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Money 101:
Personal Money Planning's Newsletter
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Money 101 DECEMBER 10, 2011 |
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 Greetings!
We have a special article adding some length to this newsletter, so I will keep this part short.
See?
Gary Silverman |
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Gary's Soapbox
The Regulation Battle continues...
It's been fun wailing about the potential of my firm being regulated by FINRA, because it's something that wasn't covered by the mainstream press much when it should have been, in October. That's when it was revealed that a FINRA office director in Kansas City provided requested documents to the SEC. That's rather routine. What shouldn't be is that over a few years when these requests were made, the FINRA director "edited" the documents prior to handing them over. Even that's not all that amazing. People do dumb (and illegal) things all the time.
What is rather amazing are the ramifications of this act. After all, the regulator of broker-dealers had the head of one of its branches falsify documents during an audit. That is, to put it mildly, a no-no. If I did that, there would be crime scene tape across my office door and the FBI would be hauling my computers out to their crime lab. In this case, FINRA was requested to hire a consultant to help them bone up their internal compliance procedures.
In other words, nothing happened.
I don't want to make a conspiracy about this (actually I do, but that's what you say before outlining a conspiracy), but the head of FINRA during the years that these boo-boos were going on is now the head of the SEC.
And people wonder why I get so cynical.
Next time, we'll have my final rant about advisor regulations and such. I'll include one regulation that I actually want them to pass-but they won't.
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Gary's Latest Articles from Times Record News and Biz to Biz
- The big secret about financial advisors? They're human, too.
- Sure, bonds beat stocks over the last 30 years, but that's not the whole story.
- Don't exclude those along the periphery when you are looking to spread your message. Those people may have more influence than the so-called "centers" of influence.
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Money 101: European Debt Crisis
Special Report by Bob Veres
Fear Itself
Yet again, the markets are spooked by the European debt crisis. By now, you may be feeling like you've heard more about the Greek economy than you ever wanted to know. Last month, the Eurozone members agreed to write down half of the Greek debt owned by the private sector, and recapitalize Europe's banks.
Problem solved, right? Unfortunately, the ink was hardly dry when a new debt problem emerged in Italy. Beginning on November 9, panic selling in the bond markets drove ten-year yields on Italian bonds over 7% before the European Central bank intervened. Yields have since risen again, and many European banks are said to be dumping their Italian bond holdings altogether.
So that means that Italy is just another--albeit much larger--Greece, right? Not exactly. As The Economist reports in its November 12 issue, Greece's public debt was estimated to be 190% of its GDP. Italy's is set to stabilize at around 120% next year, at which time the country will run a small surplus on its budget (excluding interest costs). Italy's overall deficit of less than 4% of GDP is actually below the Euro-area average. The total debt owed by Italian companies, citizens and government to outsiders--24% of GDP--is well below the borrowings of Greece (96%), Portugal (107%) or Spain (90%). The consensus is that Italy's overall borrowing costs were affordable at the yields the market was demanding earlier this year.
Italy's bond market is the world's third-largest, which means that if the country defaulted, the aftermath would wreck the fragile bailout of the Euro. The Economist magazine reports that some European companies are asking their lawyers about the validity of contracts where there is an obligation to pay in Euros. What (they are asking) is the contract worth if there is no Euro?
The danger is not an immediate default, but the consequences of the fear of a default. As the Washington Post points out, higher bond rates means higher borrowing costs, which would require Italy to impose tax increases and spending cuts. Those, plus higher borrowing costs throughout the economy, could derail economic growth, which would result in lower tax revenues and lead to further concerns among bond investors. That could, in turn, cause borrowing costs to move higher in a spiral whose primary driver is fear rather than economic reality.
President Franklin Roosevelt told an American radio audience, in the depths of the Great Depression, that "the only thing we have to fear is fear itself." That seems to be an ongoing theme in today's investment markets, where reality is not as powerful as the darkest corners of the investing public's collective imagination.
More info:
European debt deal: http://www.economist.com/node/21536871
Italy's debt: http://www.economist.com/node/21538178
http://www.economist.com/node/21538195
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Thanks to those of you who attended our End of Year Tax and Market Update Seminar this week. In the next newsletter, I'll include the Pimco article I discussed. If you would like it before then, email me and I will see you get the link.
Sincerely,
Gary Silverman
Personal Money Planning |
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DISCLOSURE
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