Archive for December, 2009|Monthly archive page


In Uncategorized on December 31, 2009 at 15:41

What could go wrong in 2010


At the start of 2009, who could have imagined that we’d actually have reasons to look back at the year fondly? It began with much to be worried about — the health of Citigroup , Bank of America , AIG  and other big financials; looming bankruptcies at GM and Chrysler; a stock market at its lowest point since 1997; and a labor market hemorrhaging jobs.

But heading into the year’s final days, optimism reigns supreme. The S&P 500  is up about 25% this year, the worst appears to be over for big banks and Detroit and many economists are even predicting growth for the overall economy and job market in 2010.

Still, people should not get overly excited.

As I wrote in late November, many investing experts think that it’s unlikely the market will do as well in 2010 as it did this year. This doesn’t necessarily mean that there will be another bear run next year. Rather, returns for stocks may be relatively mundane.

There are several reasons why that may be the case. But the biggest one is that there needs to be more compelling evidence that the economy is really improving as opposed to just holding steady after the precipitous plunge in 2008.

And investors may be ignoring some of the risks. First and foremost, it’s not yet clear if the economy’s 2.2% growth in the third quarter is sustainable.

Some worry that the economic rebound is merely a byproduct of government spending, not consumer spending. After all, retail sales during the holiday season were not exactly robust.

“The signs of underlying demand — absent federal stimulus — continue to be pretty soft,” said Keith Hembre, chief economist with First American Funds in Minneapolis.

Hembre also fears that the housing market is still incredibly weak, which could dampen any chances of a strong recovery. He argues that the relatively strong sales for existing homes last month was driven by foreclosures. New home sales, on the other hand, fell 11%

Ted Parrish, co-manager of the Henssler Equity fund , agreed that housing is the big wild card for 2010.

Parrish said that he’s not sure just yet what will happen to the housing market once the Federal Reserve stops buying mortgage-backed securities early next year. Many credit the Fed’s purchases with helping to keep mortgage rates relatively low.

“Right now, the government is buying all these mortgage-backed securities and that is still propping up the housing market. It will be interesting to see what happens to rates after that.”

Beyond housing, there are concerns about what impact all of this year’s massive stimulus spending will have on the long-term health of the U.S. economy.

John Derrick, director of research with U.S. Global Investors  in San Antonio, said that there is the potential for a so-called “double-dip recession”, i.e. another economic downturn following a brief period of growth.

Derrick said he is fairly optimistic that there won’t be such a dip, but he does think there is reason to be worried about what interest rates at zero percent combined with the trillions of dollars pumped into the system by the Fed could do to the dollar.

“Things don’t look too bad for the next 6 to 12 months,” he said. “But there is an argument that the Fed and government engineered a stop-gap measure to save the economy and delayed the inevitable. There is a potential for debasing the currency.”

Given the dollar’s weakness this year, some could argue the greenback is already debased. For that reason, Parrish said one of his key worries is that any more spending that drastically increases the federal budget deficit could lead some foreign investors to bail on the dollar.

Now don’t get me wrong. This doesn’t mean that the economy is going to have another tailspin next year. It just means that the expectations for a blockbuster recovery may be off the mark.

Hembre said he thinks that growth will be strong in the first half of the year but will taper off a bit in the second half. Overall, he’s predicting about a 2% average growth rate for the whole year.

That’s not bad, especially when you consider how bleak things were in late 2008 and earlier this year. But it still does show that there is a big disconnect between Wall Street’s bullish take on the economy and the more skeptical view many consumers have.

“We’re on the right side of the economic cycle right now,” Derrick said. “But the average individual may still be looking for jobs or not getting pay raises.”



In Uncategorized on December 30, 2009 at 00:08

NEW DELHI — This was a lost decade for the American stock market. But for much of developing world, it was the Roaring ’00s — a period of soaring markets and breakneck investment that left even some bulls wondering if the good times can last.

While the broad American market lost about a fifth of its value in the last 10 years, emerging markets like Brazil, Russia, China and India powered ahead with gains in the double or even triple digits.

The numbers are staggering. On the Ukraine’s PFTS Stock Exchange — a Wild East of investing that did not even exist until 1997 — shares soared more than 1,350 percent over the last decade. In Peru, stocks jumped more than 660 percent. Here in India, the Sensex index leaped more than 240 percent.

To believers, those heady gains underscore profound shifts taking place in the global economy, where investment dollars, euros and yen whiz across borders and time zones with the stroke of a computer key. As many Americans wait for an economic recovery, money is pouring into the fast-growing economies of Asia and Latin America, as well as into oil-rich Russia and the former Soviet bloc.

“What we’re living through now is something of epic proportions,” said Allan Conway, the head of emerging markets equities at Schroders, the big money management company in London. He likened the economic rise of nations like Brazil, Russia, India and China — the so-called BRIC countries — to that of postwar Japan.

Amid all this euphoria, even some longtime bulls wonder if investors are getting a bit carried away. Emerging markets have a history of giddy booms and crushing busts dating back to the 19th century. They collapsed spectacularly in 1997, as a chain reaction of currency devaluations, bankruptcies and recessions rocked East Asia. In 1998, the Russian market plunged more than 80 percent after the country defaulted on its debts.

More recently, emerging markets tanked with the rest of the world in 2008, after shell-shocked money managers pulled cash from anywhere that seemed risky. But they were a bright spot in 2009 — the MSCI Emerging Markets index increased 73 percent in 2009, compared with a 25 percent jump in the S.& P. 500 index.

