August 09, 2011
Commentary by Warren Capital
WASHINGTON, Aug. 9, 2011 -- It appears that the Fed is on the edge of more monetary easing, and that at the inner circles of the Fed they are becoming concerned about what remaining arrows they have in their quiver to energize the economy.
However, there are options: a Fed-backed Infrastructure Fund.
Washington, D.C. based money manager Joseph Warren, founder of the Warren Capital Group wealth management firm, proposed an infrastructure fund to the Fed in November. (See Letter to Chairman Bernanke here) Such a Fund could be used for building and improving schools, roads, water systems and the electric grid across America.
"If the Fed is going to create money out of thin air, why not build the value of the country rather than bail out those who made bad decisions and can't pay their debts," Warren says, adding that he understands there may be technical difficulties to be considered.
"Naysayers might point out that this type of Fed funding is completely outside the realm of the Fed. But this is no more outside the intent of the central banking system than bailing out AIG or buying Lehman's Maiden Lane mortgage portfolio," Warren offered in his Nov. 16, 2010 letter to Fed Chairman Ben Bernanke.
"The government is already in the market of helping states and municipalities with their infrastructure needs through the Build America Bond program. Furthermore, this cannot be derailed by an incapable Congress as the Fed can actually create these new dollars and this plan does not add to the deficit."
Warren did receive a response from the Fed, and neither Fed policymakers nor anyone else has come up with a legitimate rebuttal of this concept.
Warren says he's hoping that someone in the administration, Congress, the Fed or any other able entity will at least consider an infrastructure option.
A creation of an Infrastructure Fund by the Fed could pump real jobs into the economy, Warren says.
This idea is timely given the Fed meeting today.
"After the events that have transpired in Washington of recent, I am truly concerned that very few policy makers have quality ideas on how to improve the economy and that our country will be permanently impacted by more of the same. Policy makers don't know how lucky they are that treasuries rallied yesterday," Warren says.
Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group and its independent financial advisors are based in Washington D.C.
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July 27, 2011
Commentary by Joseph Warren
Right now the political rhetoric in Washington is thick as I’ve ever heard as the debate over the debt ceiling is coming to a crescendo. While I believe the majority of America would simply like some compromise between parties, the elected show no signs of that consideration as they are retracting further into their respective political burrows. This comes as no surprise, and I expect that even if an agreement is reached before August 2 it will have little impact on the indebtedness of the United States. Therefore, I take it upon myself to present reality.
We can all point fingers at Congress and its inability to enact legislation. But in theory, politicians are here to represent their constituents. Given such, the reality is that either citizens of this nation don’t have the civic fortitude to deal with the indebtedness for which we are all now responsible, or they haven’t made clear what policy they are willing to accept to correct this imbalance. Whatever the case, dealing with our imbalances can be done if handled practically.
It’s important to recognize that while the $14.3 trillion in treasuries is an obligation of the government, the ultimate responsible party is every American citizen. That means that because of previous policy and our lack of action every citizen of the country has become indebted by roughly $45,800 to treasury investors. In addition, government expenditures for the year will be approximately $3.55 trillion while incoming revenue will be $2.38 trillion. So, not only do you owe a huge sum but to simply prevent yourself from incurring another $3,751 in debt by year end you must take action! Here are some options:
1) Given that government receipts can only cover 67 percent of expenditures, take out a piece of paper and calculate the dollar value of every benefit you receive from the government. Once calculated, reduce that overall number by 33 percent and write down which of those benefits you are willing to reject.
2) Look back on your tax return for 2010 and examine what deductions you took. Remove a third of those deduction going forward so your tax obligation is increased by 33 percent.
3) Prepare a check written to the U.S. Treasury for $3,751.
4) If you have treasuries in your investment or retirement accounts repudiate your ownership in four of those securities thereby alleviating the U.S. Treasury of $4,000 worth of its obligations.
While none of these options are very appealing, this only gets us through year end. Your next priority is to figure out how to pay off the $45,800 you already owe. We can all whine and moan about how we got here, but that doesn’t change the reality that you owe it and are paying interest on it. The good news is that you have more time to pay off that debt. The bad news is that it’s going to take a much more drastic combination of the aforementioned options to get whole. While these actions are necessary, communicating what you’re willing to do is just as vital.
