending are up a bit, too.
To me, the compelling conclusion is inescapable—the worst is over. The risk of global financial collapse has been isolated and neutralized, and the rebuilding has begun. Dow 10000 here we come.

Saturday, 27 June 2009

Why Low Earners Relax More

By Rick Newman

If extra schooling seems like a lot of effort, get used to it--the smarter you are, the more hours you're likely to work.

It's obvious that there's a big pay gap between people who have more education and people who have less: Doctors and engineers with advanced degrees earn a lot more than high-school grads working blue-collar jobs. It turns out there's also a growing "leisure gap" between more- and less-educated Americans: The more schooling, the less time devoted to leisure.

In a new study published by the American Enterprise Institute, economists Mark Aguiar and Erik Hurst reveal some fascinating facts about how Americans of different educational levels spend their time. The average American adult spent about 32 hours a week working in 2005, the latest year for which data is available, and about 106 hours a week on "leisure," which includes sleeping, eating, watching TV, and most activities you'd think of as forms of relaxing. Men spent about 40 hours a week on work, 106 hours on leisure, and 13 hours on unpaid work like shopping, housekeeping, and car maintenance. Women spent about 26 hours a week on work, 105 hours on leisure, and 23 hours on unpaid work--about 10 hours more than men.

Many people won't be surprised to learn that the amount of time we spend on leisure is falling. Since 1985, weekly leisure time has dropped by about an hour and a half overall. For women, it's fallen more. That's a reversal of the trend from 1965 to 1985, when overall leisure time increased by 5.4 hours. The reasons for the decline: Women are working more, and women and men both spend more time each week on child care.

The leisure gaps are bigger when broken down by education level. Men with more than 12 years of education--at least some college--spent 102 hours each week on leisure. Men with a high-school education or less spent 110 hours a week on leisure. The differences get more stark up and down the education chain. Men with a college degree or more spent the least amount of time on leisure--just 100 hours a week. That's down 6 hours since 1985, the biggest decline among any educational group. At the bottom of the chain, men with less than a high school diploma spent 113 hours a week on leisure. That's 8 hours more than in 1985, the biggest jump of any group. The gaps are similar for women.

It's tempting to imagine that America's professional class has become so enslaved to their BlackBerrys that their graduate degrees have done little more than turn them into workaholics. Or that there's a class of simple, wholesome Americans who simply treasure their free time and would rather relax with their families than work for any amount of money.

That may be part of the story. But another reason undereducated Americans have more leisure time is that unemployment is higher among those with less schooling: If you're not working, you're spending more time on "leisure," whether it's quality time spent with your kids or mindless hours watching cable and waiting for a recruiter to call. Disability rates are also higher among those with less education, which means less time spent on the job. It may also be true that highly educated people enjoy their work more, so they spend more time doing it. (Since the data are from years prior to the current recession, they don't reflect changes that may have resulted from rapidly rising unemployment over the past 12 months.)

Here are some of the most interesting differences in how less-educated men (with 12 years of schooling or less) and more-educated men (with more than 12 years of schooling) spend their time:

Hours spent each week on: Less-educated men More-educated men
Paid work 36.9 41.9
Child care 2.7 3.4
Total leisure 109.8 102.3
Watching TV 21.6 15.3
Socializing 7.1 6.5
Reading 1.2 2.5
Exercise and sport 2.6 3.1
Hobbies 1.9 2.7
Eating 8.2 9.4
Sleeping 60.1 56.5

The leisure data are more than just an interesting snapshot of how Americans spend their time. One of the troublesome developments in the American economy has been an increase in income inequality: The rich have been getting richer, while others have been stuck in place or falling behind. Some economists, including a few who now advise President Obama, want to change tax rates and other policies so that the wealthy take home less pay and others take home more. Aguiar and Hurst argue that their research may show that lower-earning Americans work less--and therefore earn less--because they choose to, not because the system is gamed against them. If that's true, then efforts to redistribute wealth may be directed at people who don't want it--not if they have to work for it, anyway. That hypothesis seems sure to draw vigorous rebuttals, which means we may end up spending more of our leisure time arguing about leisure.

Mountains of Debt: America's Economic Realities

Charles Wheelan, Ph.D.

Ben Franklin supposedly said that it's better to skip supper and go to bed hungry than it is to wake up in debt. Ben would be quite disappointed in us. We Americans didn't skip dinner; instead, we opted over the past decade to gorge at the buffet and then charge it.

We woke up as the world's largest debtor -- so deeply in debt that our global creditors are getting nervous, and rightfully so.

Here are some economic realities associated with our deepening fiscal hole.

It's bad. As in, $11 trillion bad. That number alone doesn't mean much, at least without context. So here is some context. First, that's roughly $40,000 for every man, woman, and child in the country. Second, our debt is projected to grow to roughly 100 percent of GDP by 2010, meaning that, if we were to devote everything we produce as a nation to paying down debt, it would take us an entire year to pay off what we owe.

Eating Up the Global Capital Pool

Other countries have become more indebted as a percentage of GDP, but they were small countries, so they sucked up less of the global capital pool. There is only so much money in the world, and we have borrowed a shocking proportion of it. The only other time the U.S. has been so indebted was at the end of World War II.

Big debt means big interest payments. The Chinese haven't loaned us a trillion dollars because we're good-looking; they've loaned us a trillion dollars because we pay for the privilege of using that capital. Interest payments now make up more than 8 percent of the federal budget -- meaning that nearly one of every 10 of your tax dollars gets you absolutely nothing in return. No schools, no bridges, no domestic wiretaps. That's just the cost of servicing the debt we've run up.

And we've done nothing terribly productive with all that borrowed money. Debt, after all, is not inherently bad. If you borrow $100,000 to go to medical school, then you've probably done a very smart thing. When you graduate, your earning potential will be higher, enabling you to live better even after you pay off the loans (with interest). In this case, you used borrowed money to invest in something that made you more productive.

Now suppose that you borrowed $100,000 to sustain a lifestyle that you could not otherwise afford: to pay the rent, to buy nice clothes, and to make the payments on your luxury car. When that bill comes due (with interest), you're no more productive than you were when you started borrowing. You borrowed used money for consumption, not investment.

Unfortunately, America's borrowing resembles the latter more than the former. We haven't upgraded our transportation infrastructure or made major investments in alternative energy or financed education for those who could not otherwise afford it.

Stop the Bickering

We need to stop bickering about who got us here. Was it the Bush tax cuts (yes) or the Obama stimulus (yes) or profligate Congressional spending (yes) or voters who continually reward pork more than parsimony (yes)? But analyzing just overcomplicates things. We are deeply in debt because we have routinely spent more than we collect in taxes. That's just a mathematical reality that has become needlessly confounded with politics.

If you're a small government conservative, that's great. But let's say enough of the tax cuts without corresponding spending cuts. Those aren't tax cuts; they are tax postponements. You've just left the bill for future taxpayers, with interest.

And if you believe that government can and should build a stronger America, terrific. I'm sympathetic: I like early childhood education and the high-speed rail and Army sharpshooters who kill pirates. If you want those things, then pay for them.

Big government or small government, the revenues need to equal the expenditures. It really is that simple.

When the Big Bills Come Due

The big bills haven't even come due yet. If the U.S. were a family, we'd be crouched over the kitchen table trying to figure out how to pay the Amex and Visa bills -- and the gigantic Mastercard bill would still be in the mail.

The big bill still in the mail for the United States is for our entitlement programs -- primarily Social Security and Medicare. We've made huge commitments to these programs that are not adequately funded. That Social Security check you're counting on when you turn 65 doesn't show up in the debt figures, but it's still money that we will owe. Lots and lots of money.

And the Chinese are worried U.S. debt, as they should be. All debtors have creditors; ours are all over the world. The biggest one is the Chinese government, which has been buying up U.S. Treasury bonds with all the vigor and foresight of a 1990s Las Vegas real estate developer.

If we don't honor our bonds, China doesn't get to repossess the White House or the national parks; they don't get to carve their own leaders on Mt. Rushmore. Treasury debt is secured by the "full faith and credit of the U.S. government" -- which won't command much at auction, if it comes to a foreclosure type situation.

Chinese officials aren't worried about bankruptcy because the U.S. has an easier and more insidious option -- we can print our way out of the problem. Our debt is denominated in dollars, and the U.S. government has the authority to print those dollars. We could take a page from the Zimbabwe policy manual and just print money to pay our bills -- thereby debasing the currency, creating inflation, and devaluing the real value of what we owe.

Is that a sensible solution? No, as it imposes the costs of inflation on all of us. I don't know anyone eager to revisit the 1970s (in terms of economic performance or fashion).

Is it a possibility? You bet. In fact, I'm surprised that long-term interest rates haven't climbed more than they have. (When long-term lenders fear inflation, they demand higher interest rates to protect against that contingency.)

The solution to all this is straightforward: Spend less than we take in, and use the surplus to pay down debt. At the risk of lapsing into economics jargon, yes, this is going to suck. Think about it: Americans don't like their current tax bills -- which aren't even high enough to pay for our current spending, let alone the bills we've run up from the past. In the future, we will have to pay more and get less.

But we've done it before. We paid off the debt accumulated during World War II. In fact, the ensuing decades saw some of the most impressive gains in wealth and productivity in American history. But it will require a radical change from what we're doing now.

An economic recovery will help. But we can't pretend that will be enough. We need to raise taxes, cut spending, and/or reform our entitlement programs. Probably all three, and in a serious way.

Will that dampen economic growth in the short run? Yes. Will it jeopardize important social programs? Yes. Will it compromise our ability to make important public investments? Yes. Does it limit what we can spend on healthcare reform? Yes.

But as Ben Franklin would have pointed out, we should have thought about that before ordering room service and then charging it to a credit card.

Friday, 26 June 2009

Were the March Lows the Ultimate Market Bottom?

By Simon Maierhofer

As investors, we like to receive affirmation for our decisions. If you buy a certain stock or fund, it sure feels good to find out Warren Buffett did the same thing.

When it comes to owning stocks right now, there's certainly plenty of affirmation. Warren Buffett doubled down on his bet on America, the Fed sees the recession nearing a bottom, and Jeff Mortimer, CIO of Charles Schwab, says that the March lows are a text book bottom.

The ultimate judge however, is the market itself. The market does what the market wants to do, not what the Fed, Mr. Buffett, or anyone else thinks it should do (more about that later).

In an effort to find out where the market is headed, and whether the March lows will hold, we will examine the opinions of some of Wall Street's brightest minds and match those up against long-term indicators with a historic track record of accuracy.

Redemption for Warren Buffett

The 30% spike off the March lows must feel like redemption for Mr. Buffett. In his October 16th, 2008 New York Times co-ed interview, Mr. Buffett stated the following: 'I've been buying American stocks ... If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.'

Since Warren Buffett's October 2008 interview, the S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI) and Nasdaq (Nasdaq: ^IXIC) dropped another 30%, while the Financial Select Sector SPDRs (NYSEArca: XLF - News) fell as much as 62%. I wonder if Warren Buffett is already invested 100% in U.S. equities.

Contrary to Buffett's viewpoint, the ETF Profit Strategy Newslettr predicted a 2008 bottom below Dow (NYSEArca: DIA - News) 7,500, and a Q1/Q2 bottom below Dow 6,700 (the Dow bottomed at 7,392 and 6,440).

Regarding the March 2009 lows, George Soros, the billionaire investor who came out of retirement to steer his Quantum fund to an 8% gain in 2008, believes that the worst is over and the risk of a collapse has passed. Mr. Soros is convinced that the government's bank rescue plan will ultimately revive ailing financial institutions, such as represented by the SPDRs KBW Bank ETF (NYSEArca: KBE - News).