Despite 2009’s gains, few predict a major setback today. Since the 1998 debacle, some developing countries have cleaned up their acts, balancing their budgets and improving their trade balances. As their economies grow, domestic investors have become big supporters of these countries’ stock markets. With interest rates low around the world, companies based in emerging markets, like their counterparts in the developed world, enjoy access to cheap money. High commodities prices have buoyed stock and bond markets in nations that are big exporters of commodities.

But the recent travails of Dubai, where a debt-driven bubble economy is now bursting, provide a powerful reminder that in up-and-coming economies, what goes up can come down — and fast. That these markets have gained so much, so quickly — with some white-knuckled drops along the way — gives some investment professionals pause.

Mark Mobius, one of the deans of emerging market investing, said that while developing markets still have room to run, the first half of 2010 could be bumpy.

“We continue to see upside, but with substantial corrections along the way, which could be as much as 20 percent,” said Mr. Mobius, the executive chairman of Franklin Templeton Investments, which is based in San Mateo, Calif.

Some market specialists worry that asset bubbles akin to the one that inflated and burst in the American housing market might be growing in places like China and Hong Kong. Others fret over the risks posed by volatile commodities prices, as well as over the inevitable end of this period of ultralow interest rates.

Leon Goldfeld, the chief investment officer for HSBC Global Asset Management in Hong Kong, told reporters this month that HSBC had cut its exposure to Asian equities, anticipating a 10 percent to 15 percent decline in early 2010. After that, Mr. Goldfeld said, Asian stocks would represent a “good buying opportunity.”

As long-term investments go, emerging markets seem to have a lot going for them. On average, developing countries have less sovereign, corporate and household debt than developed countries. Their economies are also growing faster than industrialized ones. Merrill Lynch predicts that emerging market economies will grow 6.3 percent next year, while the global economy expands by 4.4 percent.

Emerging markets are eclipsing their developed peers in other ways as well. Imports to the BRIC nations are likely to surpass imports to the United States for the first time ever in 2009, according to Morgan Stanley.

For the moment, the developing world is the engine of global growth. Emerging markets accounted for virtually all of the year’s growth in global output, because developed economies shrank or were flat. Even if developed countries recover completely in 2010, emerging economies will account for 70 to 75 percent of the growth in global output “for the foreseeable future,” said Mr. Conway of Schroders.

Developing nations are also assuming a bigger role in the world economy. Morgan Stanley predicts that developing countries, including those in the Middle East, will account for 36 percent of total global gross domestic product in 2010, up from 21 percent in 1999.

All of this is a big lure to investors. Funds focused on equities in emerging markets attracted a record $75.4 billion this year, far surpassing their previous high of $54 billion in 2007, according to EPFR Global, which tracks fund flows.

Even after that influx, emerging markets still account for only a small fraction of investment portfolios in United States and Europe, the world’s money management centers. Less than 3 percent of assets managed by United States fund managers are invested in emerging markets. That number could double in the next five years, some investment experts say.

Even normally conservative investors might be tempted to jump into emerging markets, given the sluggish outlook in the United States and Europe. After a dismal decade for the American stock market, markets in the developing countries might seem attractive.

“Investors are starting to look at this asset class and realize that it is a pretty safe place,” said Kevin Daly, who manages $1.7 billion in emerging market debt at Aberdeen Asset Management.

Despite their volatile history, emerging markets strike some money managers as relatively secure places to invest. Of course, such hopes have been dashed before.

‘WILL 2010 CONTINUE WHERE 2009 LEFT OFF?, ‘ from Fidelity Director of Research.

In Uncategorized on December 29, 2009 at 19:31

As 2009 comes to an end, we’re left with a still-weak, but improving, economy, and a bull market in stocks, corporate bonds, and commodities. Will this continue in 2010? Or was it all just a mirage, a head fake, a sucker’s rally that is doomed to fail in the months ahead?

To answer these questions, I looked at the weight of the evidence in four areas: fundamentals, the Federal Reserve’s monetary policy, technical indicators, and investor sentiment. (Read Viewpoints: Four-Legged Bull for more insight on these topics.) I also looked at the “tail risks” and what the opportunities might be into 2011, 2012, and beyond.

What I found? More potential opportunity than risk over the intermediate term. Here’s why:

The fundamentals

While some like to focus on lagging indicators such as unemployment, I prefer to look at leading indicators such as the cost of money, the shape of the yield curve, the direction of credit spreads, the inventory cycle, and monetary and fiscal policy. All of these indicators have continued to point to further improvement for the economy in 2010. In fact, we may well have an economy that surprises the economic consensus with its strength.

That’s not to say that there aren’t risks. A big concern is that the consumer is in no condition to return as the driver of our economy. After all, consumers no longer have the income or home equity to spend, and the banks aren’t lending. While that’s a valid concern, I think it’s one for 2011, not 2010. Why? Because the inventory cycle should have enough momentum to carry the economy for the next four quarters or so, perhaps to a growth rate as high as 5% or more.

Monetary policy

Monetary policy is expected to remain highly stimulative in 2010 even if the economy recovers. The Fed has a dual mandate of full employment and price stability, and it’s clear that its main concern right now is unemployment and not inflation.

According to the Taylor Rule (one of the mathematical formulas used by the Fed to help determine at what level it should set its target interest rate), the federal funds rate should not be where it is now—0.13%—but at -5.83%, given a jobless rate of 10%. A negative rate isn’t possible, of course, which is why the Fed has injected a trillion dollars of reserves into the banking system. This is called quantitative easing (or printing money) and is designed to make up for the fact that the Fed’s “conventional” ammunition isn’t working (i.e., short-term interest rates).

