Will the firm that Bill Gross built continue to excel after he retires or scales back? Gross is older than 65 now and still working hard and superbly. But there’s clearly a succession plan in place. Gross has gradually handed over more and more of the firm to Mohammed El-Erian, and El-Erian is the heir apparent. But Gross is a trader and numbers guy. El-Erian is more of a big picture guy. The New York Times has a good rundown of the situation, including a joint interview with the two. Still untold anywhere that I’ve seen are details about the gradual fading and eventual departure of the former face of PIMCO, Paul McCulley. The only hint is that at some point Gross decided he needed to line up a success and concluded no one at the firm qualified.
Not everyone is so enthusiastic. While Mr. El-Erian has years of experience at the I.M.F. and Pimco, some people wonder if he can successfully navigate the world’s increasingly tumultuous bond markets. Unlike Mr. Gross, Mr. El-Erian isn’t a trader by nature.
“Why would somebody with so little bond trading experience be in line for the top job?” asks Sylvain R. Raynes, a co-founder of R & R Consulting in New York, which helps investors measure risks associated with bond investments. “There are other candidates who are less flamboyant.”
Others go further. An investment executive who manages money for endowments says he is comfortable keeping funds at Pimco as long as Mr. Gross is around.
“I think once Bill is gone, we take our money away immediately,” says the executive, who spoke on the condition of anonymity so as not to jeopardize his relationship with Pimco.
That’s the implication in the latest quarterly report from bond managers Hoisington Investment Management. Van Hoisington and Lacy Hunt have been fans of long-term treasury bonds and skeptics about the economy for some time. It’s paid off for investors willing to endure the high volatility of long-term treasury bonds and the headlines that come with each bump up in yields. In their latest quarterly report, the duo say that in a few years people are going to feel the same way about a 2.75% yield on long treasuries as they do today about the 5% yields of 2007.
Their main point is that, despite what most people believe, excessive debt leads to lower interest rates, not higher rates. That’s because high levels of debt reduce economic growth, and if the debt is used to pay for unproductive spending and continues to increase, high debt reduce growth further. Low economic growth leads to low interest rates. They make their point with both history and theory. An interesting point from history: The low point for interest rates on average occurs about fourteen years after the panic year, and interest rates still were very low 20 years after the panic year.
In the eleven quarters of this expansion, the
growth of real per capita GDP was the lowest for all of
the comparable post-WWII business cycle expansions
(Table 2). Real per capita disposable personal income has
risen by a scant 0.1% annual rate, remarkably weak when
compared with the 2.9% post-war average. It is often said
that economic conditions would have been much worse
if the government had not run massive budget deficits
and the Fed had not implemented extraordinary policies.
This whole premise is wrong. In all likelihood the
governmental measures made conditions worse, and the
poor results reflect the counterproductive nature of fiscal
and monetary policies. None of these numerous actions
produced anything more than transitory improvement
in economic conditions, followed by a quick retreat to
a faltering pattern while leaving the economy saddled
with even greater indebtedness. The diminutive gain
in this expansion is clearly consistent with the view
that government actions have hurt, rather than helped,
economic performance.
People who’ve been on Medicaid for a while know that it isn’t easy to find a new doctor. Many don’t want to accept new Medicaid patients because of the low reimbursement rates. Often Medicaid patients have to wait weeks for non-emergency appointments. Finding specialists can be a real problem. This problem is going to get worse. The aging of the Baby Boomers, the people receiving new coverage, and the new insurance coverage requirements all will increase the demand for medical care. The increase in demand isn’t being matched by increased the supply of doctors and other medical care providers. The only parts of medicine that don’t have a demand and supply problem are plastic surgery and dermatology. It’s not a coincidence that these are areas most treatments aren’t covered by insurance or government programs.
The Association of American Medical Colleges estimates that in 2015 the country will have 62,900 fewer doctors than needed. And that number will more than double by 2025, as the expansion of insurance coverage and the aging of baby boomers drive up demand for care. Even without the health care law, the shortfall of doctors in 2025 would still exceed 100,000.
Health experts, including many who support the law, say there is little that the government or the medical profession will be able to do to close the gap by 2014, when the law begins extending coverage to about 30 million Americans. It typically takes a decade to train a doctor.
“We have a shortage of every kind of doctor, except for plastic surgeons and dermatologists,” said Dr. G. Richard Olds, the dean of the new medical school at the University of California, Riverside, founded in part to address the region’s doctor shortage. “We’ll have a 5,000-physician shortage in 10 years, no matter what anybody does.”