A less gloomy Dr. Doom

Nouriel Roubini, one of the few economists who foresaw the financial debacle, follows the same train of thought. In April, he said that, 'Policymakers in the US, Europe, China and abroad have decided to use at maximum all their policy instruments (monetary, fiscal, cleaning up banks, resolving debt problems, helping emerging markets), they are using the bazooka and mid-size rocket, and that policy stimulus eventually will slow down the rate of economical retraction. We are seeing improvements that will get us out of this global recession by the end of the year.'

Mr. Roubini, who previously earned the nickname Dr. Doom, thinks a retest of the March lows is likely but does not expect a serious breach of them.

Interestingly enough, the credit for the recent rally is given to the Obama administration for (successfully?) diverting financial disaster. In reality, the market had begun its rally nearly two weeks before Mr. Geithner announced the Public Private Investment Program (PPIP).

After a 55% decline, some sort of rally was surely overdue. As early as mid-November 2008, the ETF Profit Strategy Newsletter predicted that the 2008 lows would be broken, followed by a multi-month rally. Early in 2009, the target level for a bottom was narrowed down to Dow 6,700 - 6,000 range followed by a 30-40% rally.

Charles Schwab Execs are bullish

From a technical perspective, Jeff Mortimer, CIO at Charles Schwab, says that the March lows are a text book bottom. The market is still undervalued, 'buy the dips' over the next 12-18 months, Mortimer advises.

According to a May 7th interview with Paul Allan Davis, a managing director who manages $4.5 billion for Schwab, the fact that higher risk sectors such as the Consumer Discretionary Select Sector SPDRs (NYSEArca: XLY - News) and Technology Select Sector SPDRs (NYSEArca: XLK - News), along with small-and micro cap stocks, such as represented by the iShares Russell 2000 (NYSEArca: IWM - News) and iShares Russell Microcap (NYSEArca: IWC - News) are outperforming defensive areas, is a bullish sign.

Commenting on Mr. Davis' thoughts, a reader posted the following note: 'Isn't this guy two months too late. Many stocks have already doubled. Getting in now isn't gonna get you the big return. Roubini said L shaped recovery - he was wrong. I listened to the wrong people, I am dumb and mad.'

There is some truth to his words. The doomsday atmosphere reached new levels surrounding the March lows. Where was the financial leadership? How come all the brilliant minds didn't tell us to buy the March 9th lows? It's easy to make judgments months after the fact (we'll see if that judgment will be correct).

On March 2nd, the ETF Profit Strategy Newsletter sent a Trend Change Alert to subscribers on record advising them to start selling short ETFs, and accumulate long and leveraged long ETFs. Depending on your risk tolerance, those ETFs included plain vanilla index ETFs like the iShares S&P 500 (NYSEArca: SPY - News), and dividend ETFs with high exposure to financial, or leveraged financial, ETFs like the Ultra Financial ProShares (NYSEArca: UYG - News).

Also, after the fact, comes Gary Stern's assessment that the Economy is nearing the recession's bottom. Gary Stern is the President of the Federal Reserve Bank in Minneapolis and the longest serving Federal Reserve official. Mr. Stern sees increased consumer spending, partially caused by an uptick in lending activity. This is often the beginning of a new cycle of economic expansion, he points out.

Just a snapshot - not a forecast

You may have noticed that the forecasts by Messrs. Buffett, Soros, Roubini, Mortimer, and Davis are contingent upon successful government intervention, or current data. Data such as consumer spending, retail sales, housing starts, etc. is merely a snapshot of the current situation. As such, they have no 'crystal ball-like' powers.

To the contrary, as we've seen in March and late 2007, news in general tends to be good towards the top and bad towards the bottom. News-based forecasts are subject to change; and who likes adjusted forecasts?

How would you feel if your car dealer told you that it was necessary to 'adjust' your estimate because they didn't figure their cost correctly? 'Adjust' for investors always means losses to their portfolio.

Warren Buffett made a very insightful comment in September 2008, right before he decided to invest in Goldman Sachs. He said he 'believes the proposed federal bailout will get approved and succeed. He further states that if congress fails to approve the bailout, all bets are off and his investment in Goldman Sachs, along with all other investments, will get killed.'

As we know, the bailout did get approved. The initial success rate was close to zero. Mr. Buffett's net worth, along with the stock market, shrunk by some 30%. Is it really smart to base your decision on the success of an event that is completely out of your hands, and entirely unpredictable?

Forward looking analysis based on the market's own internal indicators, tends to be much more reliable than external, often unrelated, projections. Who would you trust to take your body temperature; a doctor sitting right next to you, or a nurse trying to take your temperature over the phone?

The market's internal indicators

Just like the human body, in its own language, the market conveys whether it's overheated, fairly valued, or undervalued. Ironically, most analysts choose to ignore the market's signs. Schwab's Mr. Mortimer, compared the March lows to the 1974 and 1982 market bottom. Despite a discrepancy in P/E ratios (compared to the '74 and '82 lows), Mr. Mortimer believes the market has bottomed.

An analysis of all historic market bottoms over the past 100 years shows that the stock market simply has not reached rock-bottom unless P/E ratios, and dividend yields, reach certain levels.

Just as ice does not melt until temperatures are above 32 degrees, the market does not bottom until those levels are reached. This timeless piece of Wall Street wisdom has protected many investors from financial ruin and will continue to do so.

Students of such faithful indicators can use the market's signals to identify a target range for the ultimate stock market bottom. This target range is not based on current snapshots and opinions; it's founded on historic patterns and what the market is saying. The March and June issue of the ETF Profit Strategy Newsletter contain a detailed analysis of P/E ratios, dividend yields, the Dow measured in gold (NYSEArca: GLD - News), and other trusted indicators, along with target ranges for the ultimate bottom.

The New Way to Crunch Your Numbers

by David Adler

Using liability-driven investing to better meet your retirement goals.

It works for the big dogs, and it might just work for you. "Liability-driven investing," a strategy that has been sweeping the world of pension-fund management, could be the next big trend in retirement planning for wealthy individuals.

LDI, as it's known, calls for matching or at least explicitly considering your future expenses when designing a portfolio, rather than focusing on asset growth alone. The idea is to assemble investments that will generate enough gains, and at the right times, to cover everything from greens fees to a bequest to your alma mater. So far, it's mostly being used for portfolios of the super-rich, but experts say it can work just as well for the merely well-off.

LDI certainly has taken hold among large U.S. pension funds, about half of which now use it or are considering doing so. The big liabilities of these funds -- future payments to retirees -- resemble long-term bonds and are extremely dependent on interest rates. If interest rates fall, it's harder for a fund to earn the money needed to make the payments. Therefore, "the heart of most LDI strategies used by pension funds is to try to take this interest-rate risk off the table, so that assets and liabilities move in lock step when interest rates change," says Mark Ruloff, the director of asset allocation at Watson Wyatt Investment Consulting.

This can mean something as simple as investing the whole fund in bonds with the same interest-rate sensitivities as the liabilities. But liability-driven investing also has more sophisticated variants. For instance, a pension fund may run two separate portfolios -- one focused on hedging interest-rate risk using derivatives such as swaps, the other aiming to grow assets through exposure to stocks or other investments. Combined, the two portfolios remove the unwanted risk of an interest-rate mismatch but still offer the possibility of growth.

Individuals planning for retirement might not need swaps and the like, but they do have plenty of liabilities that need funding, including essential ones like food, health care and housing. Retirees also will want money for theater tickets, hockey games or foreign travel, and they will want some left over to leave a bequest. Put more bluntly, individuals planning for retirement seemingly have irreconcilable goals: money that they need and money that they want. Call it fear and greed.

Which is where LDI comes in: It precisely targets both goals through separate portfolios, making sure that the retiree has enough to live on, but also has the opportunity to boost his principal. In contrast, the traditional approach to retirement investing mashes both aims together in one portfolio, which meets neither goal with precision. Though this single portfolio may implicitly acknowledge future cash flows, liability-driven investing, as its name implies, explicitly keeps the liabilities in mind, creating very different -- and, advocates argue -- better portfolios than are common among retirees today.

"Typically, wealth managers begin by asking what you need to live on. But they are not attentive to the time pattern of the needs or the minimum you can't do without," observes Andrew Rosenfield, CEO of Guggenheim Investment Advisors in Chicago. "And none of this is tightly bound with the question of how to invest the money, which is just amazing."

Perhaps not surprisingly, the moneyed world of family offices has emerged as the first LDI beachhead for individuals. These outfits routinely handle portfolios of $50 million and up. A handful of family offices, including such prominent ones as Guggenheim, already have implemented LDI-style approaches, and asset-manager BlackRock is studying how to bring the approach to a broader swath of wealthy individuals.

"Historically, the wealth-management business has focused on the asset side," says Brian Feurtado, BlackRock's head of wealth management. "Tying investments to liabilities has been long overdue." BlackRock is working with Boxwood Strategic Advisors, a New York consultant, to find the best application to individuals. Their first step is to get a handle on a wealthy client's true balance sheet, including hard-to-value luxury assets like art.

David Rosenberg, chief investment officer of the Threshold Group, a family office outside Seattle that uses the LDI framework, breaks clients' goals into three different categories: lifestyle, risk-taking and legacy. Each carries with it different level of risks and rewards the client is willing to tolerate. Rosenberg then creates distinct portfolios to optimally serve each need.

Take, for example, the cash outflows needed to fund a client's lifestyle. Clients tend to want to immunize themselves from most potential risks when it comes to meeting these basic payments. Taking an approach similar to a pension fund's, Rosenberg has found this liability stream can be fruitfully addressed by matching it with a fixed-income portfolio of similar "duration," a measure of interest-rate sensitivity. For example, if you plan to contribute to a grandchild's college education, you might want four bond investments with different maturites, with one maturing in each year of college.

Moves like that allow you to breathe easier. Says Rosenberg: "With their lifestyle not under the threat of financial stress, clients can begin to make more thoughtful and open-minded decisions about risk with the rest of the portfolio." Since these portfolios are no longer encumbered with having to meet any cash-flow needs, the world of asset classes is opened up, including hedge funds, private equity and other investments with potentially high returns.

Last year, in the darkest days of the financial crisis, LDI fared well. Rosenberg says that his clients were better able to handle the crisis -- both financially and psycho- logically -- than if they had used traditional investment approaches. "Instead of saying the world is falling apart, they could say 'my world is secure, and the rest of world now has lots of opportunities,'" he adds.

Who Should Consider LDI

The LDI framework is most useful when people are living primarily off investment income, which is why it has attracted the attention of family offices. Those outfits also have the resources and technical expertise to create the sophisticated portfolios required. But many retirees with far less wealth also depend on investment income.

The sweet spot for LDI is investors with portfolios in the $500,000 to $10 million range, argues Larry Siegel, research director at the CFA Institute's Research Foundation. Above this level, investors aren't likely to run out of money during retirement, even if it means wriggling out of philanthropic commitments, should the portfolio tank. Below this range, a retiree doesn't really have enough assets to be able to implement the liability-driven investment approach.

A more critical stumbling block for people approaching retirement is the lack of a perfect or easily available liability hedge. There simply is no off-the-shelf product that leaves individuals with perfectly matched assets and future liabilities.

Annuities, with their insurance features, are one excellent way to hedge your longevity risk -- the danger that you will outlive your money. However, they expose investors to the credit risk of the insurance company. TIPS, or Treasury inflation-protected securities, provide inflation protection, but the returns are painfully low. Bonds, for their part, bring interest-rate risk and inflation risk. Individuals might somehow be able to cobble together a bond portfolio that matches their personal liabilities, but it won't be nearly as precise as the efforts of pension plans. That's because pension managers have the know-how and technology to keep durations matched through frequent trading.

Right now, many investors don't even try to match their assets with future expenses. "Just look at their portfolios," says M. Barton Waring, chief investment officer for investment policy and strategy, emeritus, at Barclays Global. "You don't see many attempts to match liabilities with Tips or annuities or long bonds." Instead, he says, many retiree portfolios are simply too equity-heavy.