So, the question to be asking in terms of monetary policy: What unemployment rate will lead the Fed to raise the funds rate? Using the San Francisco Federal Reserve version of the Taylor Rule, I used several different employment rates to calculate a Fed funds target rate: 9% unemployment got a -3.9% Fed fund rate, 8% got a -1.9% rate, 7% got a 0% rate. By this calculation, it would take a decline in the jobless rate from 10% to 6% to warrant any hike in interest rates. I think that’s a long ways off, which is why I think that it’s unlikely that the Fed will do any tightening in 2010.

Technical indicators

The technicals are still OK. Not great, but not terrible, either. We still see a pattern of higher highs and higher lows in the major stock market indexes (which, after all is the definition of a bull market), but we do have some negative divergences from small caps, market breadth, and financials (i.e., they made a lower high while the S&P 500® Index  made a higher high). Not the end of the world, but clearly a sign that the bull market is getting tired.

Investor sentiment

Sentiment is also still OK. Not great, but also not terrible. Sentiment surveys, such as the American Association of Individual Investors AAII Sentiment Survey, and Investor Company Institute (ICI) mutual fund sales continue to show a sentiment pendulum that has swung from a pessimistic extreme to the middle, but not (yet) all the way to an optimistic extreme.

What does this all mean?

All in all, the weight of the evidence from where I am sitting demonstrates that the economic recovery is progressing and may well turn out stronger than many investors expect, that the Fed will not risk an early exit from its policy, and that technically the bull market in stocks is intact but getting more and more mature. So, I see more opportunities than risk over the intermediate term.

Over the longer term, however, there are a number of questions that loom on the horizon.

For one, when will the Fed exit its unprecedented campaign of low interest rates and quantitative easing? If it doesn’t pull away too soon (which could trigger a deflationary relapse), will it end up pulling away too late or too slowly (triggering an inflationary spiral)? How is it going to remove all the excess reserves that it pumped into the banks? By paying interest on reserves? Will that be enough? Getting this right is like threading the eye of a needle, and that will be difficult given how high the stakes are.

Will Congress continue to run deficits, and what impact will that have on interest rates, the dollar, and the price of gold? In addition to $1.5 trillion of new debt, the Treasury also has to roll over $2 trillion of maturing debt. That’s a lot of debt. Who will buy it? China? The banks? The public? The Fed?

Has the U.S. consumer been so “scared straight” from its borrowing binge of the past decade that we are entering a prolonged period of more saving and less spending? With consumer spending comprising 70% of gross domestic product (GDP), that could have an enormous impact.

Will the combination of potential increased regulation and higher tax rates bring down productivity and dampen the country’s entrepreneurial spirit?

All profound questions, with no answers—at least not yet. For now I am focusing on the cyclical opportunities in 2010. But it’s not too early to start focusing on the longer-term unresolved issues that lie over the horizon.

‘FIVE FINANCIAL TRUTHS FOR 2010,’ from Fidelity Interactive at

In Uncategorized on December 29, 2009 at 06:44

Forget those last five pounds—New Year resolutions for 2010 should be aimed at getting your financial life in shape.

You wouldn’t buy a house without going through the numbers with a fine toothed comb. You should use the same practicality when defining a realistic education plan.


If the economic downturn has taught us anything, it’s that it’s time for a back-to-basics approach to your finances. Conventional wisdom is easily dismissed as too staid, especially when the markets are on a roller-coaster ride. But we found five financial truths that will be particularly important to embrace in 2010. Here’s what they are and how to make the most of them.

Invest overseas

You already know that investing overseas provides needed diversification from the whims of the U.S. stock market. But planners are urging clients to take a closer look at international stocks for their growth opportunities, and not just as a buffer.

Mature markets like the United States and Japan simply don’t have the growth potential other countries do, says Douglas Rice, a personal finance educator and author.

“There’s simply more demand and more room for developing countries to grow,” he says. “In China as of 2008, there were only 50 people out of every 1,000 with cars. In the U.S., for every 1,000 people, 765 owned cars. Americans will need to replace their cars eventually, but that’s a totally different demand curve than pushing out millions of new drivers every year.”

Chris McDermott, Fidelity Investments Senior Vice President of Investor Education, Retirement and Financial Planning, agrees that going international makes sense, provided investors’ timelines are long enough: “Foreign stocks generally reduce a portfolio’s risk over the long term, but can increase risk in the short term.”

So what’s the right balance? McDermott says putting 30% of your stock allocation into foreign companies provides nearly all of the diversification benefits that a 40% allocation does, with less risk.

Investing overseas isn’t as daunting as it may sound—beginners can start with a diversified international mutual fund that invests in stocks from countries all over the world. Those comfortable taking on a little more risk can find funds that focus on emerging markets—in a broad emerging markets fund or a fund that invests solely in one region or country. These funds typically are higher-growth but somewhat more unstable. More sophisticated investors can buy stocks directly on foreign exchanges through a number of trading platforms, including E-Trade and Fidelity.

Read your statements

Buy-and-hold investing is alive and well, but that doesn’t mean you can ignore your portfolio. To make the most of changing opportunities, review your investments every few months. That’s not to encourage day trading or other needless—and costly—tinkering, but in an erratic market such as we’re likely to see in 2010, it pays to keep a closer eye on your strategy and ensure it still makes sense.

Evaluate your portfolio on your own schedule. “Your review should not be driven solely by the calendar,” McDermott says. Any big life changes warrant a review to see how your current investments are positioned versus your target investment mix, timeframe, risk and financial tolerance.

Scale back college expectations

In case you hadn’t noticed—and, if you have kids, you’re wearing impressive blinders—college costs are soaring. Recent statistics put the average annual cost at private schools at $25,143. Moreover, many “elite” colleges and universities exceed $50,000 in total yearly cost. The result: Two-thirds of college students take out loans to meet the expense of higher education, boosting average debt at graduation to more than $23,000, according to a National Postsecondary Student Aid Study.

