A few weeks back when news reports were filled with reports of members of Congress using their positions and inside knowledge to profit from stock transactions, I linked to some of the stories. Now that time has passed, a less passionate review of the evidence indicates this is another case of the media running wild and not letting the facts get in the way of a good headline or lead. That doesn’t mean Congress is above board and doing everything right. The news reports alone indicate Congress should pass a law so it is illegal for anyone to take advantage of knowledge gained on the job that others don’t have.
None of Schweizer’s tirelessly reported anecdotes actually proves anything at all, not even that the member of Congress in question made out like a bandit on the particular deal. You have to have a mind-set to believe that the member of Congress must be cashing in to swallow these bits of evidence as willingly as Schweizer wants.
Unfortunately, for Congress and for the nation, most Americans now have that very mind-set. That fact alone means that Congress must pass the STOCK Act (Stop Trading on Congressional Knowledge) or legislation like it. After all, it bans conduct that evidence suggests congressmen and women may not even pursue – at least not successfully – in the first place.
I’m planning to take a break until the New Year. I hope each of you has a good ending to 2011 and a happy 2012. I’ll be back soon.
As expected, the National Association of Realtors this week announced its revised data for housing sales going back to 2007. NAR said last week that it discovered recently errors in its processes that resulted in some double counting of home sales from 2007 forward. The released data showed the mistakes made home sales appear 14% higher than they were. That means the housing collapse and recession were worse than the numbers first showed and explain why consumers seemed to report feeling the economy was worse than some data indicated. You can read about the report here and see a video analysis here.
Housing, which helped trigger the 18-month recession that ended in June 2009 when subprime borrowers defaulted, is showing signs of stabilizing as builder confidence improves and construction picks up. Nonetheless, another wave of foreclosures will probably push prices down further as more marked-down properties come on the market.
“Housing’s done an incredibly steep correction,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. “In general, demand for houses is still pretty weak. We have a big supply, a big shadow inventory.”
Brokers, mutual funds, and others will be sending you a newly-formatted information return this year. The changes comply with a new law that requires custodians to report the tax basis of assets that were sold in 2011. But not all asset sales must be reported this way, so you’ll see some inconsistencies in the form if you don’t know the rules. This article spells out the details so you won’t get a headache when reviewing your forms.
Many investors say you shouldn’t own treasury bonds because interest rates are too low. You aren’t being paid enough to own them. We’ve owned long term treasury bonds in our Retirement Watch portfolios since June 2011 and have earned over 20% on them. We continue to own them because economic growth is slow, inflation is falling, and people want safety. We own them for capital gains, not for income, and there still is room for substantial capital gains. We’re lonely on this issue, but not alone. Van Hoisington and Lacy Hunt of Hoisington Capital Management agree with us. You can read an interview with Hoisington in the latest Barron’s. It re-enforces what you’ve already read in Retirement Watch and adds some more details.
Our expectation is that we are going to enter another recession next year, when we haven’t really fully recovered from the previous one. We think we are in what Niall Ferguson, a Harvard historian, recently termed a slight depression. This isn’t a normal business cycle. So long as there is downward pressure on prices, bond yields will either continue to go down or bottom out around the real rate, assuming that the inflation rate stops at zero. We aren’t there yet, obviously, but are headed in that direction. That’s why we’ve had a bull market and why it will continue until such time as inflationary expectations start to rise.
It was one year ago that Meredith Whitney said on “60 Minutes” that hundreds of billions of dollars in defaults on tax-exempt bonds were on the way. Instead, after a brief plunge due to panic selling, tax-exempt bonds had a good year. Bloomberg calculates that investors who purchased an index of tax-exempt bonds the day after the broadcast would have over a 10% return for 12 months. The market survived two prominent bankruptcies (Harrisburg, Pa. and Jefferson County, Ala.) and a boost in defaults that was well below $100 billion.
One reason tax-exempt bond investors did well was the sharp sell off triggered by Whitney’s comments. Individual investors sold on the report, pushing down prices. Anyone who bought after that benefited from a bounce back. Over the year, local and state governments made difficult financial decisions and kept their bond payments current. They did whatever they needed to avoid defaults. The financial picture still is difficult for many states and localities, but the specter of large-scale defaults seems unlikely.
