‘FOREIGN BONDS PROVIDE BUFFER IF DOLLAR DECLINES ,’ in the N.Y. Times via fidelity.com.

Foreign Bonds Provide Buffer if Dollar Declines

By J. ALEX TARQUINIO

Published: October 28, 2009

AMERICAN investors can buy bonds issued by foreign governments that are designed to provide protection against inflation, but strategists say those bonds are really more of a bet against the dollar

“If you are a U.S. dollar-based investor, the currency fluctuations will overwhelm anything you get from inflation indexing” on the foreign bonds, said Aaron Gurwitz, the head of global investment strategy at Barclays Wealth.

For more than a decade, the United States Treasury has been selling bonds protected from inflation, known as Treasury Inflation-Protected Securities, or TIPS, whose coupon payments are based on changes in the Consumer Price Index. Investors primarily concerned about protecting their purchasing power during retirement should own TIPS, Mr. Gurwitz said.

Some strategists say that owning the foreign bonds — individually in a well-rounded bond portfolio, or through an exchange-traded fund — can be a good way to diversify and add exposure to other currencies.

Brett Hammond, the chief investment strategist at TIAA-CREF, pointed out that global inflation-protected securities, as these bonds are called, typically perform very differently from other asset classes like stocks and commodities — and even other types of bonds.

Owning any type of foreign bonds hedges an individual investor’s portfolio against a decline in the dollar and is especially useful if the portfolio has little exposure to other currencies through investments like foreign stocks. This is true, he said, for investors of any age.

David Darst, the chief investment strategist for the global wealth management group of Morgan Stanley Smith Barney, recommends global inflation-protected securities precisely because they are both a hedge against a decline in the dollar and protection against global inflation.

“It is more of a currency play than an inflation play,” he said. “But to the degree that inflation picks up with a global economic recovery, then you will be getting two hedges.” Morgan Stanley projects the dollar will fall to $1.60 against the euro by the end of 2010, down from about $1.50 now.

Mr. Darst recommends that individual investors hold 3 percent to 4 percent of their total portfolio in inflation-protected bonds. This allocation could be entirely in TIPS or in a combination of TIPS and global inflation-protected securities, he said, depending on what the investor thought of the dollar.

American investors can buy bonds from specific foreign countries through a broker, or investors can own a diverse basket of the bonds by purchasing the SPDR Deutsche Bank International Government Inflation-Protected Bond exchange-traded fund. This fund owns inflation-adjusted bonds from 17 countries, including France, Brazil and South Korea, but not the United States. The bonds are denominated in 14 currencies. At the moment, no comparable traditional mutual fund is available, according to Morningstar.

Scott Burns, the director of exchange-traded fund analysis for Morningstar, recommends owning both the Deutsche Bank fund and the iShares Barclays TIPS Bond Fund, which only owns American TIPS.

He pointed out that a decline in the dollar often coincides with rising inflation. “If the dollar goes down, the Consumer Price Index generally goes up,” he said, because the cost of imported goods increases for American consumers.

For investors who want exposure to foreign currencies but are not interested in inflation-protected bonds, Mr. Burns recommended two funds that own traditional foreign government bonds: the SPDR Barclays Capital International Treasury Bonds fund, which primarily owns bonds issued by developed countries, and the iShares JPMorgan USD Emerging Markets Bond fund. Because inflation has been very low during the recession, many investors have not been focused on inflation-adjusted bonds, which makes it easy to gauge the broad market consensus for inflation: the difference between the interest rates offered for TIPS and for plain Treasury bonds indicates what investors think future inflation will be. At the moment, TIPS prices suggest an average annual inflation rate of 1.6 percent over the next five years and 2.11 percent over the next 10 years.

If inflation is higher than that over 5 to 10 years, the current TIPS bondholders would get a higher return. If inflation fears return, though, those expectations will probably be priced into the TIPS market.

Some investment strategists say that makes this a good time to buy inflation-protected bonds — either TIPS or their foreign counterparts — precisely because the outlook for inflation is relatively benign. “You don’t want to buy flood insurance when the river is already in your living room,” Mr. Burns said.

‘THE JOBS IMPERATIVE, ‘by Paul Krugman in the Times.

If you’re looking for a job right now, your prospects are terrible. There are six times as many Americans seeking work as there are job openings, and the average duration of unemployment — the time the average job-seeker has spent looking for work — is more than six months, the highest level since the 1930s.