Time to ramp up

529 savings

Weary investors are fleeing college savings plans. Here’s why you should do the opposite.

Discouraged? Don’t be. Instead, focus on the cost versus the benefit of your child’s college options to get the most bang for your education buck.

“You wouldn’t buy a house without going through the numbers with a fine-toothed comb,” says Sandra Proulx of, a site geared to helping students find financial aid resources. “You should use the same practicality when defining a realistic education plan.”

Make sure to do some comparative shopping when considering which college makes the most financial sense.  Strategies include:

Community college. These can be a fraction of the cost of going away to school—climbing enrollment at community programs throughout the country attest to their growing popularity.

Start at a local school, then transfer. That can trim the overall expense of a “prestigious” degree.

Consider three-year programs. Colleges such as Hartwick in upstate New York have unveiled intensive programs that let students graduate in three years, saving thousands of collars.

Think career, not just school. “Have you researched the career that interests you? What’s the average pay? How quickly after graduation will you be able to pay off any student loans you take out?” says Proulx. “Will this industry still need workers once you’ve graduated? If you can’t afford it without big loans, choose another school.”

Tap your home equity—carefully

Back in the days of easy mortgages and soaring property values, banks were practically begging homeowners to tap their home equity via loans and lines of credit. And we certainly indulged, using them for everything from dream vacations to cash for home repairs.

No more. Not only are lines of credit harder to come by, lenders are routinely freezing existing lines because plummeting property values can’t support them. Even if that’s not the case, some lenders are freezing existing lines of credit due to inactivity.

So if you have a functioning line of credit, don’t leave it completely unused. That’s not license to spend, though: “No one should treat a line of credit as emergency cash,” says Rebecca Schreiber of Solid Ground Financial Planning in Silver Spring, Md. “Use it so that they’re not shut down from inactivity. Automate a bill onto a line of credit, then have your bank automatically pay off the credit account each month. Not only will the line of credit stay active but the regular timely payments will increase your credit score.”

Challenge property taxes

Savvy homeowners have always been careful not to overpay their property taxes.

Now that strategy makes particularly good sense. Although conditions have stabilized somewhat, many homeowners continue to struggle with their property values. According to the National Association of Realtors, the national median price for a single family home was $177,900 in the third quarter of 2009—11.2% lower than the same period the prior year.

That may be lousy news if you’re trying to sell but it’s music to your tax-paying ears. For example, if you bought a house for $500,000 in 2006 with a property tax rate of 1%, that’s roughly $5,000 a year. If your property is now only worth $400,000—a typical drop in many parts of the nation—you’ll save $1,000.

Don’t wait for the county to point out your newfound savings, says Dan Koblin, senior financial planner with Pinnacle Financial Group in Los Angeles.

Request that your property be reassessed. If you don’t get the break you think you deserve, follow up. Make sure the assessors are aware of any changes in your home that may negatively affect value. See how your home stacks up to comparable houses in your neighborhood. You can find similar homes and their worth at your local assessor’s office.

‘THE BIG ZERO,’ by Paul Krugman in the N.Y. Times, describing the past decade!!! Great read!

In Uncategorized on December 28, 2009 at 23:40

The Big Zero


Published: December 27, 2009

Maybe we knew, at some unconscious, instinctive level, that it would be an era best forgotten. Whatever the reason, we got through the first decade of the new millennium without ever agreeing on what to call it. The aughts? The naughties? Whatever. (Yes, I know that strictly speaking the millennium didn’t begin until 2001. Do we really care?)

But from an economic point of view, I’d suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true.

It was a decade with basically zero job creation. O.K., the headline employment number for December 2009 will be slightly higher than that for December 1999, but only slightly. And private-sector employment has actually declined — the first decade on record in which that happened.

It was a decade with zero economic gains for the typical family. Actually, even at the height of the alleged “Bush boom,” in 2007, median household income adjusted for inflation was lower than it had been in 1999. And you know what happened next.

It was a decade of zero gains for homeowners, even if they bought early: right now housing prices, adjusted for inflation, are roughly back to where they were at the beginning of the decade. And for those who bought in the decade’s middle years — when all the serious people ridiculed warnings that housing prices made no sense, that we were in the middle of a gigantic bubble — well, I feel your pain. Almost a quarter of all mortgages in America, and 45 percent of mortgages in Florida, are underwater, with owners owing more than their houses are worth.

Last and least for most Americans — but a big deal for retirement accounts, not to mention the talking heads on financial TV — it was a decade of zero gains for stocks, even without taking inflation into account. Remember the excitement when the Dow first topped 10,000, and best-selling books like “Dow 36,000” predicted that the good times would just keep rolling? Well, that was back in 1999. Last week the market closed at 10,520.

So there was a whole lot of nothing going on in measures of economic progress or success. Funny how that happened.

For as the decade began, there was an overwhelming sense of economic triumphalism in America’s business and political establishments, a belief that we — more than anyone else in the world — knew what we were doing.

Let me quote from a speech that Lawrence Summers, then deputy Treasury secretary (and now the Obama administration’s top economist), gave in 1999. “If you ask why the American financial system succeeds,” he said, “at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles: it means that every investor gets to see information presented on a comparable basis; that there is discipline on company managements in the way they report and monitor their activities.” And he went on to declare that there is “an ongoing process that really is what makes our capital market work and work as stably as it does.”

So here’s what Mr. Summers — and, to be fair, just about everyone in a policy-making position at the time — believed in 1999: America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system.