Everyone seemed happy at the agreement that came out of the European summit last week (though I was critical of it in my e-letter to Retirement Watch members). This week, everyone seems to be piling on against the agreement and issuing dire warnings about Europe. In today’s Wall Street Journal Harvard economist Martin Feldstein says the agreement was a double failure. Feldstein doesn’t forecast specifically what will happen under the agreement. Instead, he recommends a new course of action, and singles out for criticism those who say the European Central Bank needs to buy whatever sovereign debt that banks want to sell.
Meanwhile, the head of the IMF, Christine Lagarde, said the crisis is escalating and spinning out of control. She says no one country or group of countries can solve the problem. They also shouldn’t have to, because escalation of the crisis will affect all countries. This is a plug for all countries to make special contributions to the IMF so that it can put together a rescue package. BlackRock, the world’s largest money manager, issued a note today saying that Europe is headed for a full-fledged recession that will affect even the strong countries of Germany and France. It also said that the austerity measures imposed on the debtor countries will make the situation worse, not better–a point I also made in my recent comments to members.
Finally, there’s this choice quote from historian Niall Ferguson, which was included at the end of an article on the U.K.’s rejection of the European pact:
Niall Ferguson, a professor of economic history at Harvard University in Cambridge, Massachusetts, agrees. Cameron’s stance is good for London “because as things stand the euro zone is heading for an austerity death spiral,” he said. “If I were a rich German, I would already have put half my money in London. In sterling.”
Problems in Europe and the U.S. dominated financial headlines in 2011. Many people overlooked the rapid decline of China’s economy. We’ve remarked for some time in Retirement Watch that China’s been trying to slow its economy to pop some bubbles, stop some emerging bubbles, and reduce inflation. They have accomplished much of that, but it looks like they haven’t engineered the soft landing they wanted. An even more striking development is that Chinese officials acknowledged that the period of ultra-high growth in China might be over. Many investors and analysts have expected China to continue above-average growth for a considerable time. That’s a major case for investing in emerging markets and for expecting China’s economy to pull the rest of the global economy out of its torpor. Now, that theory needs to be revised. It’s also a bit of a victory for some China bears, such as short seller James Chanos.
Yu, in a briefing for reporters, said growth in the fourth quarter of 2011 is expected to dip below 9 percent, as China’s economy continues to be buffeted by sluggish growth in the United States and the continuing sovereign debt crisis in the euro-zone countries. He said the forecast for next year would be growth lower than 9 percent, with growth for the next five years between 7 and 8 percent.
“China had been growing at high speed for three decades,” Yu said. But now, he said, “China’s fundamentals are changing, including demography and the demand and supply of labor.”
Yu said the changes herald “lower future growth” but added, “We don’t believe the chance is high of a sharp plunge.”
The forecast largely confirms the accumulating anecdotal evidence that China — the world’s second-largest economy in GDP terms — is entering what could be a painful period of adjustment, as the country begins to shift away from an economy fueled by exports and lavish government spending on infrastructure.
Retirees and pre-retirees were surveyed to determine which of seven celebrities they’d most like to emulate in retirement. The winner: actress Betty White. Following her by a fairly sizable margin was former president Jimmy Carter. Check out the results here.
One clear takeaway is that when people reach a certain age, things like money and beauty don’t mean as much as they once did. Actress Helen Mirren, who at 66 is striking for her ageless beauty, was the top pick of 9% of pre-retirees and 7% of retirees. That’s a relatively small number, although those who picked her said it was because she is fit and fabulous. Rock star Steven Tyler commanded the top spot among 7% of both retirees and pre-retirees, who chose him because he was a 63-year-old free spirit.
You’ve probably heard the phrase “shirt sleeves to shirt sleeves in three generations” to describe the pattern of how one generation earns the wealth, the next preserves or uses it, and the third loses it and starts over. A key issue for many people today is how to ensure the next generations benefit from their wealth without wasting it. People have tried many structures such as trusts, family limited partnerships, and the like. But what really works is when the generation that earned the wealth teaches following generations about wealth, how to use it, and how to increase or at least preserve it.
One solution to the problem is family governance or a family council. Most families don’t have a formal organization. But when you want to preserve wealth and pass it on, some formal structure is needed. One firm did a lot of research and concluded that informal arrangements aren’t reliable. It’s better to set up a governnace structure as early as possible and use this is include all or key family members in the education and planning process.
Most of all, “a family council or other governance structure can improve the quality of family interactions by keeping family members connected with each other and informed about the status of both the family and the family business,” the authors said. The most successful structures foster communication between members and between generations, the authors said.
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