I’ve been searching the net for records on the volume of phone calls, emails and letters that have been made to Congress in the last few weeks and the data is sparse. The best that I can tell is approximately 3 percent of the U.S. population has made contact with his or her representative of late. I live in the District and politics supersedes any other topic including the weather in this town. So, I’m not sure how much this subject stirs the blood of the general public. But I do believe that remaining 97 percent would care that they are on the edge of incurring nearly $50,000 in debt at the behest of ill-directed policy if they actually recognized their looming obligation.
I also know that most Americans truly care about this country and are willing to endure some personal sacrifice for the benefit of the nation. The question is how much do you care? If there can be such a thing as a call to action in this day and age than this is it. (To find your representative visit http://www.congress.org/congressional_staff). It is no longer acceptable to simply point fingers and dodge the issue. If you decide not to participate, realize that those of us who do take action will determine the fate of your responsibility.
Short Term Consequences
Because of our reputation and what we deliver, we bring on many new clients each year. What we often hear during the initial consultation with a prospective client is that they can’t afford to take a loss like they have experienced in the past. The alarming thing is that even though much time has passed since they took such losses, they have done nothing to protect themselves against that experience going forward. That’s usually the time we explain our process as independent financial advisors and how we differ from all other money managers. While we’re not predicting it, the next few weeks could prove why we invest the way we do.
Even if my call to action sweeps the nation and it starts tomorrow, the effects will not take hold for some time. Therefore, investors might face some unique circumstances for the next few weeks related to the debt ceiling debate and the potential effects on the financial markets of a treasury default. We always look to the markets to measure the amount of trouble looming, and right now indicators remain stable. But we are keenly aware of how quickly things can change.
Whatever happens, you must have a plan in place to deal with unprecedented circumstances, like a treasury default. Our clients take solace in the fact that we do have a plan and the ability to act quickly if needed. If you’re not a client and you don’t have your plan in place, consider this your wakeup call and see our phone number is below. As always, I appreciate the continued trust and confidence.
May 01, 2011
Commentary by Joseph Warren
Given the close relationship we have with our clients and the amount of time we get to spend with each of them we often hear their worries about various economic issues. Having clients in the real world expressing their economic concerns to us holds immeasurable value as they are the true barometer of the level of fear in the markets. But often times the fearful topic du jour is not the issue to worry about as a more silent, less media-friendly matter emerges as a sure way to lose. Right now the looming debt vote in Congress serves as the former and inflation the latter.
For those not aware, the U.S. Treasury’s borrowing spree has a limit and it’s called the debt ceiling. The debt ceiling is a cap set by Congress on the total amount of indebtedness the Treasury may incur, currently $14.29 trillion. According to the Treasury, the cap will be met in the next 60 days. Two things can happen once reached: The debt ceiling can be raised like it has been done almost every year for the past five decades or the government can stop paying some of its bills.
I’ve written extensively in past editions about the inevitable path to insolvency the country is on with this deficit spending and the media has covered it ad nauseam. In reality there is no political benefit to the politicians balancing the federal budget as each representative gets elected by and is responsible to their own individual constituents. (I imagine allocating federal dollars to benefit the voters in the districts that elected you helps at re-election time.) As such, I doubt there will ever be a political consensus on government outlays vs. spending. So I can understand why clients are concerned about the pending ceiling vote on the Hill. But according to the markets, they should not be.
The most recent headline to spook investors regarding federal debt was Moody’s release that it was considering downgrading the credit quality of Treasuries. Losing its gold-plated AAA status would be a huge blow to Treasuries. But contrary to logic, the Treasury market has rallied since Moody’s release in mid-March as the yield on the 10-year Treasury has declined from 3.34% to 3.17%. While it’s not a big move, the mere decline in yield, or rally in price, proves the point. Treasuries are the world’s safe haven investment and even a threat of a downgrade to the ratings of Treasuries themselves doesn’t replace that notion. Furthermore, the paltry yield of 3.17% suggests that investors have no concern whatsoever about the government’s ability to meet its obligations. In comparison, 10-year yields on Greek and Portugal debt are 15.1% and 9.63%, respectively. Now I’m not saying it’s right, but the markets are telling you not to worry about the government defaulting. What is a concern and what we work to mitigate every day is inflation.