What percentage of all this turned out to be true? Zero.

What was truly impressive about the decade past, however, was our unwillingness, as a nation, to learn from our mistakes.

Even as the dot-com bubble deflated, credulous bankers and investors began inflating a new bubble in housing. Even after famous, admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting, analysts and investors believed banks’ claims about their own financial strength and bought into the hype about investments they didn’t understand. Even after triggering a global economic collapse, and having to be rescued at taxpayers’ expense, bankers wasted no time going right back to the culture of giant bonuses and excessive leverage.

Then there are the politicians. Even now, it’s hard to get Democrats, President Obama included, to deliver a full-throated critique of the practices that got us into the mess we’re in. And as for the Republicans: now that their policies of tax cuts and deregulation have led us into an economic quagmire, their prescription for recovery is — tax cuts and deregulation.

So let’s bid a not at all fond farewell to the Big Zero — the decade in which we achieved nothing and learned nothing. Will the next decade be better? Stay tuned. Oh, and happy New Year.


In Uncategorized on December 26, 2009 at 15:17

Dollar Will be Utterly Destroyed: Global Currency, New World Order


The dollar will get “utterly destroyed” and become “virtually worthless”, said Damon Vickers, chief investment officer of Nine Points Capital Partners. Due to the huge wage disparities between the United States and emerging markets like China, Vickers said that may resolve itself in some type of a global currency crisis.

“If the global currency crisis unfolds, then inevitably you get an alignment of a global world government. A new global currency and a new world order, so we may be moving towards that,” he said.

When the Dollar Rallies, the Market will Crash

by Mike Whitney

Interest rates. The Fed does not need slinky women in plunging necklines to peddle money. All it needs is low interest rates. When rates are pushed lower than the rate of inflation, the Fed provides a subsidy for borrowing. This is not as hard to grasp as it sounds. If I offered to give you $1.00 for very 90 cents you gave me in return, you would buy as many dollars from me as you could. The Fed operates the same way. It generates market activity by creating incentives for borrowing. Borrowing leads to speculation, and speculation leads to steadily rising asset prices. This is how the game is played. The Fed is not an unbiased observer of free market activity. The Fed drives the market. It fuels speculation and controls behavior by fixing interest rates.

When Lehman Bros flopped last year, markets went into freefall. A sharp correction turned into a full-blown panic. The bubble burst and trillions of dollars in credit vanished in a flash. Trading in exotic debt-instruments stopped overnight. A global sell-off ensued. Markets crashed. For a while, it looked like the whole system might collapse.

The Fed’s emergency intervention pulled the system back from the brink, but the economy is still wracked with deflation. Billions in toxic waste now clog the Fed’s balance sheet. The dollar has fallen like a stone.

When the financial system blows up and credit is sucked down a capital-hole, the economy goes into a downward spiral. Businesses slash inventory and lay off workers, workers have to cut back on spending and credit. That creates less demand for products, which leads to more lay offs. This is the vicious circle policymakers try to avoid. That’s why Fed chair Ben Bernanke wheeled out the heavy artillery and launched the most aggressive central bank intervention in history.

The Fed dropped rates to zero, but its Quantitative Easing (QE) program (which monetizes the debt) actually pushes rates even lower to roughly negative 2 percent.

Bernanke has underwritten every sector of the financial system with government guarantees. He has provided full-value loans for dodgy collateral which is worth only a fraction of its original value. The market can no longer operate without the Fed. The Fed IS the market, which is why it is foolish to talk about a “recovery”. The idea of recovery implies a free-standing system based on supply and demand. But, for now, the government provides the demand, which is why there is no market and no recovery. Analysts at Goldman Sachs sum it up like this:

“How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far? Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter.” (

Positive growth is an illusion created by government spending. The economy is still flat on its back. Consumer spending and credit are in sharp decline. Unemployment is steadily rising (although at a slower pace) and wages are flatlining with a chance of falling for the first time in 30 years. Deflationary pressures are building. The talk of a “jobless recovery” is intentionally misleading. Jobs ARE recovery; therefore a jobless recovery merely points to asset-inflation brought on by erratic monetary policy. Surging stocks shouldn’t be confused with a genuine recovery.

The Fed faces stiff headwinds ahead. Low interest rates can have unintended consequences. The “cheapness” of the greenback has made the dollar the funding currency for the carry trade. Investors are borrowing low cost dollars and using them to purchase higher interest assets elsewhere. The process, which is rapidly escalating, is fraught with peril as economist Nouriel Roubini points out in an article in the Financial Times:

“Since March there has been a massive rally in all sorts of risky assets… and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable…

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronized rally… Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fueling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates…

Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing…

…This policy feeds the global asset bubble it is also feeding a new US asset bubble…

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy… This is keeping short-term rates lower than is desirable… So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate… the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.” (“The Mother of all Carry Trades Faces an Inevitable Bust”, Nouriel Roubini, Financial Times)

Everyone who watches the market has noticed the inverse correlation of stocks to the dollar. When the dollar fades, stocks soar. And when the dollar strengthens, stocks plunge. Eventually, the dollar will reverse-course and stage a comeback, probably when Bernanke stops his printing operations. That will trigger the next severe correction which will burst bubbles across all asset classes.

Bernanke’s success in reflating sagging asset prices has depended entirely on interest rate manipulation and liquidity injections. There’s been no effort to patch household balance sheets, increase production, or strengthen overall demand. It’s a clever trick by a master illusionist, but it has its costs. When the dollar rallies, markets will crash. And Bernanke will be responsible.


In Uncategorized on December 25, 2009 at 22:25

With 2010 a few days away, there are several tax matters that wealthy investors need to consider next year. The two at the top of the list are whether they should convert their taxable retirement account to a tax-free Roth individual retirement account and how to deal with the uncertainty over the estate tax.

