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Top 10 Predictions For the Global Economy
Tweet Share on Facebook December 15, 2008 Comment (3)Nariman Behravesh, chief economist at IHS Global Insight whom I recently interviewed about his new book, today issues his predictions for 2009. They are not pleasant:
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The Week In Wall Street Scandals
Tweet Share on Facebook December 12, 2008 Comment (1)Do Wall Street cops have a year-end quota? Or is widespread financial damage finally exposing fraudsters? And what's going on In Canada? Illinois may have a bit of a track record as a cesspool of graft and insider dealing, but who would've suspected our tidy neighbor to the north?
Whatever it is, this week was filled with rich people doing very bad things to stay that way.
A quick list:
Today, investor and market-making veteran Bernard Madoff is leading the headlines for what could be a record-breaking "giant Ponzi scheme" worth some $50 billion. His sons reportedly turned him in.
That will most likely be the week's biggest fraud (it's Friday after all), but from up north we get the absolutely craziest scandal of the week, which also includes the greatest name.
Otto Spork. Apparently Canadian regulators ordered Spork's Sextant Capital Management to temporarily stop selling his fund in Canada, the Globe and Mail says. The reason? Spork is allegedly "investing illegally" in glaciers. That's right. It seems 95 percent of Sextant Strategic Opportunities Hedge Fund consisted of two private Luxembourg companies - Icelandic Glacier Products and Iceland Global Water 2 Partners - supposedly being developed for the bottled water business, but without any actual operations. So regulators are curious to know why shares of the fund are up 984 percent since Spork's initial investment in 2006.
Closer to home, the fraud case against New York attorney Marc Dreier got a little larger. Forbes reports his alleged two-year scheme to defraud hedge funds could equal losses of $380 million -- much of which is still unaccounted for, making Drier a flight risk, prosecutors argue. Dreier, a Harvard and Yale-educated litigator who ran a 238-attorney practice, was arrested in Canada last week after allegedly impersonating the senior counsel of a Canadian pension fund in another fraud attempt similar to one he allegedly used to sell $113 million of fake notes to two hedge funds in October. (More here from DealBook).
And then there's Rod Blagojevich, where we learned being governor means never having to appoint someone to a vacant Senate seat without a six-figure payoff. (In case you missed the criminal complaint, the Chicago Tribune still has it up here.)
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Summing Up a Terrible Year
Tweet Share on Facebook December 12, 2008 Comment (3)What sort of year was 2008? This chart from Citigroup's European Portfolio Strategist tells the tale very well (via FT's Alphaville). Note the simple "Panic" tag in mid-November.
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Damage Report 2008: Household Wealth Down $10 Trillion
Tweet Share on Facebook December 12, 2008 Comment (41)Merrill Lynch has been among the more gloomy forecasters lately, and today economist Sheryl King point to another reason why.
She writes that household balance sheets shed almost $3 trillion in the third quarter, thanks in large part to a decline in stock prices. That loss, the largest 3-month drop on record, brings the total loss by U.S. households in 2008 to $10 trillion, or about 10 years worth of equity earnings.
That is staggering.
Now for the bad news. From Merrill:
Real estate still tumbling
The Flow of Funds report also put a cap on the real estate boom, as those home ATMs pretty much fell silent. Household real estate assets fell for a 10th quarter out of the past 11 and the net worth of real estate is now down 32% since 2005. Mortgage debt actually declined in 3Q, by 1.7%, the first decline in 25 years. Moreover, we estimate that mortgage equity withdrawal was almost non-existent in 3Q, marking the lowest pace of home wealth extraction since the early 1990s – back in the day when no one had heard of option ARMs, interest only or NINJA mortgages.
Now the hard part
Persistent negative wealth effects from the slide in housing and equity prices should reinforce the uptrend in the personal savings rate, creating a highly disinflationary environment as job losses mount and unemployment rate rise toward 8-1/2% in the coming year. We estimate that the savings rate will rise to around 5% by 2010, on its way towards a more sustainable 6-7% at some point just beyond our forecast horizon. This is a daunting prospect for future US economic growth given that for every one percent increase in savings, consumer spending – that 70% of the GDP pie – is suppressed by a roughly equal amount.
Basically, to get growth back on track we need to spend more of the money we no longer have -- an unfortunate position containing little incentive to soothe just the sorts of fear-inducing paralysis that crippled markets this year and threaten to extend the duration of this recession.
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Auto Bailout Fails In Senate!
Tweet Share on Facebook December 12, 2008 Comment (8)Asian markets are selling off hard after the $14 billion bailout for U.S. automakers fell apart Thursday night.
So far:
Japan's Nikkei 225 is down 4.6 percent to 8318.30
The Topix Index is off 3.6% to 818.56.
Hong Kong's Hang Seng Index plunged 6% to 14675.41.
Also, the dollar hit a 13-year low against the yen, says the FT.