Inflation is a complicated matter as the cost of goods affects people differently depending on their direct use of those goods. That is why the consumer price index (CPI) may increase by only 2.7% in the past year while you are paying 28% more for gas. Whatever the measure, inflation is far more onerous than the government’s creditworthiness.
First, it is important to understand that the ultimate agent of stability, the Federal Reserve, faces consequences each time it eases. The Fed has absorbed $2 trillion of new assets since the financial disaster of 2008. In order to buy these assets, the Fed had to create new money. Increasing the amount of dollars in existence by 20% will eventually cause the value of each dollar to fall. We measure the value of a dollar on an index basis as it must be measured against a basket of currencies. At 73 it stands just two points away from its all time low!
Second, the value of the dollar has an inverse relationship to the cost of anything that is priced in those dollars. Hence, the recent sticker shock at the pump and the grocery store. The ultimate threat to any central bank is falling prices or deflation. One way to counteract the deflation we faced in 2008 is to add new dollars to the total amount of dollars in existence. This is guaranteed to lower the value of the dollar and will likely raise the price of anything denominated in that currency over time. What makes a falling currency so burdensome is the inflation it produces and the effect that inflation has on “real return.”
Many investors who manage their own money often cite the return they are receiving on their investments. While it’s a useful measure, it has less meaning than real return, a measure followed at Warren Capital. Real return accounts for inflation as it subtracts the inflation rate from the net return. From our perspective there is no point in evaluating how many dollars can be made on an investment without considering what those dollars will be worth when earned. Furthermore, measuring real return will continue to hold more creed going forward as Fed policy is poised to keep the value of the dollar low for some time.
Currently the Federal Reserve’s federal funds rate is targeted at zero percent. It’s pretty difficult to lower a rate beyond zero and, therefore, the Fed has no other stimulus available other than printing and buying, as noted by their recent QE2 effort. Given the anemic growth of the economy and comments from recent minutes released by the Fed, it’s hard to foresee any eminent policy designed to increase the value of the dollar or slow inflation. With CPI at 2.7% an investor would have to go out eight years on the Treasury yield curve to find debt that would break. By not considering this and owning investments with less than an equivalent yield you find a sure way to lose.
As always, I appreciate the continued trust and confidence.
Warren Capital Group is a registered investment advisor specializing in private wealth management and protection and growth for high net worth individuals, institutions, foundations, and corporations. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth. As a fee-based personal wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services.
April 11, 2011
Commentary by Stuart Brown
GDP = C + Inv + G + (Ex – I). Gross Domestic Product (GDP) is calculated as the sum of private consumption (C), gross investment (Inv), government spending (G), and the net of exports minus imports (Ex – I). Having already exhausted “job-killing” sloganeering, there is scant mention that reducing government spending will, by definition, take a toll on GDP. We can only hope the economy is sufficiently recovered to withstand retraction of stimulus.
The Fed doesn’t think so. If the Fed were confident in the sustainability of the recovery, rates would be raised or at the least, Chairman Bernanke would be talking about the end of quantitative easing.
Recent forecasts of a 4+ percent expansion in GDP for 2011, now appear overly optimistic in part due to budget austerity and debt brinkmanship. Also weighing on estimates are world events like the Japanese earthquake, euro-zone malaise (austerity has not led to robust recoveries), and higher oil prices, the result of continued chaos in the mid-east and increased global demand.
The unemployment rate is now 8.8%, down from 10.6% a year ago. If those working part-time or temporary jobs, but desiring full-time employment, were included in that statistic, the number would probably be closer to 18%. Creating a couple hundred thousand new jobs a month is not a rate fast enough to bring unemployment down to desired levels.
The battle between the Keynesians and the Hawks warms up. Last June, at Wimbledon, John Isner and Nicolas Mahut played a single match that lasted over eleven hours. At the time, I likened that eternity to the matchup between the Keynesians who wanted to stimulate an economy deep in recession and the deficit hawks who instead called for deep cuts in the federal budget.