“There is frustration due to the legislative uncertainty,” said Daniel Kesten, partner in the private client services group at Davis & Gilbert, a tax firm. “Congress had eight years to address this, but they waited until the last year when two wars and health care interrupted their thinking.”

That leaves the wealthy with decisions to make about two of the biggest financial events of their life: retirement and death.

ROTH CONVERSION Starting in 2010, there will no longer be an income limit for Roth I.R.A.’s, which allow people to contribute post-tax money that can appreciate tax-free. The income limit has been $100,000 a year for individuals. The question is whether converting an existing I.R.A., the proceeds of which are taxed when distributed, into a tax-free Roth I.R.A. makes sense.

While Congress approved the change in 2006, the opportunity to convert seems to come at an enticing time. Those whose pretax retirement accounts lost a lot of their value in the last two years might want to withdraw the money, pay tax on the amount and then put it into a Roth. For wealthy investors who do not see themselves falling into a lower income tax bracket at retirement or who believe tax rates will rise significantly, this could be a shrewd move.

But this requires a degree of omniscience that few showed with the recession that began in December 2007. “Why bother?” asked Tony Guernsey, head of national wealth management at Wilmington Trust. “Is it that much money?” He used the example of buying a Treasury bill with a week to maturity: you know the government will pay you back. But the same cannot be said for what the tax landscape — or your wealth — will look like when you retire.

The bigger benefit may come to people who plan to pass their Roth on to heirs. Unlike regular retirement accounts, there is no minimum distribution requirement with a Roth, and the tax-free treatment of its assets can be passed to an heir. “The real benefit is coming in the estate planning aspects,” said Mitch Drossman, national wealth strategist for Bank of America private wealth management. “The beneficiary must take minimum distributions. But it will be growing tax-free and distributed tax-free.”

ESTATE TAX The elephant in the room is the estate tax. Congress is unlikely to act on any changes in the tax before the end of the year. So as of now, that means the tax will disappear in 2010 before reverting in 2011 to the old rate of 55 percent for estates worth more than $1 million.

Jere Doyle, wealth strategist at Bank of New York Mellon, said the wealthy should not get their hopes up for an end to the estate tax. He pointed out that an estate did not have to submit its first tax bill until nine months after a person’s death. The Senate could wait, then, until the summer to decide on the estate tax and make it retroactive to the beginning of the year. This would wreak havoc on estate planning. Even if the Senate acted early in the coming year, it could still lead to a flurry of legal challenges on the constitutionality of reinstating a tax that had disappeared.

But there is a broader issue for moderately wealthy people. When a person dies now, the value of his or her assets gets a “step-up in basis,” which means for tax purposes the assets are valued on the day of death. Without an estate tax, this provision disappears, and the appreciated value is subject to capital gains tax.

The Internal Revenue Service will grant a $1.3 million “artificial basis” on assets of a single person and $3 million for couples if the estate tax disappears. But on the rest of the assets, the heirs will have to determine what the original cost was and pay the capital gains on the appreciated amount. For long-held stock that has split many times, this could be extremely difficult.

“If there is no estate tax in 2010, we have an income tax problem for a larger group of the population,” Mr. Kesten said. He estimated that the number of people affected would go from 6,000 to 60,000.

Still, most advisers and accountants expect that an estate tax will be reinstated, and this has pushed the wealthiest to find new ways to reduce its impact. “If we’re resigned to an estate tax existing, it’s not a call on where rates will go but an acknowledgment we won’t have a repeal,” said Janine Racanelli, managing director and head of the Advice Lab at J. P. Morgan Private Bank.

One way is through giving money to heirs above the $1 million lifetime exemption level and paying the 45 percent gift tax now. This may seem odd at first, since the estate tax is currently the same rate. But the benefit comes from how the taxes are applied: the gift tax is added like sales tax, while the estate tax is deducted like income tax. Mr. Kesten noted that a person with a $30 million estate could give roughly $20 million to his heirs during his lifetime and pay $10 million in gift taxes, or he could leave the $30 million to them and they would receive $15 million, after estate taxes.

Ms. Racanelli points out that giving money to grandchildren above the exemption rate is also better than leaving it to them through the estate. She said a person could save more than $500,000 in taxes on $1 million by giving the money now.

An option to avoid gift and estate taxes is to lend money to heirs. The Internal Revenue Service rate for such intrafamily loans in December is 0.69 percent for up to three years. The money the child makes investing above the I.R.S. rate is not subject to the higher 45 percent gift tax, but instead the lower 15 percent capital gains tax, Mr. Doyle said. If you die before the loan is repaid, however, the outstanding balance could be subject to income tax.

GIFT TAX EXCLUSION One of the most basic but highly effective estate tax strategies is the annual gift tax exclusion. The I.R.S. in 2009 allowed people to give up to $13,000 a year to anyone they wanted, tax-free. (This exclusion is separate from the $1 million lifetime exemption.)

But this is something that many wealthier people overlook, said Phyllis Silverman, vice president and senior trust adviser at PNC Wealth Management. “They’re all very busy and the idea of $13,000 per individual may not make an impact on their minds,” she said. “But when they sit down with their financial adviser, they can see how it will lower their estate costs.”

For those with an estate subject to a 45 percent estate tax, each $13,000 gift will save them at least $5,520 in estate tax, Ms Silverman said. Or consider this example: A married couple with a $10 million estate gives $13,000 a year each to six people for a decade. At the end of that time, they will have given $1.56 million tax-free. Based on the current estate tax rate, they will have also saved $702,000 in taxes by moving that money out of their estate before they die.

