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| November 15, 2011 | Issue 58 |
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Journey with DWM to
What's Next |
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Some economists say "up" and some say "down". The truth is, no one knows the future. But affluent, enlightened investors recognize that DWM strategies perform in up markets and protect in down markets. Regardless of what the future holds, with DWM, savvy investors are ready for what's next. | |
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Europe's Twin Concerns: Debt and Growth
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Europe remains the focus of the markets. Last week, the crisis swept away another leader, Prime Minister Silvio Berlusconi, who resigned after 17 years in Italian politics. Both there and in Greece, parliaments came together to install governments that are committed to delivering the difficult reforms and austerity measures demanded by the European Union, the European Central Bank and the International Monetary Fund.
Yesterday, German Chancellor Angela Merkel called for an overhaul of the EU, advocating closer political ties and tighter budget rules. Merkel renewed her warning that "if the euro fails, Europe fails" and said her mission was to save the "historic EU project."
The first concern facing Europe is that there is simply too much sovereign debt in Greece, Italy, Spain, Ireland, Portugal and Belgium. The cost of the bailouts could be in the $4 trillion range. Greece has been told they can write off 50% of their debt held by private entities, but not that owed to the IMF, ECB or other public entities. This means Greek bondholders are taking a 20-30% overall haircut which probably isn't enough as Greece may ultimately need a 90% haircut on its overall debt to be able to restructure a sustainable economic plan.
Italy's 10-year bond yield went to 7% last week. Their debt is currently 120% of their GDP, which means that interest expense alone could account for 25-30% of their budget for the coming year. Italy will need to raise almost $500 billion this year, including new debt and rollover debt. The higher rates will put even more pressure on the deficit.
Spain's deficit next year is likely to be at least 7% of GDP. The citizens are leveraged due to excessive real estate exuberance. Unemployment across Spain is 21%, and for the young it is over 40%. The Spanish government has adopted the rather novel idea that if it doesn't pay its bills then its deficit will not be as large. Absurd. Yields on Spanish debt are currently 1% less than on Italian debt, but most forecasters expect Spain will catch up with Italy shortly.
The second concern is growth. In good times, countries grow themselves out of debt. Bill Gross of PIMCO described it this way in his November 2011 newsletter "Growth is the elixir that seems to make every ache, pain or serious ailment go away. Sovereign debt too high? Just grow your way out. Unemployment rates hitting historical peaks? Growth produces jobs. Stock markets depressed? Nothing a lot of growth wouldn't cure. But growth is the commodity that the world is short of at the moment."
Last Thursday, the European Commission announced that it foresaw little or no growth in the European Union in the fourth quarter of this year. Further, it forecast a tiny 0.5% annual growth for the union and warned that the continent might be slipping into a "deep and prolonged" recession. Today's Wall Street Journal reported that industrial production in the euro zone plunged 2% in September from August. As recently as this spring, the commission forecast that Europe would grow 1.75% for 2012. Certainly, part of this reduction is due to austerity programs adopted by many of the countries.
This likely slowdown in EU growth has two big impacts. First, it makes it tougher for the EU countries to pay their debts. A drop in GDP while deficits rise means that debt-to-GDP rises faster. That means interest-rate costs are rising faster than the (lack of) growth in the economy.
Second, the likely slowdown in Europe could damage consumer and business confidence in the U.S., and strengthen the dollar, making American exports less competitive. This, of course, is coming at a time that the U.S. economy has been strengthening lately. Speaking last Thursday at the Asia-Pacific Economic Cooperation summit, Treasury Secretary Timothy Geithner said: "The crisis in Europe remains the central challenge to global growth." Ben Bernanke, chairman of the Federal Reserve, put it this way last week, "I don't think we'd be able to escape the consequences of a blow-up in Europe."
We're all watching the developments in Europe very closely. Let's hope Europe moves quickly to put in place a strong plan to restore financial stability.
For more information:
http://www.ritholtz.com/blog/2011/11/where-is-the-ecb-printing-press/print/
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US Budget: Supercommittee Report Due in 8 Days
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After three months of meetings, the "supercommittee" is approaching its "final exam". The world is anxiously awaiting their report, due November 23rd.
Back in August, when Congress voted to raise the nation's debt ceiling, it established the supercommittee and charged them with finding at least $1.2 trillion and hopefully $2 trillion or more in budget savings over the next 10 years. The bipartisan (six Republicans and six Democrats) panel has free rein to design legislation that cuts spending and reforms entitlements. It can also undertake major tax reform. Once the report is made, both houses must vote on the on the plan. The supercommittee's plan is not subject to amendment, only to a straight yes or no vote by December 23rd and it will need only a simple majority in the Senate, not the usual 60 votes out of 100.
If the package does not get through, then automatic across-the-board spending cuts of $1.2 trillion over 10 years will be imposed. These reductions would fall equally on defense and nondefense discretionary spending, including Medicare, at the rate of $100 billion per year starting in 2013. To date, the panel of 12 has not gone public with any hints of the committee's direction. There's been no fighting in the media, nor reports of compromises being made.
We're hoping that the panel and Washington don't miss this opportunity to restore the country's finances. As we reported on August 2nd, $2 trillion over 10 years sounds like a huge amount of money, but it wouldn't be nearly enough. Our government spends $100 billion more each month than it takes in. Predicted deficits over the next decade are $12 trillion or more, piled on top of existing debt of $10 trillion or more. The Economist suggests that the debt reduction package be "$3 trillion or ideally $4 trillion, big enough to convince investors that America's long-term problem is being tackled."