The party for whom “deficits don’t matter” (as long as they have the White House) has successfully moved the conversation from the economy to the deficit. The agreement that narrowly avoided shutting down government may merely be one more game in the set that includes next month’s battle over the debt ceiling and then the 2012 budget hearings.
We’ve seen this before. In the 90’s we went from deficit to surplus with higher taxes and a strong economy. In the 30’s the US descended back into depression when government prematurely addressed deficit spending before the economy was back on its feet.
Ultimately all Parties in the match are rooting for a growing and vibrant economy in which all Americans participate and benefit.
Meanwhile it is earnings season again. Estimates have been raised. Year over year, earnings are expected to grow over 17% this year and almost 13% next. Hopefully the plus of strong earnings in a growing economy can overcome the negatives of less G (Government spending) and the possible end of quantitative easing.
Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth.
March 01, 2011
Commentary by Joseph Warren
Sometimes I wonder if the founders of the Internet understood the full implications of what they were producing. While there’s some debate about who started the Internet, it is my understanding that the Department of Defense (DOD) created it in 1969 as a way to connect internal computers. Of course this is woefully ironic given the geopolitical turmoil now erupting across the Middle East all because of the Internet.
For those who don’t know, it was the death of 28-year-old Khaled Said — who was beaten to death last June after being dragged from an Internet café in Alexandria, Egypt — that galvanized Egyptians into a social movement that led to the resignation of the 30-year dictator Hosni Mubarak. Not only did access to the Internet assist in this movement, the movement took shape via Facebook and when the dictatorship blocked access, the cyber movement transformed into massive protest. The reality is that the Internet is a form of freedom and authoritative regimes may crumple in its path.
I’m taking a few things for granted when I say this, but it’s not surprising that the Internet was created in the United States. While our reputation is suffering in various parts of the world, it’s generally still accepted that America represents a free nation. And in this age what better way to demonstrate our unalienable rights than via the Internet? Of course life, liberty and the pursuit of happiness are rights that fundamentally contradict the oppressive nature of authoritative regimes.
The list of countries with oppressive governments is vast. But according to a popular human rights index, both Egypt and Libya are in the top 20 in the list of worst rights offenders. So it shouldn’t be surprising to see Mubarak ousted and Muammar Gaddafi, the controversial leader of Libya, losing his grip. What’s interesting is how the dictators react to insurrection.
With the Egyptian experience the protestors were blessed with a government that didn’t have a clue how to deal with an uprising via the Internet, as demonstrated by their fraught attempt to shut the Internet down. In Libya the reaction has been much more violent as the military fired upon protestors. This led to a massive defection of army colonels who are now attacking Col. Gaddafi’s remaining forces. What’s shocking is that these multi-decade tyrants didn’t learn more about handling Internet insurgencies from governments like China, which has more documented cases of human rights violations than both.
Last year a 24-year-old peasant was arrested in China for “illegal blogging.” The peasant mysteriously died in prison and the incident generated 100,000 comments on a Chinese blog. But the Chinese government reacted differently by reaching out to irritated bloggers and inviting them to join an investigative committee on the incident. Nothing came of the investigation as it was extremely limited, but the social unrest subsided. To me the results of these vastly different strategies have investment implications.
The seven largest companies by market capitalization are Exxon, Apple, GE, Microsoft, Berkshire Hathaway, IBM and Google. (Facebook is not included, as it remains private.) It is not coincidental that four of the seven all provide technology, software and hardware focused around the Internet. Those that further the ease of use and help push greater access worldwide stand to change both the economic and political landscape. As it becomes the tool that both democratic governments (President Obama’s online campaign was a vital tool for his overwhelming victory) use to further their reach and the force of liberty that oppressive governments must face, we will be on the lookout for the next game changer. Because not only can tyrants be toppled, but vast wealth can be created by the freedom of the Internet.