‘WALL ST., THE DEPRESSION & THE LORDS OF FINANCE, ‘ by Floyd Norris in the N.Y.Times.

In Uncategorized on December 25, 2009 at 15:07

Wall Street, the Depression and the Lords of Finance

Published: December 24, 2009

Crisis brings out the best in some people, or so it is said. It certainly produced some excellent books this year.

What follows is my list of six for 2009, books that I found informative and enjoyable this year. Three of the books cover aspects of financial history, including one on the greatest capitalists ever and two on the era that led to the Great Depression. The other three deal with how economics went astray.

It is not necessarily a best of 2009 list, in part because it purposely excludes books by my colleagues at The New York Times. But all are books I recommend with enthusiasm.

The books are discussed in alphabetical order, by author.

We are now in the midst of the second great disenchantment with previously omniscient central bankers, a fact that echoes through more than a few of this year’s books. In “Lords of Finance: The Bankers Who Broke the World,” Liaquat Ahamed tells the story of how the Great Depression began by focusing on the four revered central bankers of the 1920s — Montagu Norman of Britain, Hjalmar Schacht of Germany, Émile Moreau of France and Benjamin Strong of the United States. “They were all great lords of finance, standard-bearers of an orthodoxy that seemed to imprison them,” writes Mr. Ahamed.

To Mr. Ahamed, the Depression was not an economic earthquake, but a result of a series of bad policy decisions, beginning with the peace conference that ended World War I. He traces those decisions in detail, along with prescient warnings from John Maynard Keynes, whose views were largely ignored time and again. He ends the book with a famous statement by Keynes, that economists are the “trustees, not of civilization, but of the possibility of civilization.”

How did the economists fail so badly as trustees in the years running up to this financial crisis? Part of the answer is that one of the greatest economists of the 20th century, Hyman Minsky, was forgotten. It was Minsky who identified the way financial stability can breed overconfidence and thus produce the very types of market failures that created the crisis. But he was not a mathematical genius, and thus was out of the mainstream of postwar economics.

It became possible to get a Ph.D. in economics without ever hearing of Minsky. If Alan Greenspan and Ben Bernanke knew of him, they certainly disregarded his theories, to the detriment of all of us.

In “The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic Future,” Robert J. Barbera, one of the best Wall Street economists, sets out to explain Minsky’s importance and, in the process, to demolish some of the absurdities that came from the mathematical models of neoclassical economics, including the belief that, since markets always produce equilibrium, rising unemployment simply reflects a decision by workers to choose leisure rather than work for less.

“Ask an unemployed guy in a bar if he is enjoying his extended vacation,” Mr. Barbera writes, “and you may well have asked your last question.”

John Cassidy, a writer for The New Yorker, knows his Minsky and he knows financial markets too. The result is a lengthy book, “How Markets Fail: The Logic of Economic Calamities,” that brilliantly dissects much of what has passed for economic wisdom, and decries the lack of humility from those whose theories helped cause the disaster.

Early on, he tells the story of a speech delivered in 2005 to the Kansas City Fed conference at Jackson Hole, Wyo., by Raghuram G. Rajan, then the chief economist of the International Monetary Fund, whose warnings about how the system could blow up now seem prescient. He was greeted with scorn. Larry Summers, then the president of Harvard and now an adviser to President Obama, dismissed the paper’s premise as “largely misguided” and warned it could harm the world by encouraging unwise additional regulation.

Mr. Cassidy also quotes a column by Harvard’s Greg Mankiw, in The Times last May, in which Mr. Mankiw wrote that “despite the enormity of recent events, the principles of economics are largely unchanged.” Students, he said, still needed to learn about “the efficiency properties of market outcomes.”

Mr. Cassidy asks, “What do you suppose that refers to? Builders constructing homes for which there is no demand? Mortgage lenders foisting costly subprime loans on little old ladies of limited education?” Nothing so specific, says Mr. Cassidy. Textbook economics overlooks such inconvenient realities. “In the world of Utopian economics, the latest crisis of capitalism is always a blip.”

Larry Summers comes out a lot better in “The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street,” by Justin Fox of Time magazine. That is because Mr. Fox focuses on the younger Summers, who delighted in pointing to the illogic of much financial economics. “He constructed a model of an alternate financial universe in which investors weren’t rational and prices didn’t reflect fundamental values — and showed that, over a 50-year observation period, there was no way to differentiate it statistically from a rationally random market,” Mr. Fox writes.

Mr. Fox sets out to explain the efficient market hypothesis, a hypothesis that, as Mr. Summers observed, could never be proved but that was accepted as gospel by many economists until behavioral economists like Yale’s Robert Shiller pointed to clear evidence that many of us do not act rationally. This perceptive and penetrating book does a good job of tracing how that hypothesis led to the creation of markets that produced excesses and then ceased to function.

Sometimes history books say as much about the era in which the book is written as about the era being described. So it is in “The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals,” by Frank Partnoy, a law professor at the University of San Diego who has written previous books critical of the Wall Street where he once worked.


In Uncategorized on December 24, 2009 at 21:21

The Desiderata

Go placidly amid the noise and haste,

and remember what peace there may be in silence.

As far as possible, without surrender, be on good terms with all persons.

Speak your truth quietly and clearly; and listen to others,

even to the dull and ignorant; they too have their story.

Avoid loud and aggressive persons; they are vexations to the spirit.

If you compare yourself with others, you may become vain or bitter,

for always there will be greater and lesser persons than yourself.

Enjoy your achievements as well as your plans.

Keep interested in your own career, however humble,

it’s a real possession in the changing fortunes of time.

