February 2010
February 18, 2010 11:15 a.m.
The Debate About Greece, and more
The debt problems in Greece continue to be the focus of much attention and also moves the markets. Stocks have done all right the last couple of days because the EU has ordered Greece to come up with a plan, and investors have decided the EU will come to Greece’s rescue in some fashion. But don’t think this crisis will be resolved quickly or that its resolution will be the end of global debt problems.
There’s been an interesting debate in the Financial Times on the implications of not only Greece’s debt but sovereign debt worldwide. It started with economic historian Niall Ferguson writing in a column that Greece is just small potatoes. Other, larger countries will have similar problems in the coming years. Ferguson argued that the U.S. will be in the same situation in a few years. Martin Wolf, a regular columnist for the FT, responded that the U.S. is nothing like Greece and that, in fact, Greece and other countries don’t need to balance their budgets. I think Ferguson overstates the pessimistic case, but Wolf is too sanguine. Economies get in trouble when government debt exceeds 90% of GDP, argue Carmen Reinhart and Kenneth Rogoff in the excellent book, This Time It’s Different. The U.S. currently has a debt to GDP ratio of 84%. If economic growth doesn’t pickup and spending get under control, the ratio will rise over time.
This week shopping mall giant Simon Properties made an offer for another major mall owner, General Growth Properties. GGP is in bankruptcy proceedings because it took on too much debt. But there’s an interesting angle to this story. Early in 2009 Simon and other major real estate investment trusts sold stock at low prices to build up their balance sheets. The thinking was that private commercial property owners who do not have access to the public capital markets would be unable to sell equity or refinance debt to boost their balance sheets. They’d be forced to sell their properties or companies at low prices to companies such as Simon as the commercial real estate crisis developed.
But deals have not taken place, because the privately-owned properties are not being put up for sale. Their lenders don’t want to foreclose, because they don’t want to operate the properties. So they are making deals to keep the properties from foreclosure. That is how commercial real estate is different from residential housing. It’s also why the commercial real estate crisis will be different from the housing crisis. It also could mean REITs won’t have the opportunities they thought they would.
Traditionally a sign the employment market is about to recover is a rise in temporary worker hiring. Temp worker hiring is up over the last couple of months, but like so much other data it might not mean the same as in the past. Here’s a review of why temporary hiring may be different this time.
February 10, 2010 03:30 p.m.
Blizzards, Greenspan’s back, and more
I’m buried in snow here in northern Virginia. In the last week we’ve had three snowstorms, about what we usually have in an entire winter. We broke the record for most snow in a season, and my yard is covered in over two feet of snow. Trees are breaking under the strain of all the snow and ice. I don’t expect to see my yard or a cleared road before March.
Fortunately, modern electronics allows me to research, write, and publish electronically. As long as the utility lines stay intact, I can stay in touch with you even when I can barely get out the door.
Alan Greenspan took this week to begin a small media blitz that will get bigger in coming months. He’s planning to publish a book explaining why his monetary policy is not to blame for the financial crisis. In the meantime, he’s given an overview of his views in an interview. He makes some good points. Easy money was not solely to blame for the crisis. One factor people don’t want to talk about his China’s role in the crisis. The Fed did start to raise short-term rates in the 2000s, but long-term rates did not follow. I believe that is because China was using the dollar’s from its huge trade surplus to buy U.S. bonds. It did this to keep its currency’s value fixed to the dollar. Because of the trade deficit and China’s currency controls, the Fed had limited control over monetary policy.
You might have heard that in last week’s employment report there was a revision that reduced total jobs in the economy last year by about one million jobs. There’s a lot of confusion about this process, so I identified a couple of good articles on the topic. Here’s one and here’s the other.
Market analysts and observers remain divided into two camps. There are folks like me who believe things are different this time. We can’t count on the usual economic and market rebound to last several years after the Fed started easing. Others believe that a bottom was put in March 2009 and we can look forward to at least three years of solid economic and stock market growth. One money manager who shares my view is Bill Gross of PIMCO. Here’s his latest analysis of the current situation.
You know I like to highlight estate planning mistakes and battles that make the headlines. This week we have two entries. Either of these problems could have been avoided with some careful estate planning, but they also have a common issue. In each case the testator (estate owner) was suffering a terminal illness and was not far from death. Each revised his will while in ill health. The result is those whose shares were reduced in the revised wills are suing. They claim the new wills are invalid, because the testators were not mentally sound or were put under pressure. These charges could have been anticipated and proper defenses prepared to establish the testator’s mental capacity. One case involves a writer of music for the hit movie Crazy Heart. The other case involves the late founder of mall giant Simon properties (subscription might be required).
Finally, in case you’re still wondering how the SEC missed all the big frauds that occurred during the bull market, it could be that they were looking at pornography on the computers instead of looking for scoundrels. Get the story here.
February 3, 2010 10:30 a.m.
Some Views of the Big Picture
About this time each year, money managers begin issuing their reports for the fourth quarter of last year and their January shareholder letters. These letters review the past year and have some forecasts for the coming year. Since 2009 is considered (inaccurately) the end of a decade, many of the letters are looking back at the last 10 years and forward to the next 10.
One letter worth reviewing is from Jeremy Grantham of GMO. The firm mostly manages money for pension funds and other large institutional investors, but you can benefit from their thoughts. Grantham was warning of a stock market bubble around 1995 or 1996 and in 1999 forecast little or no return for the S&P 500 for the next decade. Here are a couple of quotes from the current letter to show you it is worth your time:
“I still believe that after the initial kick of the stimulus, we will move into a multi-year headwind as we sort out our extreme imbalances. This is likely to give us below-average GDP growth over seven years and more than our share of below-average profit margins and P/E ratios….”
“The real trap here, and a very old one at that, is to be seduced into buying equities because cash is so painful. Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly.
Another advisor who’s done well in the past and is not buying into the optimistic outlook for the next few years is Mohammed El-Erian of PIMCO. You’ve probably been exposed to PIMCO’s forecast of the “new normal” of low growth, low earnings growth, and below average returns from stocks. Here’s a summary of his latest analysis.
Former Treasury Secretary Hank Paulson already has a book out with his insider views of the financial crisis and the efforts of government officials to do something about it. Here’s an early review of the book.
Do you want to know which mutual funds are being recommended by financial advisors to their clients? Morningstar tells us which funds were the most researched in 2009 by financial advisors who use one of the firm’s products. We don’t recommend many of these funds, because they generally are load funds. But they can tell you which asset categories the advisors were looking into.
To improve the odds of having a good environment, you need advice and planning early. Don’t take my word for it. That’s the view of wealthy retirees. They say they wish they’d sought financial advice earlier than they did, and well before they actually retired. Another key point, which we’ve made in the past and will make more in the future, is you need to plan nonfinancial matters at least as much as financial matters.
The President’s budget proposals are out, and they include tax increases for many of you. He proposes letting the Bush tax cuts expire at the end of 2010 as scheduled, plus other tax increases.