While traditional retirement portfolios often include bonds to offset the risks of stocks, the payment streams of the bonds are rarely matched closely with future expenses. For instance, a mutual fund benchmarked to the popular Barcap (formerly Lehman) Aggregate bond index would have too short a duration to match such liabilities as long-term care.

Is all this theoretical, or does liability-driven investing really pay? Watson Wyatt's analysis of corporate pension funds found that those who used LDI, rather than traditional strategies, had a higher return on assets over the past two years. But the main argument in favor of LDI is much starker: "Traditional portfolio strategies failed in 2008," says Watson Wyatt's Mark Ruloff. "Simple diversification is no longer the whole story. Hedge funds, REITs and the stock market all went down together."

LDI, though still in its infancy, could be the missing part of the story. It just might put a real shine in the golden years.

Thursday, 25 June 2009

资本汇·城市与商会投资高峰论坛24日下午在上海香格里拉大酒店召开。嘉宾围绕“紧抓需求·招商亮剑”主题展开热烈讨论,以下是嘉宾谢国忠发言实录。

谢国忠:谢谢大家,很高兴有机会今天和大家交流意见。现在形势比较复杂,大家有很多疑问,我的观点是我个人的观点,大家等一下可以互相交流。
  
  金融危机差不多有两年的时间了,从07年8月份次贷危机开始来算。经济危机也差不多一年时间了,08年第三季度开始世界经济出现下滑。今天第一次观点有很大的变化,过去三个月里面,全世界的股市上升了近5成,发达国家也上升了有3成,一些地方房地产也有回升,不少观点认为危机过了,新一轮的增长又开始了。但这个观点呢,并不是说得到那么多人的支持,因为我们看到的是市场波动很大。市场波动大,意味着大家观点还是不一致。总的来说,乐观的人占上风,所以为什么会出现市场朝上走。
  
  我先解释一下,我们的危机到今天这几年是怎么走过来的,要了解问题为什么会出现你才会对未来变化有比较切实的理解,不会听别人说说就改变你的观点。我们今天的危机是很多年积累起来的,我写这个问题,光写问题就写了10年。这个危机,主要是过去20年经济繁荣当中有一些走过头了。我们的经济繁荣20年,是因为全球化和技术革命,特别是IT革命带来的。这两个力量使得世界经济出现了史无前例的繁荣,这个繁荣的出现,不仅是有了繁荣,还有很重要的一个是比较稳定,20年没有出现过很大的危机,我们出现的危机,主要的是新兴市场出现了94年墨西哥的货币危机,98年出现了亚洲金融危机,00年出现了高科技的调整,这个危机总的来说,时间都很短。墨西哥的危机对我们都没有什么影响,98年的危机,差不多一年半的时间,99年大幅上升。2000年、01年高科技的回调,幅度很小,两年就起来了,这个繁荣是史无前例的。而这么长时间的繁荣,波动那么小,引起了大家对风险的低估,所以金融出现了史无前例的繁荣,一般人对风险,认为风险小,所以大家对金融特别感兴趣。
  
  这个背后,我觉得是出现了一个泡沫,这个泡沫的问题主要是因为货币政策引起的。我这么多年一直在写格林斯潘是制造泡沫的人,他认为解决任何问题都是靠增加流通。增加流通就是增加货币供应量,读过经济学的人都知道,70年代的时候出现了货币供应过多,引起了通涨。后来引起了货币论,印钞一定会通涨,货币增加得多,通涨是不可避免的。格林斯潘一共主持了美国货币政策18年,18年当中,他每次用的都是印钞票解决问题,但是没有出现通涨啊,就在这个阶段出现了一个新的论点,认为通涨和货币是没有关系的。但是这种想法,其实是非常暂时的现象,其主要的原因是因为我们出现一个力量把通涨压住了,这个力量就是全球化,全球化使得发展中国家的劳动力进入了世界市场,把发达国家的工资压住了,美国的实际工资20年来没有什么增长。工资的增长扣除通涨,没有什么增长。另外一个是IT的力量,也减少了生产的成本,这两个力量使得货币供应暂时不引起通涨,货币的供应量进入了资本市场,资产市场,引起了股市、楼市的上升。股市楼市上升之后,带动了需求的上升,所以为什么格林斯潘当时能够那么有效的去管理经济,每次经济下调的时候就可以通过发放货币把经济拉回来,实际上是在搞泡沫。搞泡沫里面,有一个很明显的东西可以看到的,那就是负债率的大幅度上升。负债率的大幅度上升,借来的钱去买股票、房地产,引起股票、房地产价格的大幅上升。这是积累了那么多年起来的,我们看到,在格林斯潘时代出现了很多相对价格的变化。比如说美国的住房价格,美国住房从历史上来说,总的价值和GDP的比例历史平均就是一倍以下的,上次泡沫是1.3倍,低的时候是0.7、0.8倍,收入和房价的比例是比较稳定的,这次达到1.7倍,是历史上没有出现的,英国的房价更离谱,房价和收入的比例,从94年最高点也就是06年,增长了200%,美国增加了100%。这个价格的出现,就是说通涨被一个特殊的力量压铸以后,央行印钞票过度刺激了资产市场,引起资产价格上升,财富效应带动需求,格林斯潘通过制造一个新的泡沫解决过去的泡沫爆了之后遗留下来的经济问题。现在这个大泡沫爆了之后,有很多人认为我们要制造一个新的泡沫才可以解决经济的问题,所以有很多观点认为印钞票、再搞一个泡沫,大家觉得泡沫爆了之后人活不下去了,昨天的日子那么好过,股价高、楼价高、盈利高、消费业旺,突然泡沫爆了,刚刚爆的时候政府还改革,指责华尔街贪婪,带给我们这么大的灾难,现在不谈了,全世界的人现在都在唱好。为什么?怀念过去的泡沫,就想回到昨天多好啊!
  
  在这种心态下,政府放钱,靠什么?减息,这个钱放出来又引起资产价格的上升。你怎么理解这件事?这是不是昨天的回来?我们是不是可以回到格林斯潘的时代?资产价格上升之后带动实体经济的上升?然后我们又回到过去的好时光,我觉得这个可能性是非常小的。为什么?过去我们世界经济的流动框架,货币从央行放出来,最底层的就是中国和美国的互动,中国是低成本,农民进工厂拿一点工资,造产品,卖给美国人。美国人因为货币政策的关系房价上升,他买东西,这个钱留到中国,中国再借给他们。中国生产、美国消费,当中的钱是借来的。这个核心,里面有很多因素,第一个你要把通涨压住,这很重要的一个概念,就是过去20年美国价格变成中国价格,美国的工厂搬到中国这是一个过程,原来是美国的劳动力生产成本决定价格的,20年后,工厂已经搬到中国以后,这个价格下降的过程已经结束了,现在世界上就是中国价格。但是中国价格本身是上升的,过去中国价格上升的时候,世界经济是感受不到的,因为美国价格很高,你掉到中国价格,中国价格上升没有什么大的影响,今天都变成中国价格,中国价格在上升,所以这个是一个通涨性的。对货币的供应,一定会有限制。另外,在美国的钱要传递到消费,要通过房地产。美国的房地产不能像中国通过政府手段扭转,中国的开发商其实就是政府,房地产开发商都是为政府打工的,土地都是在政府的手里,银行又是政府控制的,政府对房地产的影响是非常大的。美国不一样,美国的土地是私人拥有的,美国造房子是无法控制的。过去的过程,在房价上升的过程引起很多房地产供应的上升,这个供应的上升给第二套房,就是渡假房吸纳的,这个市场已经饱和了。现在还有那么多房子,所以房价有一个还原。这是中国对房地产的看法,和其他地方对房地产的看法是有区别的。大部分中国人认为土地是有限的资源,为什么中国人那么想占有土地?他觉得土地是有限的,长期会涨价的。我在日本泡沫看到过,日本房价很高的时候,我第一次在日本夏天打工,我看不懂日本的房子房价是美国10倍,很简单,我看不懂日本的工资和美国差不多,房地产的价格为什么会是10倍呢?东京的人指着山说,山围着,就这么一些地,这些地只会涨不会跌。你今天去看,土地价格跌了10%都不止。当时我去一个同学家,他住在上海青浦这样的地方,坐火车获取1个多小时,100多平米的房子,要卖600万美金,当时的600万美金相当于现在1000多美金,他们全家工资加起来是10万出头一些,比例那么失调,当时没有人认为这是一个问题,为什么?土地就那么多,土地总有人要的,别人要的时候,这价格会上升的,每个人都信,这个想法就推动了市场土地价格继续的上升。但他最终出现了拐点,掉下去再起来是很困难的。而且,在美国的土地特别多,日本至少还说土地有限,土地有限这是一个虚拟的概念,土地有限,你土地可以到海里去要的,可以围海造地的,这很便宜,所以,这怎么会说土地供不应求呢?但是人的心态到了一定的阶段,他就每个人都信,因为每个人都相信土地价格会上升。当时日本钱都集中在土地的市场,其他地方的通涨也没有那么多。美国,房地产价格要回来几乎是不可能的。昨天报的数字,房地产的价格继续大跌,虽然股市涨了差不多50%。为什么?土地都是私有的,经济学有一个道理,资产的价格是再生产的价格,房子的价格是再造房子的价格来决定的。如果你觉得土地是买不到了,那价格就随便你说了,是不是?但是土地毕竟还是有的,所以在美国的土地都是私人有的,政府无法控制。在中国至少有政府一看房地产市场不好了,他就不拍卖土地了。那边央行说,你要买房子,可以借钱。但是这些在美国是不可能的,我一个朋友买了60公顷的土地,那是10年前,那相当于700多亩地啊,当时他造了木头房子,10多万美金。所以,土地在美国是不值钱的。原来通过货币吹起来的房地产价格倒下来,最终回不来,怎么也救不活的。我听到中国很多人要到美国买房子,千万别买,跑到美国去,去曼哈顿去一看,说房子比上海还便宜,美国历史上,房子历来便宜,因为地多,土地都私人拥有,而且每个房子供应是无限的。我原来有个同事,他是天主教的,所以每年他都生一个孩子。在中国,现在是独生子女政策,那房子那么贵怎么生得起?上海出生率、香港出生率那么低,最主要的原因是房价引起的。我的同事每年都有电子邮件说我又生了一个孩子,起了什么名字,和大家说我去什么地方买工具、买木板,回家就在自己房子旁边搭个房间,他的土地相当于供应无限的。在中国行吗?一平方米1.5万了,怎么可以随便搭房子?
  