Exercise caution in your business affairs, for the world is full of trickery.

But let this not blind you to what virtue there is;

many persons strive for high ideals, and everywhere life is full of heroism.

Be yourself.

Especially do not feign affection. Neither be cynical about love;

for in the face of all aridity and disenchantment,

it is as perennial as the grass.

Take kindly the counsel of the years,

gracefully surrendering the things of youth.

Nurture strength of spirit to shield you in sudden misfortune.

But do not distress yourself with dark imaginings.

Many fears are born of fatigue and loneliness.

Beyond a wholesome discipline, be gentle with yourself.

You are a child of the universe no less than the trees and the stars;

you have a right to be here.

And whether or not it is clear to you,

no doubt the universe is unfolding as it should.

Therefore be at peace with God, whatever you conceive him to be.

And whatever your labors and aspirations, in the noisy confusion of life,

keep peace in your soul.

With all its sham, drudgery and broken dreams, it is still a beautiful world.

Be cheerful. Strive to be happy.

‘HOLIDAY READING LIST 2009, ‘ from Ralph Nader at commondreams .org. CHECK OUT THIS WEBSITE……

In Uncategorized on December 24, 2009 at 19:56

Published on Thursday, December 24, 2009 by

Holiday Reading List 2009

by Ralph Nader

This is the golden age of muckraking books and documentaries but some of them may have escaped your attention because reviews and promotions cannot keep up with the sheer volume of material.

Here are my recommendations for your Holiday and later reading time:

1. Achieving the Impossible by Lois Marie Gibbs; Published by the Center for Health, Environment and Justice ( is an inspiring collection of short stories about how ordinary people have risen to meet the challenges of toxic pollution confronting their families and communities. The author herself rose from the Love Canal controversy in Niagara Falls, New York to lead a grand national grass roots organization.

2. Europe’s Promise: Why the European Way is the Best Hope In An Insecure Age by Steven Hill (University of California Press, 2010.) His thesis is that Western Europe treats its people better in many ways than the United States does its people, and not just in social insurance and services. Read, wonder and galvanize!

3. Grand Illusion: The Myth of Voter Choice in A Two-Party Tyranny by Theresa Amato (New Press, 2009.) My former campaign manager weighs in with an indictment of the two-party barriers to a competitive electoral system, candidate ballot access and voter choice. Partly personal memoir of her battles in 2000 and 2004, part history about the decades long ago when third parties could get on the ballot easier and make a difference and part a series of reforms that only an outraged public can make happen.

4. Priceless Money: Banking Time for Changing Times by Edgar S. Cahn is a revolutionary elevation of traditional assets in how time can become a currency—a means of exchange that is beyond price—that does not allow market price to define value. It is a limited edition booklet you’ll never forget, free. Send two first class stamps to TimeBanksUSA, 5500 39th St. NW, Washington, D.C. 20015.

5. Empire of Illusion by Chris Hedges (Nation Books, 2009) The Pulitzer Prize winning war correspondent turned prolific author and lecturer, Mr. Hedges goes to the core of a culture that cannot distinguish between reality and illusion. He “exposes the mechanisms used to divert us from confronting the economic, political and moral collapse around us.” In gripping, memorable concrete prose that resonates the moment we let ourselves think.

6. The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis by Josh Kosman (Portfolio Hardcover, 2009.) Think it is all about the brand names of a corrupt, reckless Wall Street? Try the entirely unregulated private equity firms that acquire and strip mine them under the guise of saving them, then leave behind debt time bombs and mass layoffs as the value of these leveraged buyouts is sucked out by the corporate bunccaneers. Kosman predicts a coming private equity-caused big bubble crisis.

7. Ordinary People Doing the Extraordinary: The Story of Ed and Joyce Koupal and the Initiative Process by Dwayne Hunn and Doris Ober. This husband-wife team “just ordinary people,” in their words, started out powerless and in over a decade, largely in the seventies, built Initiative power to qualify reforms on the California ballot for the popular vote. A story for the ages that strips away excuses steeped in a sense of powerlessness. This small but invigorating paperback can be obtained from The People’s Lobby ( for $15, including shipping. California St., Unit 201, San Francisco, CA 94109.

8. Getting Away With Torture: Secret Government, War Crimes, and the Rule of Law by Christopher H. Pyle (Potomac Books, 2009) A former captain in army intelligence and Congressional staffer, now teaching constitutional law at Mount Holyoke College, Mr. Pyle shatters our belief in the rule of law before the unconstitutional government of Bush and Cheney in waging war crimes and torture, while seeking Congressional amnesty to those responsible for implementing their rogue, secret regime. Veteran constitutional law specialist, Louis Fisher asserts these practices have “left American weaker politically, economically, morally, and legally.”

9. It Takes A Pillage by Nomi Prins (Wiley, 2009.) A former managing director of Goldman Sachs, who quit Wall Street, and now is dedicated to educating and mobilizing the American people so that they press for reforms to prevent myopic greed from bringing down our economy again and to hold the speculators and crooks accountable. She “gets inside how the banks looted the Treasury, stole the bailout, and continued with business as usual,” in the words of one reviewer.

10. Censored 2010: The Top 25 Censored Stories of 2008-09 edited by Peter Phillips and Mickey Huff with Project Censored (Seven Stories Press, 2009.) This book contains investigative pieces on important topics too often neglected by the mainstream news organizations. Read this book, it will make you angry and then it will energize you to take on a significant societal problem in the New Year.

Ralph Nader is a consumer advocate, lawyer, and author. His most recent book – and first novel –  is, Only The Super Wealthy Can Save Us. His most recent work of non-fiction is The Seventeen Traditions.