{"id":14351,"date":"2012-08-09T09:04:27","date_gmt":"2012-08-09T13:04:27","guid":{"rendered":"http:\/\/www.technologyinvestor.com\/?p=14351"},"modified":"2012-08-09T09:23:59","modified_gmt":"2012-08-09T13:23:59","slug":"investing-isnt-easy-in-todays-messy-world","status":"publish","type":"post","link":"https:\/\/www.technologyinvestor.com\/?p=14351","title":{"rendered":"Investing isn’t easy in today’s messy world."},"content":{"rendered":"

The problem with shorts on this column.<\/strong><\/span> I mention ones I like. Some I short. Often I don’t give adequate warning when I’m closing them, i.e. buying to cover. I do that when something happens during the day that gives me pause to say: “I’ve made enough. It’s time to close.” I covered RIMM when there was too much news of hedge funds buying in, Nokia or Microsoft or somebody buying the stock… Anyway the stock had been low and flat for a while and was ticking up… Maybe I was wrong? Maybe it will go to zero, though there are still real assets there. Why be greedy? I was up substantially. Time to move on. You make these sort of decisions when suddenly all the news and rumor stories start turning positive. Google Alerts is good for keeping you in touch with the news and the rumors.<\/p>\n

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I’m still short RadioShack though it has ticked up a little, too. Time to close that most, profitable short?<\/p>\n

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I went shopping in a RadioShack store on Lexington Avenue yesterday. I searched the entire store for something to buy — anything. But I even had enough batteries.<\/p>\n

Investing during a crisis. <\/strong>The Economist published this cover story in its October 15-21, 2011 magazine.<\/span>
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It’s been hard. Lately I’ve put some money into real estate syndications — both residential and commercial. These assets have typically dropped 50% in value in the past six years. So getting into them is cheaper now. Sort of. Residential complexes are typically selling at a 4 cap, while commercial properties, since they are perceived to be riskier, are selling at seven to eight cap, though we picked up one recently for a tinge over a nine cap. I’ve also invested a little in small startups and semi-startups. Sometimes these things work. Last year we doubled our money on a Chinese groupon.<\/p>\n

This Economist piece details the risks in total investing world. It’s worth reading.<\/p>\n

Nowhere to hide
\n<\/strong>Investors have had a dreadful time in the recent past. The immediate future looks pretty rotten, too<\/p>\n

PITY the world’s savers. Economists and other busybodies chide them for not spending more, thereby stimulating the economy. Meanwhile their pension schemes are steadily being made less generous, a process that will require them to save more, not less, if they want to enjoy a comfortable retirement. Britons now retiring on private pensions will receive an income 30% less than those who left work three years ago (see Buttonwood). When savers try to find a home for their money, they face daily headlines about bank bailouts, sovereign-debt crises and the possibility of another recession.<\/p>\n

Given the scale of the risks, investors are not being offered much in the way of reward. In much of the developed world, yields on cash are 1.5% or below. The most liquid government bond markets (those of America, Britain, Germany and Japan) offer yields of 2.5% or less. In both cases, such meagre returns are part of a deliberate policy: governments and central banks want companies that might create jobs to start borrowing again. Even American equities, despite a dismal record over the past decade, offer a dividend yield of just 2.1%, a level that historically has been associated with low returns for several years to come (see article). That is a legacy of the stratospheric valuations attained by Wall Street at the height of the dotcom bubble.<\/p>\n

The danger for savers is not simply of disappointing returns, but of devastating blows to their wealth. Just after the second world war, British government bonds (gilts) offered yields similar to today’s; those who bought them lost three-quarters of their money, in real terms, by 1974. Investors with more of an appetite for risk may do even worse. Those who bought Japanese shares at the peak in 1989 are now sitting on a nominal 80% loss.<\/p>\n

Polish up your crystal ball<\/p>\n

Investors’ choices will be guided by how they think the crisis will unfold. The best hope is that the authorities will “muddle through”: stabilise the European sovereign-debt crisis, steer developed economies back on to a path of 2-3% annual growth while simultaneously devising realistic plans to reduce government debt over the medium term. But if that rosy prospect does not materialise-and the odds are against it-the world is looking at three scenarios.<\/p>\n

One possibility is that the developed world will attempt to inflate its debt away, perhaps by ever-larger doses of quantitative easing. A surge in commodity prices in 2010 and early 2011 has pushed inflation higher than it was a year ago in each of the G7 countries, and in Brazil, Russia and China as well (India is the exception among the BRICs). Inflation normally suggests investors should go for gold. But its stratospheric price, and the fact that most economists think that inflation will fall back as the global economy slows, argue against it.<\/p>\n

A second possibility is that the European authorities make a fatal miscalculation, allowing Greece to default chaotically, without adequately propping up the region’s banks or protecting bigger economies such as Italy and Spain from collateral damage. The result could be a very sharp fall in European GDP, with knock-on effects in the rest of the rich world. That scenario argues in favour of US Treasuries.<\/p>\n