  因为房地产回不来,所以美国的消费起不来了。因为本来房地产做抵押到银行贷款,如果房价再掉,就无法到银行抵押、借钱,所以消费不会好,消费不会好经济也不会好,所以美国的经济要回来很困难。过去是走过头,负债率过高,房价不可能朝上涨,让你继续借钱把这个东西放大,所以你回头走了,这就要还债啊,美国家庭负债率现在是140的家庭收入,过去历史上就一半,多出来的一半就是房价高引起的。杠杆越用越多到去杠杆化,这会引起经济长期低迷。美国的家庭储蓄率历史上平均是8%,泡沫当中变成负的,为什么存钱?房子每年都涨那么多,你觉得越来越有钱,不用存钱啊。现在,很快就回到5%,要超过10%,靠这个慢慢的还钱。美国家庭负债刚刚下降,今年第一季度刚刚下降了一点点,这个过程是要好几年的。所以美国的经济是5年里面回不来的,需要很大的调整。而且,不仅是负债的问题,还有成本的问题。这20年,最重要的是医疗成本,从8%的GDP到16.5%的GDP,这个调整要花很久,要把医疗成本调回去。医疗成本和人口年龄指数、平方成正比,在人口老化的过程中,医疗成本是上升的。另外,美国毕竟比其他的国家上升那么多,是他体制有问题,另外是美国人这几年体重上升也有问题。美国1/3的人从医学定义是有肥胖症的,心血管病比较早发,引起医疗成本上升。为什么美国总统很好,白宫种蔬菜是很重要的,鼓励大家吃蔬菜。美国这个问题不仅是债务的问题,还有很重要的一个社会现象,这个社会现象不解决,美国的经济要好也不容易。为什么认为美国经济会很快回来,和中国良性循环的可能性非常小,这件事就先别想了。为什么我说这件事?中国是靠出口,说内需内需,这是说给外国人听的,我们主要是靠出口的,外国的经济非常重要。你看欧洲和日本,都是人口老化,对他们的社会经济影响非常大,过去这几年的问题是被世界经济繁荣掩盖了,现在都曝出来了,德国人口下降已经有10年了,我们都在说日本的人口下降。他们的失业率过去是10%以上,后来掉到7%,这是经济繁荣,现在又回去了。为什么事业那么高?因为你就业工资大部分的人是给别人养老的,工作有什么积极性?不工作的,像德国,你失业救济金相当于工资的7、8成,你还有积极性工作吗?我搞不懂,为什么欧洲人还要干活呢?他的经济体制是不鼓励大家工作的,不鼓励大家去赚钱,所以经济不太会好。经济不好,我觉得这也是一个社会的选择。中国人现在不懂,经济好,赚钱,全世界没有像中国这样的国家。我们看到人家经济不好就替人家着急,其实人家觉得这样不错。他因为结构性的问题,人也没有这样的愿望,他这样活着挺开心的。欧洲也好不了,你看日本,这次日本比美国还惨,日本的GDP下降是两位数,这么大的经济体,从30年代到现在,没有出现过这么大经济下滑是两位数的。工业下降30%,昨天出的5月份出口下降40%,日本真正的是大箫条啊,从89年开始一直不好,但至少平稳,这次是掉下悬崖了。日本的公司第一次出现了大幅度裁员、关厂,为什么会出现这样的问题呢?日本其实是非常依赖于出口的,而且出口变得非常专业,过去日本在80年代的时候有很多产业,日本主要依赖的是汽车产业。日本人的汽车造得很好,你买车很可能购买日本的车,其他地方的质量相对都下降。日本最终倒霉的是买车的人没有了,汽车的需求是靠信贷支持的。你看房地产的问题,汽车和房地产一回事,都是靠借钱撑着的。美国人过去,一般3年换一部车,开车三年就觉得不爽了,怎么总是开这个车?那个车好啊,到店里一看,说买这个车,不要钱,你开走吧,没有首付、没有利息,你每个月给我200块吧,感觉我赚2500,每个月200还行,就每三年换一个车,其实这个车开七、八年都没有问题,那时候是因为信贷宽松引起的,而现在没有了。没有了,他也就开老车,不想新车了,观念大变化了,所以汽车需求下降了一半,至少下降了1/3。所以,汽车厂关门不是简单的周期性问题,而是掉下来之后就不起来了,就爬地上了。日本的经济为什么那么糟?第一次大裁员,日本人相信是平等的,大家差不多,这次实在受不了了,关厂、裁员那么多。过去日本人不敢拿救济金的,感觉丢脸,而现在呢?排队啊。至少就说明,你说日本没有需求,人口老化,大部分的财富集中在65岁以上的手里,年轻人没有什么消费能力的。这样的经济怎么会很兴旺呢?不太可能。日本、欧洲、美国加起来,都不太可能短期内经济好,不管再怎么刺激。他们占世界经济的3/4,世界GDP55万亿美金,日本、欧洲、美国占40万亿,发展中国家就15万亿,现在出现一个说法“西方不亮东方亮,别人不好我们好”,我们13亿人呢。我们说刺激消费,什么家电下乡等,经常有新名堂,弄点钱,但是钱都很小,暂时对某个企业有作用,但是对整个的经济来说是没有什么大的作用。9亿的农民,存款我们可以看到的,你让他们存款买东西,以后他们更穷了,问题更大了。中国管经济,有时候利用老百姓的弱点,为什么说家电下乡管用?说中国人爱贪小便宜,说你买了东西到我这里来我给你退现金,他感觉不买就亏了,所以有短期的刺激。我们看到的数字,从生产性的数字,全世界来说,中国的数字稍微有点好,就是PMI等等,这是存货周期引起的,最终的需求,像零售,全世界没有地方增长的。中国有点增长,我不知道增长多快,我看到很多企业也没有什么增长。我们统计局说有20%的增长?我也不清楚这个数字哪里来的。公司投资呢?最终需求不好,过去又投资那么多,怎么公司可能大量投资呢?没有的。中国银行贷款,从去年12月份开始到5月份,6个月加起来6万多亿放出来,现在炒东西的钱和这6万多亿有很大的关系。6万多亿全世界疯炒,炒石油、炒股票、炒房地产,中国的虚拟经济一下子好像变得很火爆,但实体经济呢?我看不出来很火爆,有苗头会火爆,但是我没有看到。民企,我很少看到有人说要投资,很少。和一般的民企老板,我见他们都说不干了,企业卖掉,弄点钱,炒股、炒房地产,这样活着挺好的,如果大家都不干活了,都炒股、炒房地产,这经济怎么会好呢?那剩下就是国企,中央的领导人一个命令你就得投,现在很多企业都有生产力过剩的问题,你能再投多少呢?现在在投的,我真正可以看到的,真的有增加的是基础设施建设,铁路、公路这两边可以看到。铁路公路占GDP的比例也不是很大,另外现在造铁路公路不用什么劳动力,都是机器造的,对上游的材料供应有一定的好处,对市场带来的好处是有限的,这和过去我们的概念,投公路成千上万的人在上面干活,这个时代已经过去了。对经济来说,对就业的影响是比较小的。我刚刚说的这个事,就是短线的事要经济很快回来是不可能的,但是现在是要大家相信经济回来,股市楼市好了经济不就好了吗?是倒过来想的。所以为什么要先催大虚拟经济?经济很健康的时候,你这样做可能能产生一定的效果,但是经济固然是个泡沫,已经爆了爬下了,你打个强心针他站起来大家就说没有问题了,接下来要跑步了?我觉得这个可能性不是很大。
  
  全世界在唱好,带来虚拟经济的繁荣是不可维持的。接下来的拐点又会出现,这个拐点是什么呢?就是通涨的出现。刚刚我说到了放钱,在格林斯潘时代放钱没有通涨。如果放钱永远不来通涨多好?所有的人就不用干活了。但是所有人都有钱没有人干活,东西一定会涨价的,因为东西的供应变少了,这不符合逻辑的。你放钱多了,总会出现通涨的。现在,4、5月份我和一些食品行业的公司了解情况,所有的供应材料价格都大幅度上升。大宗商品,从1月份到现在价格都明显加倍。土地的价格又是给政府控制,现在我们有三步政策,不许降薪、不许裁员、不许拖欠工资,这个成本也只能上不能下,所以变成通涨的可能性非常大。中国有通涨就意味着世界有通涨,过去是靠中国的IT压着,现在IT已经差不多消化了,如果中国有通涨全世界都有通涨。通涨一来,就要加息了。加息之后,最后一根救命稻草--印钞票,没有了。
  
  这个过程,明年可能更痛苦。只有到最后一根救命稻草都没有的时候,人才会放弃。现在因为大家看到股市来了,每个人都在唱好,觉得全都好了,你不能说不好。现在我要还在投行工作,他肯定会被抓起来。现在所有的都得唱好,不唱好不行。几个月前多痛苦啊?现在好不容易泡沫做起来一点了,大家都非常珍惜,要维护这个泡沫,一点点把它弄大。我觉得基本的环境是不利的,不太可能我们再制造一个泡沫来处理上一个泡沫爆掉之后留下的问题,这个泡沫做不成。今天我们看到的是非常虚的,最重要我们要回来,只有通过改革。我刚刚说的故事,就是美国、欧洲、日本经济回来可能性不是很大,中国很多人想先炒起虚拟经济,明年全世界的经济好了我们不就接上了吗?老电影重新放就行了,但老电影放不起来了,明年你会发现虚拟经济和实体经济脱空更严重。世界逼中国单干,中国要自己创造繁荣,不是和美国人、西方人互动,那边和你互动不起来,人家没有钱了,你得自己动起来。中国的确人多,但是中国人的问题就是老百姓没有钱。中国过去10年经济的繁荣和98年经济的调整有很大的关系。98年政府做了三件事,把国有企业改革,打破铁饭碗,轻装上阵,提高竞争力。第二件事是加入WTO,把中国变成世界工厂,让世界的跨国企业到中国来发展,他们得到中国的低成本、中国得到了就业。第三,公房给住户,名义上拿了点钱。以上这三个都是针对城市的,WTO是给民工带来了好处。对大部分城市家庭来说,今天他们的财富主要还是公房分给他的财富。你想想,没有这个财富,老百姓怎么会消费呢?所以这是非常重要的,十年的繁荣这三个政策是非常重要的。这三个政策,我们给老百姓一定的财富让他消费,最重要的是我们成本下降之后,能在世界全球化过程中得到更多的好处,提高我们的竞争力。今天有竞争力没有用,因为没有需求,所以你自己要有需求。今天,我们更需要给老百姓财富让他去消费。中国的消费在GDP当中占的比例非常低,有很多人说中国人不想花钱。我觉得这个不完全有道理,中国的家庭储蓄率,按照世界银行两年前的报告,储蓄率只有30%,和日本20年前没有大的区别。中国消费在GDP的比例一直都在下降,是中国家庭收入在GDP比例当中下降,这差不多是一起走的。不能把中国内需不足的问题怪成不愿意花钱的问题,有一个收入低还有一个财富低的问题。中国家庭的财富,总的加起来25万亿的存款,加上房地产差不多是30多万亿,加起来60万亿,两倍的GDP,很低的。在其他成熟的国家应该是四倍,所以中国的家庭财富水平很低。家庭财富低,因为财富有一半在政府的手里,政府拿那么多股票,土地、资源都是政府的,一般的市场里面,应该是家庭的,可以形成一个良性循环的问题,因为没有财富是不敢消费的。虽然你有了收入,你不能全花掉,财富才可以带来安全感。前几天,政府又在说国企上市10%的流通股份,2.5%要给社保,一个是给老百姓让他有安全感,这起一定的作用,但是作用是有限的。钱在政府的手里,老百姓心里还是有想法的。钱在政府手里,老百姓把政府手里的1块钱看作是4毛钱,不会比4毛钱多。钱,放在老百姓的口袋最好。全世界的人都对中国很乐观,因为他们看到中国家庭负债率低、政府负债率低,政府有那么多的资产,中国需求是可以起来的。很简单的办法就是国有企业的股票分给老百姓,10多万亿给老百姓会不会引起革命?中国大部分的老百姓哪怕有钱?没有钱的。过去的改革,给农村带来的好处有限,一个破房子他们住5、6个人,没有钱,给他5、6万他第一件事是住房,第二件事是送孩子上学。这样的财富留在政府的手里什么用?国资委的人说我管15万亿,感觉很牛,其实这也不是他的,中国当官的都喜欢说我有多少钱,实际上这不是他的钱啊。现在反对的声音也很多,说你看俄罗斯这个国家后来又问题了,但这和中国的问题不一样,俄罗斯都没有上市,不知道价值。还有拍卖,当时谁有钱买你的东西?钱都是从银行借来的,可以从银行借来的钱都是有关系的。那是借了大家的钱来购买东西,把东西放到自己的口袋。国企的股票分给老百姓之后,引起了10年的繁荣。如果中国这么做,也会引起10年的繁荣。但是老百姓花钱之后,说不定投资的钱就不够了,怎么办?过去我们赚钱都是靠帮别人做衣服、做鞋子,很累,中国人喜欢便宜,去赚别人的钱,我觉得很痛苦,最好是别人把钱给你用,不用你争,发展经济最高的境界就是别人给你钱,你给别人一张纸,美国人那是最高境界。你总是想打苦功,那是发不了财的,世界上哪有做苦功才可以发财的?中国人就是这样苦命,这永远都发不起来。要打破这样的想法。很多人说美国人现在很惨,美国人今天是惨,但是美国人过去20年开心过了,中国人没有开心过啊。现在要让中国人开心一下也行,不要太辛苦,这么好的机会,全世界都要加税。发财,只有几个人发财,也就是只有几个人开心,有很多人不开心。像伊斯兰教现在还不让别人赚钱,美国50年代要交税90%,后来变成20%多,现在开始上升了。为什么上升?在20多年的繁荣情况下,大部分人没有钱,钱集中在一小部分人的手里。大部分人生活都靠借钱,可以借到钱就没有问题了,你赚你的钱我借我的钱没有关系,但是借不到钱的时候就翻脸了,那时候民主,我举手,搞重新分配。这是坏事吗?不是坏事。因为朝右走,让一小部分人努力奋斗、创造财富。朝左走呢?是社会平衡,两边都要。如果你总是在左边,没有人工作,这个社会越来越穷,总是在右边,就要搞革命。左走、右走,这是社会自我调整的过程。美国的10年、20年都是重新的分配。过去有很多人,20多年没有钱变成有钱,现在是有钱变成没钱,这是社会调整的一个过程。他想逃,要逃到避税的地方,但现在要把避税的地方关掉,要把有钱人的钱一点点拿走。如果这时候中国的人开门,世界上有钱的人都会往中国跑。世界财富缩水50万亿美金,现在还有150万亿美金,可以折腾10%到中国,中国的经济发展就好了,不用做衬衫、做鞋子了,多辛苦?这些孩子应该让他们上学,不应该在工厂里面耗着。中国要做这个事很简单,就降低税收。中国现在个人所得税40%多,又没有多少人交,你说这40%多拿着干什么?公司的所得税是25%,个人所得税40%多,在公司干活的人什么都报销,你收不到这个钱。你把个人所得税降到25%,你收税更多,双赢。政府拿钱多,外国人一看25%?也来了。你收25%,不像美国收你90%啊。我们再开放汇率、自由进出,给人家安全感,钱不都来了吗?钱来了我们建城市,让农民干城,变成城市人,他们的子女上学,变成白领。以前是种地的,以后是白领在办公室打电脑,偷偷玩,不干活,这就是现代化。原来在农村,撒了种子吃瓜子,不干活。两代之后,大家人在办公室里面,也是不干活,这样经济就发展好了。干这件事没有那么复杂,只要我们有胆量。有很多人和我说,这是中国自己干,单干,你怎么解释美国的问题?我觉得中国人很多人不了解,你和他讲理论,说泡沫什么的,他不理解,听不懂。有一天我想到一个词,我说要懂得今天的世界很容易,就是美国人坐庄做爆了,他发了那么多衍生产品什么的,后来人家发现他没有钱,所以就爆了,人家不要你了。现在该轮到中国坐庄了,中国人给人家发点东西,钱就来了。再做20年也可能就爆掉,爆掉又怎么呢?中国的农民都在城市里面住下来了,每个人都有房子了,过上幸福的日子了,爆了也没有问题了,到时候我们和美国人一样,贬值,不还钱,不是挺好的吗?
  