While the media often portray people as downsizing and moving as they age, most people resist. They want to remain in the homes they’ve grown comfortable in over the years. They also want to remain in the same communities where they have ties. It’s not an impossible dream. You don’t have to move simply because you’re older and can’t do everything you used to. The Washington Post has a good piece on how some people in the Washington, D.C. people are doing just that. They’ve learned how to have their homes modified to meet their new needs and where to get help when needed from outside organizations.
If you insist on complete independent and self-sufficiency, you aren’t going to do well. But if you learn to make use of some additional resources and have the money to modify your home and receive some help, you can stay in your long-time home longer.
In the Washington region, the population of people 65 and older rose 29 percent from 2000 to 2010, according to the Brookings Institution. That has spurred a number of new programs in the “aging in place” movement, which aims to help elderly people such as Cousins remain in their homes rather than relocate to assisted-living facilities.
“I’m an independent man,” said Cousins, who’s lived in the house since 1968. “I don’t like to be on an institution schedule. I don’t take well to rules I don’t agree with.”
The movement to accommodate elderly people in their homes is growing rapidly in this region, with villages becoming a more popular option.
California’s state budget continues to worsen, and it’s been the place where the most local governments filed for bankruptcy. Other local governments have sharply curtailed basic services because they don’t have the money. California is in about as bad shape as Greece, and it’s getting worse. The politicians in California, it seems, can’t control themselves. Despite their deep financial problems, California recently decided to go ahead with an extremely expensive new rail system.
The California system is repeated throughout the globe. Local governments in Europe, China, and the U.S. are deep in debt and in recession, according to Michael Boskin of Stanford University. He reviews the situation, focusing on California, and concludes that a big part of the problem is control by one political party so there are no checks and balances.
California’s fiscal crises may also provide lessons for subnational governments around the world. Three California cities have recently declared bankruptcy: Stockton, the largest American city ever to do so; San Bernardino, the second-largest bankrupt city; and Mammoth Lakes. Compton is rumored to be next; most observers expect more to follow.
The state faces another large budget deficit, yet Governor Jerry Brown’s budget this year includes a substantial spending increase. Brown’s ballot initiative this November would raise California’s top personal income-tax rate to 13.3%, the nation’s highest. According to Brown, the tax hike would be temporary, yet it would last seven years. Meanwhile, he claims to be tough on California’s notoriously well-paid and powerful public-employee unions by negotiating a 5% pay cut. But the details reveal a net 1.6% pay cut in exchange for a 5% reduction in work hours.
Global investment markets rallied strongly Friday after European Central Bank President Mario Draghi said the ECB would “do whatever it takes” to preserve the euro. That excited investors more than it should have, but I think it’s main effect was to cause a bunch of short sellers to take their profits for now. Often overlooked in the reports on Draghi’s statement was his qualifier “within the ECB’s mandate.” That’s always been the sticking point between the ECB and people who want it to be more aggressive in saving the European economy. The ECB doesn’t have as much flexibility as the Federal Reserve.
More importantly, central banks can solve only a liquidity crisis. Europe has a solvency crisis. The ECB can solve that only if it is able and willing to buy all the bad loans and take the losses itself. It doesn’t want to and isn’t allow to anyway. This article puts Draghi’s words into context, pointing out that the ECB (and the Fed) use public statements to move markets so they can delay having to real action. Also, in the past the ECB’s actions have had temporary benefits for the markets, and things ended up worse after the ECB’s actions wore off.
But then, what did we think Draghi was going to say? That the euro is doomed, and there’s nothing to do about it? It’s all part of the script Europe’s leaders have been following for three years now: “Don’t worry, we got this.” And yet here we are, stuck in the most recent cycle of unraveling. The latest trend was pretty dire, as the yield on Spain’s 10-year bonds had risen to 7.69 percent by Tuesday. Italy’s had reached 6.5 percent. The contagion appeared even to be creeping into Germany, whose safe-haven status was called into question earlier this week when Moody’s announced it was placing the nation’s AAA rating under review. If the Germans aren’t safe, who is?
Investors should be cautious about commodities for the next 20 years and expect lower growth from China. These positions are the result of normal cycles and unrelated to the global financial crisis. They come from Ruchir Sharma, who’s with Morgan Stanley and author of Breakout Nations, an incisive book on emerging economies and investing in them.