Warren Capital News
For those who read my November 2010 letter to Fed Chairman Ben Bernanke, you'll remember that I questioned effectiveness of the $600 billion treasury bond purchase the Fed was about to embark. I was concerned that the second part of their dual mandate — to promote a high level of employment — would not be reasonably influenced by such a bond purchase. Rather, I proposed, start an infrastructure fund with said funds, which would certainly create jobs. Well to my pleasant surprise, I received a reply from a Fed director in late January.
Part of the beauty of the Fed is the unique manner in which they communicate. When you control monetary policy and are the lender of last resort, you better have an ability to mask your intentions or the markets will manipulate them. The Fed is truly the master of the obscure and their reply to me served proof. The general nature of the reply was neither to dismiss nor fully address my suggestion, but rather point out the merits of their quantitative easing (QE2). After reading it multiple times I came to the exact conclusion they wanted me to: That the Federal Reserve’s treasury purchases “should help keep interest rates lower than they would otherwise have been”. While this was not the revelation I'd hoped, I did learn two things.
First, the interest on the treasuries that the Fed purchases is returned to the treasury; thereby, saving the government $110 billion in interest payments. So through this bizarre tactic, not only are the interest payments the treasury must make on their bonds lower “than they than would otherwise have been," the Fed also massively reduces the treasury's expenses. (If I was running the treasury I'd have to send a thank you note to Chairman Bernanke.) Second, and potentially more important to me over the long run, I now know that there is a decent chance that some of my opinions are reaching powerful ears. So if you ever decide to employ such a brash tactic as composing a letter to arguably the most powerful individual in the world, I advise you to make your point direct and your language precise. Your message might just reach intended recipient. As always, I appreciate the continued trust and confidence.
Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group's independent financial advisors based in Washington D.C. assist clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth.
November 10, 2010
Commentary by Stuart Brown
Qualitative Easing is an Indirect Stimulus. The Fed’s purchasing of $600 billion of Treasury bonds is target of much discussion and criticism. This is an indirect attempt to get the banks to lend. Normally the Fed stimulates a slow economy by swapping cash for bills and notes held by banks, (or conversely, soaking up cash from an overheated economy by selling to banks notes and bonds). What is unusual is the longer maturity of the bonds and the magnitude involved.
A Targeted Approach Would be More Directly Stimulating. If instead of buying Treasuries the Fed chose to buy “Bridge and Tunnel,” or “Water and Sewer” bonds, the economy would be benefit directly. Employment would improve and the benefits of a repaired infrastructure would benefit Americans for years to come.
These are Functions of Government. Revenue-strapped states have been cutting back on municipal financing.
Continue reading this commentary »
November 01, 2010
Commentary by Joseph Warren
As I stand here today, I can’t help but acknowledge how far things have come and how much has improved since this time last year. About this time in 2008, we were on the edge of an economic abyss and looking into it. But as I suggested in my commentary last November, investors underestimate the ability of the U.S. to self correct and the 39% year‐to‐date return on the NASDAQ is proof. Regardless of this rebound, I believe it my prudent duty to consider what could be different next time.
Here’s the reality: Every time we face a true correction in markets, it is more severe, frightening and painful than the last one.It has to be. Otherwise, prices really won’t correct. This was certainly the case this past fall as fear ran rampant. Nearly every asset went down in value and the Treasury was immersed in a daily game of financial whack‐a‐mole. As it turns out, the world did not collapse and the apocalyptic prognosticators proved incorrect. But I remember how easy it was to understand their arguments as I, along with just about everyone privy, actually examined what was over the ledge for the first time. (Luckily, our headquarters is located on a low floor). No one predicted nor understood the interconnectivity of financial markets, and we’ve seen the consequences of such. Given this fact and the said reality, it may prove futile to spend much time predicting the next financial calamity. Nevertheless, here’s my educated guess on a more frightening scenario that could unfold.
Our recession narrowly avoided becoming the second great depression only by the aid and backing of assets by the U.S. Government. Everything from money markets to car manufacturers was guaranteed. Intrinsic in the ability of the government to stabilize the markets with its guarantees is the assumption that it has the capability to meet these guarantees. If called, the money the government can use to meet these obligations comes from sales of treasury bonds and the printing of dollars, both methods of which the government relied heavily upon during this last crisis. But in my mind, there is a very real possibility these options might not be available next time.