  今天的市场,刚刚我说的有出路,真正的牛市起来,要看到中国有结构性的调整。我99年的时候看到中国宣布加入WTO的时候我说市场要回来了,大家什么都可以买了。因为没有结构调整就没有持续的高增长,没有持续高增长就没有牛市,没有牛市就只能靠波动吸引人,今天就是波动市,股市、方式都是这样的,涨了大家进去,跌了大家出来,折腾至少要到明年年底,大家千万别追。这样的市场操作很简单,没有人买的时候你去买,看看你们的邻居,都在市场里面的时候赶快卖了,这就是赶快折腾的一个市场。像今天的价位,说会涨吗?有可能涨一点,但上限是有限的,政府在推动,政府会让它涨到6000点吗?不可能了,上次涨到6000点出现那么多社会问题,政府怎么会让它涨到6000点呢?在比较高位会压住你的,比如多放点IPO,那不是股市就压住了吗?这样,你的钱就变成国有企业的钱了,国有企业维护社会稳定了,你的钱就去维护社会稳定了。在高位的时候,千万不要追了,我觉得没有必要。而且,我觉得现在国内不算,因为国内政府在推,国外我们是在调整的阶段。年初我写了文章我说春天有大反弹,这个根据在哪里?这么大的经济危机之后都有反弹,日本反弹三次,每次都是50%以上。这次,我觉得也是类似,但这个反弹比我想象的早了一些,3月初就开始了。所以这个时间过长,当中会出现一个下调,我们觉得是一个M型的。现在国外已经开始回调了,可能回调1、2个月,经济数据下半年真的会好一些,因为政府花那么多钱会创造一些需求,但这完全是政府创造的需求,没有后劲。政府创造的需求有后劲是进入良性循环,消费起来了、公司投资了。政府,只不过暂时给你推一下,就像一个汽车没有电发动不起来的时候,政府推一下发动起来了。但现在发动机没有了,政府推车会动,但是不推车就停下来了,但是政府不可能永远推啊,美国财政赤字2万亿美金,14%、15%的GDP。日本人经济衰退快20年,财政赤字达到10%,美国一年就10%多的GDP,这么维持下去怎么可能?国家要破产的。所以政府推的话长不了,政府不推的时候,通涨又来的时候,又加息的时候,明年可能会有一个时刻很痛苦,在这个痛苦的时候,股市比较低的时候别忘了买入,因为接下来又会反弹。我刚刚说的,经济没有起来之前就是上上下下。

The US could benefit from inflation as long as it doesn't push the government into default

Andy Xie

Updated on Jun 16, 2009






A tide of inflation fear is sweeping financial markets: the oil price has doubled in three months, the US Treasury yield has surged by a third in one month, gold is nearing its record high again and agricultural commodities are all soaring. The rising prices are taking place amid weak demand. Inflation fears are driving the surge.






The market is getting it right this time. The US is targeting a 5 per cent-plus inflation rate for the foreseeable future. It is the only way to speed up relief for indebted American households. Inflation works well when debts are locked into long-term fixed rates and don't need new financing. The recent wave of mortgage refinancing, for example, has put many American households in an excellent position to benefit from inflation. If inflation surges, American household income will rise with it, but the debt will remain locked into the previous low rates. Of course, the people who lent to American households will be robbed by inflation.






However, the US government isn't quite ready for high inflation. It has US$11.4 trillion in outstanding debt, and that is growing by over US$6 billion per day. The average maturity of the federal debt is only four years and, hence, a quarter needs refinancing every year. With US$2 trillion net financing for 2009, the federal government needs to raise about US$10 billion per day. If the Treasury yield continues to surge, the expected interest burden for the federal government may spiral out of control. At some point, the market may stop lending to the US government, if it expects it to go bankrupt.






The government bond market is usually a Ponzi scheme. Governments rarely run budget surpluses to pay off old debts. They almost always borrow new money to pay off the old and spend the difference. A check of modern history will show that most countries have experienced a government debt crisis. These were about defaulting government debts accumulated over decades. Government bonds are usually viewed as safe, as they rarely default. But, that is only the case as long as investors are willing to lend. When the bonds do default, they do so on all the debt they have borrowed. The safety of government debt is a self-fulfilling market expectation. Hence, when interest rates are high and government financing need is great, the expectation bubble can burst.






When the market stops giving money to the federal government, the Fed can step in and print it, to monetise national debt. However, that will almost certainly lead to a dollar crash and hyperinflation. Russia did it in 1998: it did wipe away the national debt but, with investors shunning Russia afterwards, it remained poor for many years. Only surging oil prices have brought prosperity back. Is the US ready to "do a Russia"? I think not. America still has enough credibility to charter a more profitable path that would impoverish its creditors slowly.






The Fed will probably talk tough on inflation soon and may raise interest rates before the end of the year. Though its action may calm bond vigilantes, it could spark panic over liquidity among commodity and stock market speculators. A market crash is likely. The Fed may need to respond to the liquidity panic with soothing words and more purchases of Treasuries. It will have to skilfully navigate between bond vigilantes and liquidity junkies. The idea is to fool both: they should be made to believe in the Fed's determination to fight inflation and later to support growth. The reality will actually be stagflation.






The ideal path for the Fed is for interest rates to stay well below inflation - keeping the real interest rate negative - and for the US dollar to decline gradually. The former minimises the US debt burden and transfers it to foreigners. The latter draws manufacturing back to the US. It won't be easy to pull off such a feat. The liquidity junkies are easy to manage. They speculate with other people's money and desperately want to be fooled. It takes little to make them jump.






Bond vigilantes, however, are not easy to pacify. They are ardent wealth preservers and will run at the first sign of inflation. However, they may not be as tough as before. Everything else is inflated already. When the consumer price index inflates, to devalue money, there are no places to hide. If the Fed performs well, the bond vigilantes could become pussycats too.






"Feeling lucky" must be hard-wired into the human psyche. When Homo sapiens evolved on the African Savannah, the ones with a penchant for trying new horizons prospered. It was the right strategy in an underpopulated world. One group that felt lucky left Africa for Eurasia and got really lucky; they got the ultimate free lunch - the rest of the world for nothing. We are all their descendants. We are all born with the "get lucky" gene.






Today, however, the world has 6.6 billion people. Everything is taken. So we have created financial markets to satisfy our "get lucky" urge. In this virtual world, central bankers play god and print pieces of paper for us to fight over.






Over the next five years, governments and central banks will *censored* investors into subsidising economic growth through volatility. We have seen this in the tech world before. Nasdaq attracts people with its ups and downs. Volatility creates the illusion that one can get lucky and become rich.






Over the past 20 years, hundreds of billions of dollars have been poured into tech space. The money has spawned many technologies to benefit mankind. But investors as a whole have not made money.






The same will happen to the stock market in general. A weak economy needs low-cost capital, preferably negative, to maximise employment. No one will put money into a sure loser. Volatility creates the possibility of winning. Nothing turns Homo sapiens into willing losers like a chance.






Andy Xie is an independent economist

The tide recedes for Asian equities

Goh Eng Yeow examines the stock market's outlook going forward

INVESTING one’s hard-earned nesteggs is serious business.

Still, I must say that I am pleasantly surprised to get so many responses, thanking me for my Sunday Times column "Lessons from the financial crisis" two weeks ago.

Quite a number of readers have also noted that I am an avid tracker of the flow of funds in and out of the various Asian markets. They want to know where they can also find the data to do likewise.

I replied to all the queries by referring to a blog which I wrote last month. I get my report on fund flows from Citigroup every Monday and it has turned out to be one of my most important reading materials for the week.

And readers are reaping the benefit of getting privileged information which only big-time fund managers have access to, when I subsequently reproduce the report as an article.

Today, I wrote another fund flow piece in The Straits Times to report that there had been a net flow of money out of greater China funds last week – the first time this had occurred since March when regional markets bottomed out.

I must thank Citigroup strategist Elaine Chu for kindly sharing the raw data on the fund flows with me. The article would have been impossible to write otherwise.

Going by the manner in which inflow of funds into China funds has been slowing to a trickle, it is only be a matter of weeks before foreign investors start taking money out of them as well.

This will have implications on the Singapore, Hong Kong and Taiwan bourses where a large number of listed firms also have heavy exposure to mainland China.

It looks like the trigger for any sell-off on regional equities will come from Wall Street whose fund managers may need to trim their exposure in Asia in order to offset losses back home.

The only bright spot in the world of equities at the moment is Asia and foreign fund managers will be desperate to display some good results to show to their investors.