You might think, then, that doing something about the employment situation would be a top policy priority. But now that total financial collapse has been averted, all the urgency seems to have vanished from policy discussion, replaced by a strange passivity. There’s a pervasive sense in Washington that nothing more can or should be done, that we should just wait for the economic recovery to trickle down to workers.

 

This is wrong and unacceptable.

 

Yes, the recession is probably over in a technical sense, but that doesn’t mean that full employment is just around the corner. Historically, financial crises have typically been followed not just by severe recessions but by anemic recoveries; it’s usually years before unemployment declines to anything like normal levels. And all indications are that the aftermath of the latest financial crisis is following the usual script. The Federal Reserve, for example, expects unemployment, currently 10.2 percent, to stay above 8 percent — a number that would have been considered disastrous not long ago — until sometime in 2012.

 

And the damage from sustained high unemployment will last much longer. The long-term unemployed can lose their skills, and even when the economy recovers they tend to have difficulty finding a job, because they’re regarded as poor risks by potential employers. Meanwhile, students who graduate into a poor labor market start their careers at a huge disadvantage — and pay a price in lower earnings for their whole working lives. Failure to act on unemployment isn’t just cruel, it’s short-sighted.

 

So it’s time for an emergency jobs program.

 

How is a jobs program different from a second stimulus? It’s a matter of priorities. The 2009 Obama stimulus bill was focused on restoring economic growth. It was, in effect, based on the belief that if you build G.D.P., the jobs will come. That strategy might have worked if the stimulus had been big enough — but it wasn’t. And as a matter of political reality, it’s hard to see how the administration could pass a second stimulus big enough to make up for the original shortfall.

 

So our best hope now is for a somewhat cheaper program that generates more jobs for the buck. Such a program should shy away from measures, like general tax cuts, that at best lead only indirectly to job creation, with many possible disconnects along the way. Instead, it should consist of measures that more or less directly save or add jobs.

 

One such measure would be another round of aid to beleaguered state and local governments, which have seen their tax receipts plunge and which, unlike the federal government, can’t borrow to cover a temporary shortfall. More aid would help avoid both a drastic worsening of public services (especially education) and the elimination of hundreds of thousands of jobs.

 

Meanwhile, the federal government could provide jobs by … providing jobs. It’s time for at least a small-scale version of the New Deal’s Works Progress Administration, one that would offer relatively low-paying (but much better than nothing) public-service employment. There would be accusations that the government was creating make-work jobs, but the W.P.A. left many solid achievements in its wake. And the key point is that direct public employment can create a lot of jobs at relatively low cost. In a proposal to be released today, the Economic Policy Institute, a progressive think tank, argues that spending $40 billion a year for three years on public-service employment would create a million jobs, which sounds about right.

 

Finally, we can offer businesses direct incentives for employment. It’s probably too late for a job-conserving program, like the highly successful subsidy Germany offered to employers who maintained their work forces. But employers could be encouraged to add workers as the economy expands. The Economic Policy Institute proposes a tax credit for employers who increase their payrolls, which is certainly worth trying.

 

All of this would cost money, probably several hundred billion dollars, and raise the budget deficit in the short run. But this has to be weighed against the high cost of inaction in the face of a social and economic emergency.

 

Later this week, President Obama will hold a “jobs summit.” Most of the people I talk to are cynical about the event, and expect the administration to offer no more than symbolic gestures. But it doesn’t have to be that way. Yes, we can create more jobs — and yes, we should.

‘GET READY FOR HALF A RECOVERY,’ by Gretchen Morgenson in the Sunday Times.

Get Ready for Half a Recovery …..By GRETCHEN MORGENSON

Published: November 28, 2009

A ROBUST economic recovery in 2010 is certainly on most investors’ wish lists as this year draws to a close. A return to prosperity would not only mean an end to our long financial nightmare, but it would also buttress a rebounding stock market, one of 2009’s few bright spots.

The news out of Dubai late last week, however — that its investment company is struggling to meet repayments on some of its $59 billion in debt — reminds us that we are far from finished with a ferocious deleveraging process that began last year. And the weight of debt that still must be worked out is one reason that Ian Shepherdson, chief United States economist at High Frequency Economics, estimates that growth in the United States’ output for 2010 will be no better than 2 percent.