From the NYT:
“It’s over with,” the Senate majority leader, Harry Reid of Nevada, said on the Senate floor, after it was clear that a deal could not be reached. “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”
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Alternative Investments: Inflation-Protected Securities
Tweet Share on Facebook December 11, 2008 CommentFrom 5 Alternative Investments to Protect Your Portfoio:
Inflation-protected securities
A slowing economy and the threat of deflation haunt the market today, but the return-killing specter of inflation will eventually re-emerge, if history is any guide. A small allocation of treasury inflation-protected securities, or TIPS, helps lower the risk of unexpected jumps in prices.Like other bonds, TIPS offer a fixed rate of return, but returns are adjusted for inflation and can offset losses that can hit stocks when inflation starts to climb. There's a negative correlation between stocks and TIPS, Swedroe notes. In 2000, 2001, and 2002, for example, S&P 500 returns were off 9.1 percent, 11.9 percent, and 22.1 percent, respectively. During those years, the Lehman Brothers Treasury TIPS Index returned 13.2 percent, 7.9 percent, and 16.6 percent.
Plus, as a TIPS investor, you can also get a little extra yield by buying longer-term maturities, and you'll still sleep easier than if you'd bought traditional treasuries, since you'll know that inflation won't eat up your returns. "Even in the Great Depression, we did not go 10 years with cumulative deflation," Swedroe says. "So buy a 20-year TIP. The real risk is inflation."
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Alternative Investments: Fixed Annuities
Tweet Share on Facebook December 11, 2008 Comment (4)From 5 Alternative Investments to Protect Your Portfolio:
Fixed annuities
Annuities aren't for everyone, but for retirees considering how to make shrinking portfolios last, they're worth keeping in mind. Fixed annuities are contracts issued by insurance companies that provide regular payments until the end of the holder's life. They offer some of the best security against ups and downs in investment returns at a time when you'll be spending your hard-won gains in retirement.A bonus: The payments you receive from putting a lump sum in an annuity can actually be higher than investing the same amount in a 30-year bond. Swedroe says a 60-year-old male taking out an immediate annuity will see a payout 20 percent higher than a 30-year treasury bond would produce, and if he lives past 90, the payments continue.
The obvious drawback to annuities is that if you die early, you generally lose the asset. But the peace of mind that comes with guaranteed income may make it worth taking that risk. "We insure so many things in our lives, but few people think about hedging longevity risk because they don't think of it as a risk," Swedroe says. "But you have the risk of outliving your money. It's the only way to hedge that."
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Alternative Investments: Stable-Value Funds
Tweet Share on Facebook December 11, 2008 CommentFrom 5 Alternative Investments To Protect Your Portfolio:
Stable-value funds
Offered through retirement accounts, including IRAs, stable-value funds are a conservative answer for investors looking for just a bit more return than the usual money market fund provides. Stable-value funds are essentially agreements between an issuer and an insurer who agree to keep the fund's value stable. (Here is a more detailed explanation). Volatility and risk are generally low for stable value.Stable-value funds invest in longer-dated bonds (typically one to three years) with higher yields than those of traditional money market funds, which hold short-dated treasuries. A 20-year study by the Stable Value Investment Association showed that such funds outperformed 30-day treasury bills by 3.2 percentage points a year, with only slightly higher risk.
However, stable-value funds aren't as transparent as money market funds (for instance, they can take credit risk or make other bets on riskier bonds), so investing in a highly rated fund is a must. "They're a nice enhancement for people who need a little more yield," Swedroe says.
One caution: Stable-value funds tend to do well when interest rates are dropping. That's great when short-term rates are falling, as they have been during this recession, but the funds could be less attractive when interest rates edge up from their currently low levels.
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Alternative Investments: Commodities
Tweet Share on Facebook December 11, 2008 CommentFrom 5 Alternative Investments to Protect Your Portfolio:
Commodities
It may not be happening right now, but over time, commodities investments can offset swings in stocks and bonds. Commodities rise with inflation, which is negatively correlated with stocks and bonds. From 1973 through 2007, the Lehman Brothers Bond Index twice posted a negative return, once in 1994 and once in 1999, for an average 3 percent loss. In both years, the Goldman Sachs Commodity Index rose, for an average gain of 23.1 percent. During that same period, the S&P 500 had eight years of negative returns, and during six of those the commodity index was positive.Plus, commodities tend to perform best when your portfolio needs them most. During times of strife or unexpected market shocks, commodity prices rise as supplies are threatened. Again, 2008 has been an exception, as commodities have fallen along with everything else because of slowing global demand.
Still, Swedroe says commodities can help you build a diverse portfolio. A dollop of commodities offsets the risk of inflation, allowing you to buy longer-dated bonds with higher yields. "If you're going to add commodities, then you can own a long-term bond fund. If you don't, you're better off with short or intermediate [bonds] to cut your risk of inflation," Swedroe says.
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Alternative Investments: Real Estate
Tweet Share on Facebook December 11, 2008 Comment (2)From 5 Alternative Investments to Protect Your Portfolio:
Real estate
That's right. The bogeyman of this downturn should still—someday—be a viable part of your portfolio. The housing bust makes it easy to shun the sector entirely, but real estate investment trusts, or REITs, historically offer unique risk-management benefits.
Over the past 20 years, REITs have helped juice returns and smooth out volatility. A sample portfolio from 1978 through 2007 shows that putting 10 percent of equity holdings in U.S. REITs improved returns by 0.3 percent and cut volatility by 0.9 percent, compared with investing in stocks alone. Real estate tends not to move in tandem with stocks, and it has almost no correlation with short-term bonds. (The obvious exception to the rule: 2008, when popular indexes like the Vanguard REIT ETF [VNQ] are off more than 40 percent year to date, just like equities.)
Real estate is a "low-correlating asset, not a no-correlating one, but that doesn't mean diversification isn't working," Swedroe says.