With the half-year drawing to a close next Tuesday, some window-dressing is still possible to shore up stock prices at close to their current levels.

After that, it is anyone’s guess how regional stock markets may move.

We will be entering a period which is traditionally shrouded in uncertainties.

August has traditionally been a jittery period for the stock market. The US sub-prime crisis started in August 2007. The seeds for Lehman Brothers’ destruction were sown in August last year.

Looking back over the past 100 years, the First World War started officially on August 1, 1914, while the Second World War commenced at end-August, 1939.

Also coinciding with this uncertain period is the seventh month on the Chinese lunar calendar which starts from August 20 this year – the so-called ghost month.

Even though we live in the space age and has put men on the moon, some deep-seated beliefs still hold fast. Both the property and stock market traditionally slow down during this period and this year will be no exception.

Rich lost 20% of wealth

NEW YORK - THE world's rich lost a fifth of their wealth in 2008 and the number of people with fortunes of more than US$1 million (S$1.46 million) fell 15 per cent as the financial crisis wiped out two years of growth, a study showed on Wednesday.

The total value of the world's wealthy - people with net assets of more than US$1 million excluding their main home and everyday possessions - dropped below 2005 levels to US$32.8 trillion, the 13th annual Merrill Lynch/Capgemini World Wealth Report found.

Nearly 35 per cent of that wealth belongs to so-called ultra rich people with fortunes of more than US$30 million, who account for 0.9 per cent of the rich population. In 2008 the number of ultra-rich people and their value dropped by nearly a quarter.

'There was really nowhere to hide as an investor in 2008,' Dan Sontag, Merrill Lynch Global Wealth Management president, told a news conference. 'No region ended the year unscathed.'

The United States, Japan and Germany are home to 54 per cent of the world's rich and this year China surpassed Britain and now has the fourth largest rich population. Rounding out the top 10 are France, Canada, Switzerland, Italy and Brazil.

The United States saw an 18.5 per cent drop in its rich population, but it still remains No. 1 with 29 per cent, or 2.5 million, of the world's rich. Japan's rich population fell 10 per cent, but Germany lost only 2.7 per cent of its wealthy.

As global markets plunged, wealthy investors fled with the study showing the proportion of cash-based holdings increased to 21 per cent of overall portfolios, up 7 per cent from 2006.

In North America, which traditionally favours equity investments, stocks made up 34 per cent of portfolios of the wealthy in 2008, down from 43 per cent a year earlier.

'That tells you how risk averse people got,' Mr Sontag said.

'Last year was about preservation, not appreciation.' 'The 2008 flight to safety imperative... is easing now,' he said. 'We're encouraging (rich people) to return to higher risk, higher return assets and away from capital preservation instruments as conditions improve.' -- REUTERS

Recession is easing: Fed

WASHINGTON - THE Federal Reserve on Wednesday said the recession is easing, but that the economy likely will remain weak and keep a lid on inflation.

Against this backdrop, the Fed held a key bank lending rate at a record low of between zero and 0.25 per cent, and pledged again to keep it there for 'an extended period' to help brace activity going forward.

Even though energy and other commodity prices have risen recently, the Fed said inflation will remain 'subdued for some time.'

This new language sought to ease Wall Street's concerns the Fed's aggressive actions to revive the economy will spur inflation later on.

The Fed also decided to stay the course on existing programs intended to drive down rates on mortgages and other consumer debt.

Instead, the central bank again kept the door wide open to making changes if economic conditions warrant.

The Fed in March launched a US$1.2 trillion (S$1.8 trillion) effort to drive down interest rates to try to revive lending and get Americans to spend more freely again.

It said it would spend up to US$300 billion to buy long-term government bonds over six months and boost its purchases of mortgage securities.

So far, the Fed has bought about US$177.5 billion in Treasury bonds.

The Fed is on track to buy up to US$1.25 trillion worth of securities issued by Fannie Mae and Freddie Mac by the end of this year or early next year. Nearly US$456 billion worth of those securities have been purchased. -- AP

'No bounce' says Buffett

NEW YORK - WARREN Buffett said on Wednesday that the US economy has 'no bounce' and will take time to recover, but there is no risk of deflation to push it further into despair.

Speaking on CNBC television, the world's second-richest person also praised efforts by the Obama administration and Federal Reserve to jump-start economic activity.

He lamented that the slowdown has hurt his insurance and investment company Berkshire Hathaway, which runs close to 80 businesses and in the January-to-March period had its first quarterly loss since 2001.

'We have had no bounce' in the economy, Mr Buffett said on CNBC television.

Asked whether the economy was still in a 'shambles,' as he had said in February, Mr Buffett said: 'I'm afraid that's true.' But he added: 'I don't worry about deflation at all.'

US gross domestic product fell at a 5.7 per cent annualised rate in the first quarter.

Government efforts to stimulate business activity remain a work in progress, and President Barack Obama on Tuesday again said the nation's jobless rate will rise above 10 per cent.

'They're doing things, but they take a while to have an effect,' Mr Buffett said. 'You can't produce a baby in one month by getting nine women pregnant.'

Buffett nonetheless maintained his long-held belief in the stock market, saying that it is 'attractive over the next 10 years' relative to alternatives.

Asked whether Mr Obama should reappoint Ben Bernanke to lead the Federal Reserve when the chairman's term expires next January, Buffett said: 'I don't see how you could do better.' -- REUTERS

Monday, 22 June 2009

Two Proofs That Global Economy Is Not on the Upswing

Below are two seemingly unrelated articles that tell a similar story: talk that the global economy is on the upswing seems to be premature, to say the least.

In the first report (hat tip to Calculated Risk), the Vice Chairman of General Electric (GE), a company with 14 major lines of business -- appliances, aviation, consumer electronics, electrical distribution, energy, business finance, consumer finance, healthcare, lighting, commercial and industrial markets, media & entertainment, oil & gas, rail, and security -- and a presence in more than 100 countries, states point-blank that they are not seeing evidence of the turnaround that policymakers (e.g., Fed Chairman Ben Bernanke), clueless Wall Street types (see: "The Wall Street Clown Show"), and TV pundits keep referring to.


1. "GE Vice Chair Rice Sees No ‘Green Shoots’ in Orders" (Bloomberg):

General Electric Co. Vice Chairman John Rice said he isn’t seeing an increase in orders even as U.S. economic statistics suggest the world’s largest economy may soon shift to a recovery.

“I am not particularly of the green shoots group yet,” Rice said today to the Atlanta Press Club, referring to a phrase used by Federal Reserve Chairman Ben S. Bernanke that described signs of a nascent recovery. “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.”

GE is the world’s biggest maker of jet engines, power-plant turbines, locomotives, medical imaging equipment. Rice oversees the Fairfield, Connecticut-based company’s industrial businesses.

“We see a world where good companies and good consumers can’t get all the credit we would like,” Rice said. “Companies with lots of cash on their balance sheet are worried about whether they will get what they need for working capital” and are cutting spending.




2. "Fear the Dark Side of China's Lending Surge" (Caijing.com.cn):

Banks loans designed to spark economic recovery have been channeled into asset speculation, doing more harm than good.

China's credit boom has increased bank lending by more than 6 trillion yuan since December. Many analysts think an economic boom will follow in the second half 2009. They will be disappointed. Much of this lending has not been used to support tangible projects but, instead, has been channeled into asset markets.

Many boom forecasters think asset market speculation will lead to spending growth through the wealth effect. But creating a bubble to support an economy brings, at best, a few short-term benefits along with a lot of long-term pain. Moreover, some of this speculation is actually hurting China's economy by driving asset prices higher

Thursday, 18 June 2009

The worst is yet to come: Financial Crisis Part II

European banks: $283B more in writedownsFRANKFURT (Reuters) -- Euro-zone banks will probably need to write down another $283 billion this year and next on bad loans and securities, the European Central Bank said on Monday. The ECB estimated bank writedowns due to securities -- or toxic assets -- would total around $218 billion from the start of the financial turmoil to the end of 2010, while bad loans would account for another $431 billion -- a total of $649 billion, with an estimated $366 billion already announced. The figures were published in the ECB's latest Financial Stability Review, which concluded that risks to the financial sector had increased in the last six months amidst a deterioration in the economic environment which is putting pressure on the bottom line of companies and households.

"The contraction of economic activity and the diminished growth prospects have resulted in a further erosion of the market values of a broad range of assets," the report said. "Connected with this, there has been a significant increase in the range of estimates of potential future writedowns and losses that banks will have to absorb before the credit cycle reaches a trough." The ECB's estimate of $649 billion for the whole period contrasts with a figure of $904 billion from the International Monetary Fund in April.

The ECB said the calculations were surrounded by a high degree of uncertainty stemming from the economic and market outlook, accounting rules allowing banks to delay reporting writedowns and the very uncertain outlook for bank profits. "Against this background, write-off rates could increase by more than currently anticipated," the ECB said. However, ECB Vice-President Lucas Papademos said most big euro area banks "appear to be well-capitalized enough to withstand downside scenarios."

The report outlined a wide range of risks and dangers for the financial sector in the 16-nation region, ranging from the financial situation of firms and households to continued volatility on markets. "Both policymakers and market participants will have to be very alert in the period ahead. There is no room for complacency," ECB Vice-President Lucas Papademos told a news conference. Property prices could be expected to fall further, in some countries at least, and big banks and insurance firms remained vulnerable to a further erosion of the capital base and a loss of investor confidence.

Worse than expected?

The euro area economic downturn could be worse than currently expected and there were increasing signs of a negative feedback loop between the real economy and the financial sector -- although there were also some positives. "Following a weak start in 2009, there have recently been increasing signs from survey data -- both within and outside the euro area -- suggesting that the pace of deterioration in activity is moderating and that consumer and business sentiment is improving, although still remaining at low levels," the report said.

The ECB said the risk of deflation was limited and central bank actions in cutting interest rates and lending banks unlimited funds had helped reduce money market spreads, although these were still elevated for longer maturities. Without commenting directly on the outlook for official interest rates - now at a record low 1% -- the ECB noted households were in a better position to repay debt than earlier. "The interest rate risk faced by households has declined somewhat since (December 2008), and is expected to remain subdued looking forward," it said.

The ECB said the outlook for euro zone government bond yields was surrounded by persistent uncertainty regarding macro-financial developments. "Upward risks for yields could be seen if flight-to-safety flows unwind further or if bond markets have difficulty in absorbing the increased issuance needs of euro area governments," the report said.

As part of its measures to stimulate the eurozone economy, the ECB has been offering unlimited liquidity to banks, and will shortly launch longer-term refinancing operations. However, a debate has begun amongst policymakers about when such extraordinary policy measures need to be unwound. "The current ample liquidity provided by the ECB will not remain in place (forever)," Papademos said. Asked about the ECB's 12-month refi operations which will begin next week, Papademos said he would wait to see the market's reaction. "Then we will see what demand is from institutions ... at this point I will not speculate."

Bubble of Belief’ in China Economy Seen Bursting

By David Wilson

June 17 (Bloomberg) -- Rallies in commodity prices and mining-company shares stem from a “bubble of belief” in China’s economy that is likely to burst, according to Albert Edwards, a strategist at Societe Generale.

“I believe we will look back on the Chinese economic miracle as the sickest joke yet played on investors,” Edwards wrote yesterday in a report. To support his argument, he cited falling earnings at the country’s industrial companies.

The CHART OF THE DAY shows year-over-year percentage changes in profits, as compiled by China’s National Bureau of Statistics. The chart combines monthly data from 2005 and 2006 with a quarterly index, started in 2007, that tracks companies in 22 provinces. This quarter’s report is set for June 26.

Commodity prices climbed 21 percent this year through yesterday, according to the UBS Bloomberg Constant Maturity Commodity Index. Mining stocks paced a 23 percent gain in the MSCI World Materials Index, the year’s top performer among 10 industry groups in the MSCI World Index.