This newspaper persists in believing that Europe’s politicians cannot be stupid enough to allow the euro to collapse; but, like their equally uninspiring peers in America, they are unlikely to do much to help the West’s economies grow. So we suspect that the rich world faces a third scenario: Japanese-style stagnation. Recessions are likely to be more frequent than they were in the 1980s and 1990s, and the overall growth rate sluggish. Such an outcome would make it very difficult for the developed world to work off its debts; more countries would fall into the kind of debt trap faced by Japan.<\/p>\n

Different quotes for different folks<\/p>\n

On the face of it, a gloomy outlook argues for Treasuries. In recessions, they have generally been a good bet, delivering an average positive return of 10.4% while equities have delivered an average negative return of 15.3%. But that depends on negligible inflation; and given that the current American rate is 3.8% and that the average rate since 1900 has been 3.1%, this is a big risk for investors to take. It was inflation that wiped out British gilt-holders after the second world war.<\/p>\n

Equities offer a better hedge against inflation, but American shares still look expensive. On a cyclically adjusted price-earnings measure, which smooths profits over ten years, they trade on a multiple of 19.4, compared to a historic average of 16.4. European equities, which have on average underperformed American ones, look more attractive: the price-earnings ratio in the euro zone is 11. But there is a case for holding cash on the ground that things may get worse before they get better.<\/p>\n

If markets continue downwards, equities could be a bargain next year; already some companies with global brand names trade on dividend yields of more than 5%. Many big companies are sitting on piles of cash and are benefiting from the continued growth in Asia. A purer bet on emerging markets would be to buy shares in China and India; but Asia will not be immune from a global downturn and their markets are still opaque. At the moment many of the best refuges are to be found in corporate bonds. European high-yield bonds pay 10 percentage points more than government issues, even though default rates are currently very low: in the year to September, only 1.9% of issues defaulted. But, once again, if the economy stalls, even corporate bonds may become cheaper.<\/p>\n

It would be better for the global economy if savers piled their cash into equities and corporate bonds now, rather than waiting for better news. But savers are understandably reluctant to buy in the face of political dithering; whether it is Europe’s failure to sort out the Greek crisis or Washington’s failure to devise a plan that combines short-term economic stimulus with a long-term plan to reduce the deficit. That is yet another reason for politicians to get their various acts together: doing so will encourage savers to remove their cash from under their mattresses and put it into productive assets.<\/p>\n

The global crash. Japanese lessons<\/strong><\/span>. This week’s Economist focuses on analogies between Japan the present global crash.<\/p>\n

After five years of crisis, the euro area risks Japanese-style economic stagnation<\/strong><\/p>\n

FIVE years ago, things looked rosy. In the first week of August 2007 forecasts by investors and major central banks predicted growth rates of 2-3% in America and Europe. But on August 9th 2007 everything changed. A French bank, BNP Paribas, announced big losses on subprime-mortgage investments. The same day, the European Central Bank (ECB) was forced to inject ?95 billion ($130 billion at the time) of emergency liquidity. The crisis had begun.<\/p>\n

During the first year, policymakers looked to Japan as a guide, or rather a warning. Japan’s debt bubble had caused a “lost decade”, from 1991 to 2001. Analysts commonly drew three lessons. To avoid Japanese-style stagnation it was vital, first, to act fast; second, to clean up battered balance-sheets; and, third, to provide a bold economic stimulus. If Japan is taken as the yardstick, America and Britain have a mixed record. The euro area looks as if it might be turning Japanese.<\/p>\n

Debts took years to build up. Take the American consumer. Debt was around 70% of GDP in 2000, and grew at around 4 percentage points a year to reach close to 100% of GDP by 2007. The same was true of European banks and governments: debts rose hugely but steadily. It was not hard to spot debt mountains forming.<\/p>\n

The crisis erupted with the realisation that subprime exposures were widespread. Many assets were worth less in the market than they had been bought for. Debts started to look unsustainable and interest rates jumped. This meant governments, consumers and banks, after building up debt slowly, suddenly faced much higher costs, as debts matured and they were forced to refinance at higher rates.<\/p>\n

The reaction was quick. By the end of 2008 the Federal Reserve, the ECB and the Bank of England had slashed official interest rates. Their aim was to offset the spike in debt costs that companies and consumers were facing. The cuts were fast by Japanese standards (see top right-hand chart). It seemed the first lesson had been learnt.<\/p>\n

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Falling asset prices meant that many banks and firms had debts that outweighed their assets. The Japanese experience showed that the next job was to deal with these broken balance-sheets. There are three main options: renegotiate debt, raise equity or go bankrupt.<\/p>\n

In the efforts to reinvigorate balance-sheets, debt investors have reigned supreme. Debts have been honoured. Indeed, a recent report from Deutsche Bank shows that even investors in risky high-yield debt have had five great years. Bank bonds in America have returned 31%; in Europe, 25%.<\/p>\n