Whether the Treasury likes to admit it or not, there is such a thing as the debt ceiling, and Congress does have to vote on it. More importantly is the fact that there has to be an appetite for treasuries — whetted by interest rates — for them to be acquired. At today’s paltry rates, I’m baffled as to who would really want to buy treasuries. Long‐term critics of this stance argue that treasury auctions continue to run smoothly and foreigners continue to buy our bonds. But closer inspection reveals an interesting trend.
It’s true that holdings of treasuries by foreigners are up throughout this crisis. But so is the total amount of treasury debt and the 29 percent of this total that foreigners hold is about the same percentage it was in August 2008. What’salarming is that of the approximately $1 trillionincrease in treasury debt over the pastyear, half of that came in the form of Treasury Bills (short term debt) and foreigners purchased the vast majority of these bills. To me that indicates that very few were interested in buying long‐term treasuries. The majority of the government’s ability to guarantee and stabilize the economy came from foreign purchases of very liquid and easily redirected money in the form of Treasury Bills. What happens when the interest on those bills, which is paid in dollars and currently averages 0.17 percent, turns into an actual loss for foreign holders because of exchange rates? This leads to my secondconcern: money supply and the ability to print currency.
For the past decade, the government has basically burned the buck by printing dollars. It’s a rather stealthy maneuver as the layman rarely follows the value of the dollar. But the fact is that the total amount of money in the system (the money supply) has doubled in the past decade. The net effect of this policy, a decrease in the value of the dollar, has finally started to make headlines. But in reality, the dollar has been declining in value since 2002 (the change in the value of the dollar is noted in red and the change in money supply in blue in the chart below) and whether we like it or not this has major consequences.
Most tangible assets, like gold and oil, are priced in dollars. If you check their charts you’ll see the effect of a falling dollar. They have skyrocketed in price in recent times primarily because the countries that produce these assets are getting paid in dollars that are going down in value. If this continues, it is my belief that these most vital assets will no longer be priced in dollars and our currency will lose its dominant role. This, of course, becomes self fulfilling: The value of the dollar will plummet if this happens to the extent that our ability to buy goods from other countries is seriously compromised and permanently diminished.
If you want to set the stage for a truly precarious and frightening scenario for the United States, take away its ability to borrow and print money. That’s the type of thing that destroys empires. I’m not necessarily making that prediction as I know predictions have the half life of an open cup of Activia in this business. But I do believe these possibilities need to be recognized and understood by policy makers.
In the end, I have to admit that I don’t know what will cause the next calamity or exactly when it will occur. (If I knew such, I’d probably install a T1 line into the house, link up a few more trading terminals and rarely leave my desk). So, this could be somewhat of a futile exercise. Nevertheless, this is not the first time I’ve run such an analysis. But no matter the accuracy of these thoughts, what I do know is that next time it will be different.
As always, I appreciate your continued trust and confidence.
Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth.
June 15, 2010
Commentary by Stuart Brown
The Shrinking Money Supply. Since the end of 2008, the year over year rate of change in M-2 has been getting crushed. M-2 includes household savings deposits, money markets and CDs in addition to M-1 (green cash, traveler’s checks, demand deposits and checking accounts. One might think with the amount of stimulus and the Treasury printing dollars, the money supply would be showing just the opposite, i.e. an explosion in financial assets.
Clearly, despite best efforts, money supply has yet to show signs of rebounding. Depending on your outlook, either banks are not lending or individuals and businesses are not seeking new funding. Rather, deleveraging has been the order of the day.
Continue reading this commentary »
May 01, 2010
Commentary by Joseph Warren
Every time I sit down to write a commentary it seems that some new debacle has emerged that threatens market value. Each has its own unique versions of potential peril and the newest one often seems more dire than the last. Yet the prior dilemma, however intricate and scary it must have been at that moment,has been overcome, or at least postponed. Nevertheless, wealth managers face new issues almost daily as the struggle between progress and restraint continues. What’s important, and what sets Warren Capital apart from it's competitors, is how we handle issues in this constant battle.