While the Chinese economy expanded 6.1 percent in the first quarter from a year earlier, Edwards wrote that he was skeptical about its ability to sustain that level of growth during a global recession.

“The bullish group-think on China is just as vulnerable to massive disappointment as any other extreme example of bubble- nonsense I have seen over the last two decades,” his report said. “The fall to earth will be equally as shocking.”

Wednesday, 17 June 2009

Andy Xie: Markets are trading on Imagination

A combination of growth optimism and inflation fear has catapulted asset markets in the past few weeks. These two concerns should drive markets in different directions: Inflation fear, for example, should limit room for stimulus and prompt stock markets to retreat. But the investment camps expressing these opposite concerns go separate ways, each pumping up what seems believable. As a result, stock and commodity markets are mirroring the behavior seen during the giddy days of 2007.

Regardless of what investors or speculators say to justify their punting, the real driving force is the return of animal spirit. After living in fear for more than a year, they just couldn't sit around any longer. So they decided to inch back. The resulting market appreciation emboldened more people. All sorts of theories began to surface to justify the market trend. Now that the rising trend has been around for three months globally and seven months in China, even the most timid have been unable to resist. They're jumping in, in droves.

When the least informed and most credulous get into the market, the market is usually peaking. A rising economy and growing income produces more funds to fuel the market. But the global economy is now stuck with years of slow growth. Strong economic growth won't follow the current stock market surge. This is a bear market rally. People who jump in now will lose big.

Over the past three weeks, the dollar dove while oil and treasury yields surged. These price movements exhibited typical symptoms of inflation fear, which is complicating policymaking around the world. The United States, in particular, could be bottled in. The federal government's fiscal stimulus and liquidity pumping by the Federal Reserve are twin instruments for propping up the bursting U.S. economy. The fiscal deficit could top US$ 2 trillion (15 percent of GDP) in 2009. That would increase by one-third the total stock of federal government debt outstanding. Such a massive amount of federal debt paper needs a buoyant Treasury to absorb. If the Treasury market is a bear market, absorption becomes a huge problem.

U.S. Treasury Secretary Timothy Geithner recently visited China to, among other things, persuade China to buy more Treasuries. According to a Brookings Institution estimate, China holds US$ 1.7 trillion in U.S. Treasuries and GSE paper (about 15 percent of the total stock). If China stops buying, it could plunge the Treasury market into deep bear territory. If China does not buy, the Treasury market will get worse. But China can't prop up the market by buying.

In the past few years, purchases by central banks around the world have dominated demand for Treasuries. Central banks have been buying because their currencies are linked to the dollar. Hence, such demand is not price sensitive. The demand level is proportionate to the U.S. current account deficit, which determines the amount of dollars held by foreign central banks. The bigger the U.S. current account deficit, the greater the demand for Treasuries. This is why the Treasury yield was trending down during the bulging U.S. current account deficit period 2001-'08.

This dynamic in the Treasury market was changed by the bursting of the U.S. credit-cum-property bubble. It is decreasing U.S. consumption and the U.S. current account deficit. The 2009 deficit is probably under US$ 400 billion, halved from the peak. That means non-U.S. central banks have much less money to buy, while the supply is surging. It means central banks no longer determine Treasury pricing. American institutions and families are now marginal buyers. This switch in who determines price is shifting Treasury yields significantly higher.

The 10-year Treasury yield historically averages about 6 percent, with about 3.5 percent inflation and a real yield of 2.5 percent. This reflects the preferences of marginal buyers in the United States. Foreign central banks have pushed down the yield requirement substantially over the past seven years. If marginal buyers become American again, as I believe, Treasury yields will surge even higher from current levels. Future inflation will average more than 3.5 percent, I believe. Some policy thinkers in the United States believe the Fed should target inflation between 5 and 6 percent. The Treasury yield could rise to between 7.5 and 8.5 percent from the current 3.5 percent.

A massive supply of Treasuries would only worsen the market. The Federal Reserve has been trying to prop the Treasury market by buying more than US$ 300 billion – a purchase that's backfired. Treasury investors are terrified by the inflation implication of the Fed action. It is equivalent to monetizing national debt. As the federal deficit will remain sky-high for years to come, the monetization could become much larger, which might lead to hyperinflation. This is why the Treasury yield has surged in the past three weeks.

One possible response is to finance the U.S. budget deficit with short-term financing. As the Fed controls short-term interest rates, such a strategy could avoid the pain of high interest rates. But this strategy could crash the dollar.

The dollar index-DXY has fallen 10 percent from the March level, even though the U.S. trade deficit has declined substantially. It reflects the market's expectations that the Fed's monetary policy will lead to inflation and a dollar crash. The cause of dollar weakness is the outflow of U.S. money, in my view. It is the primary cause of a surge in emerging markets and commodities. Most U.S. analysts think the dollar's weakness is due to foreigners buying less of it. This is probably incorrect.

The dollar's weakness can limit Fed policy options. It heightens inflation risks; a weak dollar imports inflation and, more importantly, increases inflation expectations, which can be self-fulfilling in today's environment. The Fed has released and committed US$ 12 trillion (83 percent of GDP) for bailing out the financial system. This massive overhang in money supply could cause hyperinflation if not withdrawn in time. So far, the market is still giving the Fed the benefit of the doubt, believing it will indeed withdraw the money. Dollar weakness reflects the market's wavering confidence in the Fed. If the wavering continues, it could lead to a dollar collapse and make inflation self-fulfilling.

The Fed may have to change its stance, even using token gestures, to assure the market it won't release too much money. For example, signaling rate hikes would soothe the market. But the economy is still in terrible shape; unemployment may surpass 10 percent this year. Any suggestion of hiking interest rates would dampen growth expectations. The Fed is caught between a rock and a hard place.

Oil prices have doubled since a March low, even though global demand continues to decline. The driving forces again are expectations of inflation and a weaker dollar. As U.S.-based funds flee, some of the money has flowed into oil ETFs. This initially impacted futures prices, creating a huge gap between cash and futures prices. The gap increased inventory demand as investors tried to profit from the gap. Rising inventory demand caused spot prices to reach parity with futures prices. Rising oil prices, though, lead to inflation and depress growth. It is a stagflation factor. If the Fed doesn't rein in weak dollar expectations, stagflation will arrive sooner than I previously expected.

Stagflation in the 1970s spawned the development of rational expectation theory in economics. Monetary stimulus works by fooling people into believing in money's value while the central bank cheapens it. This perception gap stimulates the economy by fooling people into demanding more money than they should. Rational expectation theory clarified the underpinning for Keynesian liquidity theory. However, as they say, people can't be fooled three times. Central banks that tried to use stimuli to solve structural problems in the '70s saw their stimuli didn't work. People saw through what they tried again and again, and began behaving accordingly, which translated monetary stimulus straight into inflation without stimulating economic growth.

Rational expectation theory discredited Keynesian theory and laid the foundation for Paul Volker's tough love policy, which jagged up interest rates and triggered a recession. The recession convinced people that the central bank was serious about cooling inflation, so they adjusted their behavior accordingly. Inflation expectations fell sharply afterward. The credibility that Volker brought to the Fed was exploited by Alan Greenspan, who kept pumping money to solve economic problems. As I have argued before, special factors made Greenspan's approach effective at the same. Its byproduct was asset bubbles. As the environment has changed, rational expectation theory will again exert force on the impact of monetary policy.

Movements in Treasury yields, oil and the dollar underscore the return of rational expectation. Policymakers have to take actions to dent the speed of its returning. Otherwise, the stimulus will lose traction everywhere, and the global economy will slump. I expect at least gestures from U.S. policymakers to assuage market concerns about rampant fiscal and monetary expansion. The noise would be to emphasize the "temporary" nature of the stimulus. The market will probably be fooled again. It will fully wake up only in 2010. The United States has no way out but to print money. As a rational country, it will do what it has to, regardless of its rhetoric. This is why I expect a second dip for the global economy in 2010.

While inflation expectations are causing some in the investor community to act, the rest are betting on strong economic recovery. Massive amounts of money have flowed into emerging markets, making it look like a runaway train. Many bystanders can't take it any longer and are jumping in. Markets, after trending up for three months, are gapping up. Unfortunately for the last-minute bulls, current market movements suggest peaking. If you buy now, you have a 90 percent chance of losing money when you try to get out.

Contrary to all the market noise, there are no signs of a significant economic recovery. So-called green shoots in the global economy are mostly due to inventory cycles. Stimuli might juice up growth a bit in the second half 2009. Nothing, however, suggests a lasting recovery. Markets are trading on imagination.

The return of funds flowing into property is even more ridiculous. A property burst usually lasts for more than three years. The current burst is larger than usual. The property market is likely to remain in bear territory for much longer. The bulls are talking about inflation as the bullish factor for property. Unfortunately, property prices have risen already and need to come down even as CPI rises. Then the two can reach parity.

While rational expectation is returning to part of the investment community, most investors are still trapped by institutional weakness, which makes them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in this business need something to do. Since they invest other people's money, they are biased toward bullish sentiment. Otherwise, if they say it's all bad, their investors will take back the money, and they will lose their jobs. Governments know that, and create noise to give them excuses to be bullish.

This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than those who held U.S. market bonds, and who lost big in Japan and emerging markets in general. It is astonishing that a value-destroying industry has lasted so long. The greater irony is that salaries in this industry have been two to three times above what's paid in other sector. The key to its survival is volatility. As markets collapse and surge, possibilities for getting rich quickly are created. Unfortunately, most people don't get out when markets are high, as they are now. They only take a ride.

Indeed, most people who invest in the stock market get poorer. Look at Japan, Korea and Taiwan: Even though their per capita incomes have risen enormously over the past three decades, investors in these stock markets lost money. Economic growth is a necessary but not sufficient condition for investors to make money in the stock market. Most countries, unfortunately, don't possess the conditions for stock markets to reflect economic growth. The key is good corporate governance. It requires rule of law and good morality. Neither is apparent in most markets.

It's a widely accepted notion that long term stock investors make money. Actually, this is not true. Most companies don't last for more than 20 years. How can long term investment make money for you? The bankruptcy of General Motors should remind people that this notion is ridiculous. General Motors was a symbol of the U.S. economy, a century-old company that succumbed to bankruptcy. In the long run, all companies go bankrupt.

Property on the surface is better than the stock market. It is something physical that investors can touch. However, it doesn't hold much value in the long run either. Look at Japan: Its property prices are lower than they were three decades ago. U.S. property prices will likely bottom below levels of 20 years ago, after adjusting for inflation.

China's property market holds even less value in the long run. Chinese properties are sitting on land leased for 70 years for residential properties and 50 years for commercial properties. Their residual values are zero at the end. The hope for perpetual appreciation is a joke. If you accept zero value at the end of 70 years, the property value should only be the use value during those 70 years. The use value is fully reflected in rental yield. The current rental yield is half the mortgage interest rate. How could properties not be overvalued? The bulls want buyers to ignore rental yield and focus on appreciation. But appreciation in the long run isn't possible. Depreciation is, as the end value is zero.

The world is setting up for a big crash, again. Since the last bubble burst, governments around the world have not been focusing on reforms. They are trying to pump a new bubble to solve existing problems. Before inflation appears, this strategy works. As inflation expectation rises, its effectiveness is threatened. When inflation appears in 2010, another crash will come.

If you are a speculator and confident you can get out before it crashes, this is your market. If you think this market is for real, you are making a mistake and should get out as soon as possible. If you lost money during your last three market entries, stay away from this one – as far as you can.

5 Reasons to Start a Business in a Recession

Kimberly Palmer

Does becoming your own boss sound especially tempting now, with jobs less secure and benefits being cut? If it does, you're hardly the only one: Research by Federal Reserve economist Ellen Rissman finds that men are almost twice as likely to become self-employed when they are already unemployed. Working for themselves is temporary, however: Within one year, about 2 in 10 workers return to paid employment.