Commodities generally have a 10-year bull market followed by a 20-year bear market. Sharma says this is a 200-year pattern, and commodities are wrapping up a 10-year bull market.
China’s been the driver of commodities for a while, and China’s been slowing. The China slow down isn’t a short-term cyclical change. It’s a longer-term pattern that’s going to continue going forward. China’s had about three decades of exceptionally high growth. It’s per capital income is around $6,000, and that’s the level that growth slowed in previous successful emerging economies. Sharma’s looking for a new growth rate of 6% to 7% for China. That will be a shock for people expecting an 8% to 10% rate to continue.
Also, the number of people now entering the labor force is slowing down. Utilization rate in China is over 50% for the first time, so it doesn’t need to employ people as much as it did. He thinks investing in China now would be like investing in Japan in the 1970s or early 1980s, but not like investing in Japan near its peak in 1989. So, he still sees returns but not the strong returns of the last decade.
Sharma made the comments on Bloomberg Surveillance. If you have an iPhone or iPad, you can hear the full interview on either of the free apps, Bloomberg Radio and Bloomberg Television.
One of the themes of my book Invest Like a Fox…Not Like a Hedgehog is that many people spend too much time looking for the ideal piece of data or market signal that will tell them how to invest. They spend a lot of time playing with data and reading statistics to find the holy grail. I’ve even had people get mad at me because I couldn’t tell them one or two reliable indicators they should follow to tell them when to adjust their portfolios.
One story I tell in the book is about two researchers who engaged in data mining to find the piece of data with the highest correlation to changes in the S&P 500. Their answer was butter production in Bangladesh. The point of their research and of my book is that markets and economics are both dynamic and complex. You can’t find the reliable signal that so many people search for, and if you do it soon will stop being reliable.
The lead author of that research is back with a fresh essay on the subject and reiterating the main point, after relating some interesting stories about what happened since then. It’s a short article and worth your time.
This, to my endless embarrassment, has become something of a “meme” in quant investing. Do a search on “Butter in Bangladesh” and it fills the entire first page of results and then some. Most people get that it’s a joke, but I still get the occasional call asking for the current butter figures. Answers: (a) I don’t know, and (b) it really doesn’t matter. If you think it does, put your money in a sock under your mattress.
As the Fed is being pressured by the markets for another round of quantitative easing, the debate heats up over whether the previous rounds work. Credit Suisse did a good round up of all the research reports on the issue, and the blog FTAlphaville summarized it well here. The key question is what do people mean by “work”? Some people thought the goal was to increase economic growth and make it sustainable. Others believe the goal was to raise asset prices, especially for stocks, to increase confidence and eventually spending. The blog says the goals were (1) avoid deflation or disinflation (2) reduce unemployment, and (3) reduce expectations of real yields. It’s an important read, especially for investors who are trying to decide if they should take on more investment risk if another QE policy is announced.
In a sense, QE2 “worked” for a little while as inflation and inflation expectations started rising and the economy appeared to rebound. Of course, the effect had faded by the following summer.
The reasons it faded are varied and probably impossible to untangle — in early 2011 the economy had to deal with the supply chain disruption from the Japanese earthquake, a commodity price spike throughout the Arab spring, the government nearly shutting down over an idiotic budget standoff, the perpetual European near-catastrophe, and of course there were those seasonality adjustment issues.
But it’s not unreasonable to think that a contributing factor was that the Fed’s commitment to further easing in a time of higher inflation, even with the unemployment rate still elevated, was no longer credible. We’ve long found it persuasive that the potency of QE2 in particular came as much from the signal it sent as from the direct inflation of asset prices or the size of the purchases.
The old joke is the way to make a small fortune from art is to start with a large fortune. You can get burned by dealers and galleries selling mediocre pieces at high markups, consultants who are taking money from both sides of the deal, and outright forgeries. But there is a way to get rich in art, as demonstrated by Herbert and Dorothy Vogel. Herb died recently, prompting a long obituary in The Washington Post. His example also is a template for the way to get rich at almost anything.
Herb and Dorothy Vogel had three requirements in purchasing art: It had to be inexpensive; it had to be small enough to be carried on the subway or in a taxi; and it had to fit inside their one-bedroom apartment. Over time, the diminutive couple – neither of them much taller than 5 feet – became recognized in the art world.They haunted the galleries and studios of New York, attending as many as 25 art events a week. They studied art magazines and kept in close touch with dozens of artists.
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