World attention could shift fairly quickly from Europe to Washington come next week. If lawmakers' cuts are too small, credit-rating firms may lower U.S. government debt ratings as Standard & Poor did in August. This could cause a plunge in the stock markets as it did in August, even though the US economy has been making progress as evidenced by reduction in initial jobless claims, October U.S. auto sales climbing 7.5%, new housing starts rising 15% in September and increased demand for U.S. manufactured products.
Hold onto your Turkey. This holiday season may become more volatile than ever.
For more information: http://www.economist.com/node/21538150
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Business: F.F.A. is Expanding
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Glen Frey of the Eagles would say that people like me (who grew up in Chicago) "Belong to the City" with "concrete under our feet." That is true. However, farming has always been of interest to me. When you attend school in places like Champaign, Illinois, you realize the huge impact of farming nationally, not simply for the agricultural production but also for the wholesome values embraced by most of the "farm kids" and their families.
Although the nation continues to shift even further from its agrarian roots, The Future Farmers of America ("F.F.A.") is not only still in existence-they are thriving.
The F.F.A. has found a niche as an organization that actually prepares students for viable careers. About 70% of its members live in rural areas and 19 % in small towns. However, the fastest growing segment of F.F.A. membership is in urban and suburban areas, now making up 10% of the membership.
Farm employment accounts for less than 1% of all jobs in the U.S., yet one in 12 jobs is agriculture-related. And, during the downturn the last three years, these workers have actually fared better than most. The field of agriculture, which includes forestry and fishing, has added jobs between 2008 and 2011 while total employment has fallen roughly 4%.
F.F.A. has expanded into genetics, logistics, landscape gardening and alternative fuels. In addition, the group's chapters aim to teach students about leadership and job readiness, including public speaking and developing business budgets.
45,000 teenagers attended the annual convention in Indianapolis last month. They listened to panel discussions such as "Learning to Lead" and "Banking Tips for Students," competed in contests to identify cuts of meat and species of plants, and presented business marketing plans. The F.F.A. emphasizes work on group projects and old-fashioned presentations in essays and speeches.
Thor Pearson, 17, grew up on a cattle ranch started by his great-grandfather in Washington which Thor's father has turned into a "hobby farm." Mr. Pearson raised 50 head of cattle last year and competed in agricultural events during the convention. However, his career ambitions are in sales. He said he was unworried about his job prospects and indicated that "You can get pretty far with a good attitude and a good work ethic."
The convention of course included typical current-day teenage interests; rock music, laser shows, video games, karaoke machines and taking goofy pictures. At the same time, the New York Times describes the organization as a "throwback that stresses wholesome values." Most of the conventioneers were neatly groomed and there were frequent invocations of God and country.
Kudos goes out to F.F.A. Keep up the good work.
For more information:
http://www.nytimes.com/2011/11/12/business/ffa-prospers-by-expanding-its-scope.html
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Steve Jobs: The Genius' Advice for President Obama
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Walter Isaacson, the author of Steve Jobs, currently the NYT number one non-fiction bestseller, wrestled with how to describe Mr. Jobs' genius. Mr. Isaacson said that Mr. Jobs wasn't smart, the way a Bill Gates or a Mensa member is, yet he was a genius. "His imaginative leaps were instinctive, unexpected and at times magical." Trained in Zen Buddhism, Mr. Jobs came to value experiential wisdom over empirical analysis.
Steve Jobs was super-ingenious. He had an ability to apply creativity and aesthetic sensibilities to a challenge. One of Steve Jobs' early heroes was Edwin Land of Polaroid who said people who could stand at the intersection of humanities and science would indeed be very important. Mr. Jobs said "that's what I wanted to become."
In the aftermath of his resignation and then his death, the Web has erupted with stories about Steve Jobs. His genius, his quirkiness and his bruising personality all joined together to produce his almost fanatical devotion to making world-changing products. There was the alleged time he asked engineers on the original iPod team to stay up all night fiddling with the headphone jack so it made a more satisfying clicking sound.
Early last year, Steve Jobs told President Obama, "You're heading for a one-term presidency." Mr. Jobs was particularly concerned about regulations that had created too many burdens on the economy. Steve Jobs had been an Obama supporter but he was particularly frustrated with Washington. He told the President that if high-tech companies were supposed to be the country's engine for growth, then the federal government had to stop gumming up the works.
Mr. Jobs proposed to the President at that time that he would put together a group of six or seven CEOs who could explain the innovation challenges facing America. Mr. Obama accepted the offer but after White House aides got involved in planning the dinner, it became unwieldy and Jobs pulled out. However, he kept communicating with the President.
Steve Jobs stressed the need for more trained engineers and suggested that any foreign students who earned an engineering degree in the U.S. should be given a visa to stay in the country. Mr. Jobs told President Obama that Apple employs 700,000 factory workers in China because it can't find the 30,000 engineers in the U.S. that it needs on site for its plants. "If we could keep more engineers here, we could move manufacturing here," said Jobs. At the time, President Obama told Mr. Jobs that this initiative would have to await broader immigration reform, which he (the President) was unable to accomplish. Mr. Jobs was infuriated.
The "Stopping Trained in America Ph.Ds from Leaving the Economy" movement was made memorable by venture capitalist John Doerr in 2008, who said, "I would staple a green card to the diploma of anyone that graduates with a degree in the physical sciences or engineering in the U.S." Today, foreign nationals account for 70% of doctorates in electrical engineering and 50% of the master's degrees. The U.S. issues 140,000 green cards each year. And, the current immigration policy sets a cap per country of 7% of the total. So, this year, no more than 10,000 Chinese or 10,000 Indians will get a green card. Many politicians have supported the "Staple Act," as an elegant, creative solution to our major jobs problem. Unfortunately, Washington is so mired in politics and campaign races that nothing has happened. Steve Jobs must be rolling over in his grave.
For more information:
http://online.wsj.com/article/SB10001424052970203687504577003763659779448.html
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