As asset values fell, debt maintained its fixed value. This meant that equity, the balance-sheet shock-absorber, had to fall in value. So although debt caused the problem, equity took the pain. A Dow Jones index of bank equity is down by more than 60% since 2007, according to Deutsche Bank. Some banks’ share prices are down by more than 95%.<\/p>\n

In many cases, the equity buffers were too small, so governments stepped in, taking equity stakes in banks. In both America and Europe governments stood behind their financial sectors. Balance-sheets were repaired. It seemed the second lesson from Japan had been learnt too.<\/p>\n

But the clean-up just moved the problem on. Governments borrowed to fund the bail-outs. So banks’ balance-sheets were strengthened at the expense of public ones. America’s support for the banks cost 5% of GDP; Britain’s cash injection into its ailing banks was 9% of GDP. And household debt was still high.<\/p>\n

A third lesson from Japan was to seek a strong stimulus: in a growing economy, high debt need not be a problem. Take a household’s finances. A large mortgage is fine as long as breadwinners’ incomes are sufficient to pay the interest and leave some to spare. Inflation helps too, as debts are fixed at their historical values but wages should rise with inflation.<\/p>\n

Following Japan’s example, central banks engaged in “quantitative easing” (QE), buying bonds for newly created cash (see bottom left-hand chart). This aims to drive up bond prices, lowering yields and making debt manageable. The QE programmes have been bolder than Japan’s and corporate-bond yields have indeed fallen (see Buttonwood).<\/p>\n

But although policymakers learnt some lessons from Japan, there are reasons to worry about the next five years. In Britain and America there are two main concerns. First, the fiscal stimulus may not be bold enough and in Britain is being withdrawn before the economy is back on its feet. Having supported banks, governments are trying to cut deficits and have little to spend. Richard Koo of Nomura, a bank, reckons Japan’s experience shows that governments should increase borrowing to mop up private-sector savings.<\/p>\n

Second, government bail-outs can have long-term costs. In some cases, broken balance-sheets are a sign of a broken business model; bankruptcy is then a better option, cleansing the economy of unproductive firms. Japan kept too many bad firms going. There are signs of that in America and Britain too. The American government’s bail-outs ran to over $601 billion, with 928 recipients across banking, insurance and car industries. Britain has large stakes in two of its four big banks and has no clear plans to sell them.<\/p>\n

The euro area is in a more dangerous position. Its recovery has been painfully slow (see bottom right-hand chart). Its prospects look grim: data released on August 1st showed German, French and Italian manufacturing contracting at an increasing rate (dragging Britain down with them). And to the meagre stimulus and zombification of industry can be added a third Japanese trait-policy indecision. On August 2nd Mario Draghi, the ECB’s head, indicated the bank’s readiness to buy bonds again as part of a co-ordinated rescue plan. Stockmarkets initially fell, suggesting the investors are unconvinced that it will save the euro area from aping Japan.<\/p>\n

Service as it’s meant to be.<\/strong><\/span> My Nutone wireless door buzzer broke. I called the company about returning it. No way. I asked to speak to the president. I actually got transferred to the president. He said “Sorry, we’ll fix it.” He transferred me to his chief techie, who said he’s send me a replacement.<\/p>\n

How to forward in Gmail.<\/strong><\/span> Gmail is reliable and useful but its interface sucks. I had to ask Michael, my briliant son, how to forward an email in Gmail. Finally.<\/p>\n

This is the top button bar. It does everything, but forward.<\/p>\n

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Snuck away on the right hand side are these two buttons. Click on the little down arrow, and<\/p>\n

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these\u00a0 choices will drop down, including Forward.<\/p>\n

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There, you actually learned something.<\/p>\n

Meantime, you probably should sign up for a free email account at Microsoft’s new Gmail killer called Outlook.<\/p>\n

Like Gmail, it’s free. Sign up here.<\/strong><\/a> To forward in Outlook, you hit the reply down button. It’s a little easier.<\/p>\n

Want another reason to dislike banks?<\/strong><\/span> Read this piece on how banks are charging today’s borrowers too much, and makig thsemselves a handsome profit. Click here.<\/strong><\/a><\/p>\n

Incredible pictures from Mars.<\/strong><\/span> Some people have too much time on their hands.
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Harry Newton who has given up serving (for now), reduced his string tension to 65 lbs, reduced his strung racquet weight to 10 ounces and is concentrating on using his body more and his arm less to hit the ball. It’s working, though I still get shooting spasms down my arm in the night. This whole arm thing gives boredom a whole new meaning. Almost as boring as dealing with our air conditioning problems.<\/p>\n","protected":false},"excerpt":{"rendered":"

The problem with shorts on this column. I mention ones I like. Some I short. Often I don’t give adequate warning when I’m closing them, i.e. buying to cover. I do that when something happens during the day that gives me pause to say: “I’ve made enough. It’s time to close.” I covered RIMM when […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-14351","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/14351","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=14351"}],"version-history":[{"count":0,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/14351\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=14351"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=14351"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=14351"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}