Mr. Shepherdson — whose economic forecasts have been more right than wrong throughout the credit crisis — says that while cost-cutting has produced enviable productivity figures and rising earnings at large companies, continued growth in corporate output will be much harder to come by.

“Looking further ahead, you can’t survive on cost-cutting forever,” he says. “We will have to see decent volume growth but we won’t see that immediately.”

Mr. Shepherdson’s 2 percent estimate for gross domestic product growth next year is roughly half what he would normally expect for a solid economic recovery. And a crucial reason is the fact that bad assets on personal and institutional balance sheets are the equivalent of a ball and chain strapped to the economy, he says.

“You can pick up that ball and walk with it,” he says, “but you have to walk slowly.”

All that debt overhanging consumers and organizations is the pivotal reason we are still seeing a free fall in bank lending. And small businesses, which account for half of all jobs in this country, are taking the brunt of this credit contraction. Smaller banks are especially worried about their own balance sheets and aren’t making loans. This puts small businesses — important engines of growth — squarely on the brink.

INVESTORS may be celebrating data that points to improvements in economic activity — this month, for example, the Institute for Supply Management said manufacturing had expanded for three months in a row. But Mr. Shepherdson worries about what he sees in monthly figures put out by the National Federation of Independent Business, a trade group representing small businesses.

The N.F.I.B. data was far more prescient than that of the I.S.M. in predicting the current recession, which began in December 2007, Mr. Shepherdson says. The N.F.I.B. survey signaled a downturn in the spring of 2007, while I.S.M. studies didn’t point to a recession until after Lehman Brothers failed in September 2008.

In its survey, the N.F.I.B. asks small businesses how easy it is for them to get loans. The most recent data shows that credit tightness peaked earlier this fall — the worst levels in 23 years, Mr. Shepherdson says. Although credit continues to remain troublingly hard for small business to come by, that phenomenon is a largely untold story.

“Wall Street focuses on big companies because they are in the Standard & Poor’s 500, but small businesses are still in a very grim state,” he says. “Small-company activity according to the N.F.I.B. is still at deep recession levels.”

And while small businesses do not make up the big stock indexes, they do contribute significantly to the overall economy. The tens of millions of people who work at small concerns are, after all, customers of those big, high-profile corporations like McDonald’s, Wal-Mart and Whirlpool.

What we all are enduring — and what small businesses, workers and consumers continue to be pummeled by, even as Wall Street wizards jump back into the bonus pool — is the dismantling of the great credit boom of the early 2000s. This necessary but grueling deleveraging began last year and is now in full swing. But it is nowhere near over.

Bank credit outstanding peaked in October 2008 at $7.3 trillion and is now down to $6.72 trillion. Still, Mr. Shepherdson says he thinks that banking-sector loan and lease assets have to fall by an additional $2 trillion. That could take another two years.

“We are in unknown territory here,” he said. “Since the peak in October ’08, bank credit has dropped by 8 percent. That is enormous and it is accelerating. The peak-to-trough drop in the early ’90s was just 1.3 percent and that was enough to scare the pants off the Fed.”

This credit cave-in is the driving force behind the Federal Reserve’s mortgage purchase program, Mr. Shepherdson says. The last thing the central bank wants to see is a decline in the broad-based money supply, because when that happens it usually means a depression is afoot. Money supply didn’t fall in the early 1990s, but it fell by one-quarter during the 1930s.

The Fed’s asset purchase program is therefore not about driving down mortgage rates, Mr. Shepherdson says, but about trying to prevent a collapse in the money supply. When the Fed buys assets it creates deposits, which, in turn, helps offset the credit pullback. If the Fed wasn’t buying mortgages with both hands, Mr. Shepherdson estimates, the money supply would be falling 1 percent a month.

The message amid this gloom, he says, is that the Fed isn’t likely to raise interest rates anytime soon. In fact, he doesn’t anticipate an increase in rates until the spring of 2011.

“I WOULD be astonished if they raised rates in the heart of the credit contraction storm,” Mr. Shepherdson says. “The credit contraction will last for a couple of years and if the Fed is interested in offsetting it, they will have to buy assets through next year.”

Deflating an asset bubble is never fun, and this particular specimen is one for the record books. The binge may have been a blast, but the purge, alas, sure is painful.