That doesn't mean the recession is leading to huge upticks in those who call themselves self-employed. Overall, the self-employment rate has dipped a bit during the current recession, although it still remains close to 11 percent, where it has hovered for most of the past decade. Steven Hipple, economist at the Bureau of Labor Statistics, says that while some people are drawn to self-employment as a way to avoid unemployment, there are also many self-employed businesses, for example in retail or construction, that are going under during the recession. That's why the net effect appears to be a slight decline in self-employment, explains Hipple.

But don't let those numbers discourage you. Going against the tide and starting your own business in a recession not only lets you escape from the corporate grind, but it also can be easier than it would be during boom times. Here are five reasons to consider going solo now:

Extra protection from dreaded pink slips. In 2004, when Susie Fougerousse was a stay-at-home mother of two, she realized that she loved decorating her children's rooms and she thought she could make a business out of it. She noticed that it was hard to find pieces she liked in the stores near her, so she launched an online business that sells upscale furniture and décor. While the $10,000 in start-up costs was scary at first, she says starting a business is what ended up saving her family financially.

The company, Rosenberry Rooms, is now a multimillion-dollar company, while her husband's former industry, textiles, has all but dried up. "It's a huge blessing," says Fougerousse, 34, who lives in Cary, N.Ca. "He would have lost his job with how things went in that industry. You think you're on the safe track [by working at a big company], but that turned out to be the most risky," she says. Her husband now works full time on Rosenberry Rooms as well.

"It feels very beneficial to have multiple income streams right now," says Michelle Goodman, author of My So-Called Freelance Life: How to Survive and Thrive as a Creative Professional for Hire, who has worked as a freelancer for almost two decades. Goodman has four to five writing gigs a month, including work for ABC News and the Seattle Times. "With a full-time job, if you get laid off, that's the whole thing. But if I got laid off from one of mine, I could still have 50 percent of my income left," she says.

But just because earning money on your own provides income doesn't mean you should ditch your day job just yet. Pamela Skillings, author of Escape From Corporate America and a career coach, recommends moonlighting on the side to test the waters before becoming self-employed full time. She says that approach lets you find out, "Is it something you want to do full time? Does it have market potential?"

You set your own income. If you're working for the man, you have little control over your salary--all you can do is request a raise, which can be turned down. But Skillings says that as someone who is self-employed, "I have full control to shift and come up with a great idea or find a new client. I could double my income with one good idea or connection."

Your start-up costs are lower. "The cost of failure right now to start a company or start something entrepreneurial is very low," says Tim Ferriss, entrepreneur and author of The 4-Hour Workweek. Since the economic situation is so tough, no one would think less of someone who started a company and failed, since so many are failing, he says. He also points out that networking sites Facebook and LinkedIn were both started during the "dot-com depression" of 2000 to 2001. Plus, he adds, advertising and service providers are cheaper because everything is on sale.

Not only does the recession make it easier to find discounts on the capital needed to start a new business, but ithas also brought the old-fashioned practice of bartering back into style. Trading services is a great way to take advantage of the bad economy, says Kimberly Seals-Allers, author of The Mocha Manual to Turning Your Passion Into Profit and creator of MochaManual.com, especially if you're starting a new business and need help with website design or accounting, for example. "You'll have a large number of highly qualified individuals [offering their services] who you couldn't have afforded before. It's an opportunity to find talent and negotiate things," she says.

To find a willing partner, visit sites such as JoeBarter.com and Craigslist.com. You can post what you're looking for and what you have to offer and then wait for responses.


It's easier to find partners. Fougerousse inspired her younger brother and his wife, Tim Bradley and Anne Morrison Bradley of Ferndale, Mich., to start The Premium Pet, an online pet décor store that launches in August. As they form relationships with vendors, whose products they will sell through their website, they've found that the recession has made vendors more willing to give them a chance. "When things are going well, they're more selective, so for us, it's an advantage right now because we can get more products right off the bat," says Tim Bradley.

It's gratifying. This one is just as true during boom times as during a recession, but becoming self-employed provides a sense of satisfaction that's hard to come by when working for someone else. "The whole construct of going into an office and working 9 to 5 felt too rigid," says Goodman. "I got bored with the monotony of projects."

Skillings says that even though she's working harder than she did in the corporate world, she finds more value and satisfaction in what she does. She says, "In my corporate job, it didn't feel meaningful. It wasn't something that resonated with me."

How Do I Know You're Not Bernie Madoff?

by Paul Sullivan

Tony Guernsey has been in the wealth management business for four decades. But clients have started asking him a question that at first caught him off guard: How do I know I own what you tell me I own?

This is the existential crisis rippling through wealth management right now, in the wake of the unraveling of Bernard L. Madoff’s long-running Ponzi scheme. Mr. Guernsey, the head of national wealth management at Wilmington Trust, says he understands why investors are asking the question, but it still unnerves him. “They got their statements from Madoff, and now they get their statement from XYZ Corporation. And they say, ‘How do I know they exist?’ ”

When he is asked this, Mr. Guernsey says he walks clients through the checks and balances that a 106-year-old firm like Wilmington has. Still, this is the ultimate reverberation from the Madoff scandal: trust, the foundation between wealth manager and client, has been called into question, if not destroyed.

“It used to be that if you owned I.B.M., you could pull the certificate out of your sock drawer,” said Dan Rauchle, president of Wells Fargo Alternative Asset Management. “Once we moved away from that, we got into this world of trusting others to know what we owned.”

The process of restoring that trust may take time. But in the meantime, investors may be putting their faith in misguided ways of ensuring trust. Mr. Madoff, after all, was not charged after an investigation by the Securities and Exchange Commission a year before his firm collapsed. Here are some considerations:

CUT THROUGH THE CLUTTER Financial disclosure rules compel money managers to send out statements. The problem is that the statements and trade confirmations arrive so frequently, they fail to help investors understand what they own.

To mitigate this, many wealth management firms have developed their own systems to track and present client assets. HSBC Private Bank has had WealthTrack for nearly five years, while Barclays Wealth is introducing Wealth Management Reporting. But there are many more, including a popular one from Advent Software.

These systems consolidate the values of securities, partnerships and, in some cases, assets like homes and jewelry. HSBC’s program takes into account the different ways firms value assets by finding a common trading date. It also breaks out the impact of currency fluctuation..

These systems have limits, though. “Our reporting is only as good as the data we receive,” said Mary Duke, head of global wealth solutions for the Americas at HSBC Private Bank. “A hedge fund’s value depends on when the hedge fund reports — if it reports a month-end value, but we get it a month late.”

In other words, no consolidation program is foolproof.

But a blind faith in transparency can also be misleading. The concept has become a buzzword. Would more frequent and detailed reporting have helped Mr. Madoff’s investors when the S.E.C. missed the fraud?

“If a complex instrument is completely transparent, you’re still not going to be able to figure it out,” said Aaron Gurwitz, head of global investment strategy at Barclays Wealth.

He noted that a collateralized debt obligation — a type of security linked to the financial collapse — could be called transparent, while a simple structured note that limits an investment’s losses and gains could be utterly opaque because of the way it was created.

A simpler example is municipal bonds, which have been attracting investor interest because they are perceived as secure. While it is easy to get a price on bonds from large entities like New York or California, the same cannot be said for thousands of smaller issuers. The reason is that there is no designated market-maker for municipal bonds. So getting a price often can mean calling around to several sellers.

Here, though, investors’ fears could be assuaged with more information. However hard they are to price, municipal bonds have a default rate under 1 percent.

SIX RULES FOR HEDGE FUNDS Full information is key to investing in hedge funds now. When times were good, no one was bothered by rules that prevented investors from taking their money out when they wanted. But when the market collapsed in the fall, people suddenly balked at these lock-up provisions.

Mr. Rauchle said he believed that a simple six-step plan could benefit investors and keep hedge fund managers from having to submit to excessive government regulation. The first four points are straightforward: each fund larger than $100 million needs to register with the S.E.C. and have an independent custodian who holds the money, an independent administrator who prices the securities and an independent auditor.

But managers may balk at Mr. Rauchle’s last two proposals: he wants hedge funds to reveal how they price securities and to submit to an independent, quarterly analysis of their portfolios. Up until now, hedge funds have prided themselves on secrecy.

“This is about providing information and letting people decide,” Mr. Rauchle said. “I don’t think we should put an S.E.C. official in every hedge fund office. Nor do I think we should allow fund managers to stay behind this veil of secrecy.”

CHECKING UP While trust that your spouse is not keeping secrets from you is a critical to a sound marriage, trust that your wealth manager is not cheating you is a different story.

Kelly Campbell,an adviser in Fairfax, Va., and the author of a book coming out in July, “Fire Your Broker” (Riverfront Press) suggested calling the firm that actually holds your money to check on the manager. Most independent advisers use a separate custodial firm to hold their funds. (Mr. Madoff was his own custodian, which should have been a red flag.)

“It’s doing a little bit of your own homework,” Mr. Campbell said.

That type of checking is not hard. Dean Barber, an adviser in Kansas City and the host of the radio show “The Wealth Management Show,”said that just about every piece of information an adviser could get a client could get, too.

Of course, shadowing your investment adviser could be as unhealthy as fretting over your spouse’s fidelity. Mike Saghy, director of investments at PNC Wealth Management, said that to prevent this concern he steers clients with at least $1 million into separately managed accounts. This way they know what stocks and bonds they actually own — not how many shares in a fund they have.

“People are showing some angst over mutual fund holdings,” he said. “The want to know that they own a muni bond from the state of Pennsylvania and not a portfolio of muni bonds.”

RESTORING TRUST At the end of the day, living life fearing that the people handling your money are deceiving you is not good for you. Insisting on openness is one way to rebuild trust.

“There are no secrets in our industry,” Mr. Barber said. “If somebody tells you, ‘We have a special way of doing things but we don’t divulge how we do it,’ chances are it’s a scam.”

As harsh as this sounds, the alternative is not practical: even hoarding gold bricks in your basement requires a level of trust. “How do I know it’s not a lead bar painted gold?” Mr. Guernsey asked.

Bankers group sees U.S. recession ending in third quarter

WASHINGTON (Reuters) - The U.S. recession will end in the third quarter, but lingering high unemployment and large federal deficits may pose a longer-term threat, economists advising the American Bankers Association said on Tuesday.

The economists expect the U.S. Federal Reserve would keep interest rates near zero percent until the third quarter of 2010 because a sluggish recovery would keep inflation in check.

They forecast that 2009 real gross domestic product would fall 1.3 percent, with 2010 growth rebounding to 3 percent.

However, they thought unemployment would not peak until the first quarter of 2010, and it may be several years before the economy returns to full employment, which they pegged at 5 percent.

"The economy will return to growth but not to health," said Bruce Kasman, chairman of the economic advisory committee and chief economist for JPMorgan Chase in New York. "Growth in the coming quarters is likely to gather momentum but will not prove sufficiently robust to undo much of the severe damaged to our labor markets and public finances."

The economic advisory committee of the ABA meets semiannually to make their forecast after meeting with the Federal Reserve's Board of Governors. Tuesday's forecast was similar to the consensus forecast in the Blue Chip survey of economists, which was released last week.

Kasman said the committee was largely in agreement on the broad contours of the economic growth forecast, but there was less agreement on the path of inflation and how soon the Federal Reserve would begin hiking interest rates.

Some thought there was sufficient slack in the economy to keep price pressures down, but longer term there was growing concern among some committee members that large federal deficits and a slower pace of economic growth could pose an inflationary threat.

The Federal Reserve wraps up its next policy-setting meeting on June 25, and is widely expected to keep interest rates unchanged near zero percent. However, there is much debate among economists about whether the Fed will announce plans to buy more assets such as Treasury debt to help keep borrowing costs low.

(Reporting by Wendell Marsh; Editing by Leslie Adler)

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