In my 2010 outlook piece, I predicted that risk would become a factor again as several countries would be unable to roll their debt as they have become overwhelmed from absorbing the losses of their respective banks. As we’ve noted in the past, simply moving bad debts from one balance sheet to another doesn’t mean the debts disappear. We knew aday of reckoning was coming and it looks like Greece is first in line.
Greece is currently in a major fiscal hole and theyield on two‐year Greek notes, which started at 5.21% this year, has blown out to 14.5%. While this may look insignificant to some, this is a colossal change in terms of sovereign debt. Greece will not be able to roll its debt withoutEuropean Union or International MonetaryFund aid. I would be willing to bet, however,that many Main Street investors are just becoming aware that Greece is on the brink of default and they are have no idea what this means to them. Investors are relying on their professional advisors to steer their assets through the Greece fire. The question becomes whether or not that reliance is the right decision. Therefore, I offer our analysis.
The first thing we do when a problem emerges is try to determine the effect of the worst case scenario. From our perspective, Greece is currently a relatively isolated issue. It is aminiscule portion of the total sovereign debt ofthe world, and European banks most likelywould absorb the default. (This is probably whythere is no actual policy in place to aid Greeceof yet as rhetoric has been the only tool implemented). Nevertheless, we have noexposure to Greek debt and we’ve avoided Portugal and Spain as well, who are next in lineif default contagion spreads. Up until the last few days the debt yield of all of these countries hasn’t come close to reflecting the potential default risk we believed possible. In addition, we can only speculate about a short‐term remedy as there are too many players involved. Some of our sources indicate that Greece will be dropped from the EU, revalue its own currency versus the euro and re‐enter sometime down the road. But this, of course, does absolutely nothing to fix the real problem in Greece. Which brings me to my second point: How can we use this incident to our investment advantage?
When we strategize about specific events affecting investment policy, we look to use those events to make a large gain with reduced risk or to protect principal for unforeseen consequences. The Greek incident offers opportunity for both.
The short term causes of Greece’s problems are all too common. Greece borrowed too much money, manipulated the manner in which it disclosed those borrowings and collateralizedits borrowings with its most prime assets. This type of irresponsibility leads to default. But it’s important to remember that investors don’t buy sovereign debt to take on risk. Most sovereign debt purchasers are willing to accept smaller interest payments in return for assurance. So, the possibility of Greek default requires us to examine the safety of even the most assured investments.
In normal times, sovereign debt would be considered the safest asset. But global recessions constrain economies. With enough pressure, long‐term fundamental issues bubble up and their bursting is accelerated. This is precisely what’s occurring in Greece.
Most economists assert that Greece overextended itself this last decade and the spending on which Greece embarked to combat the recession pushed it to the brink of default. While we agree that Greece is overextended, this bland assertion does nothing to identify how Greece got here. To find out why, we compared economies that are performing well against those that are constrained or contracting.
In 1980, the total population of Greece was about 9.7 million. Today it stands at approximately 10.7 million. That’s an 11% growth in population over 30 years. When compared to India, Brazil and Indonesia, whose populations have all grown nearly 60% or more over the same time, the fundamental reason why Greece is faltering becomes obvious: its population is not growing as vivaciously.
In terms of growth, there are no major economies other than China that can competewith the growth of India, Brazil and Indonesia over the last few decades. Given the tables below, it doesn’t take much to recognize the correlation between population growth and economic growth.(Note that the United States also enters into the growth arena as its percent of population growth has slightly eclipsed China.) Accepting this fact, if we can determine the similarities between countries growing in population, we can simultaneously identify areas of the world where the odds of investment return are increased and avoid areas where a governmentguarantee has limits.
After some serious inspection of a world map, the first two things I noticed were that all the aforementioned growth nations have massive amounts of land at their disposal and they all have direct access to the ocean. Therefore, they have room for population expansion and they can directly access the seas for shipping routes. The next similarity was a little less obvious at first but just as vital.
In India, the domestic currency is the rupee. Brazil has the real. Indonesia has the rupiah. China has the yuan, and we all know about the dollar. What’s important is that each of these countries has a central bank tasked to maintain the “value and stability” of their respective currency. Defining exactly what that task means in terms of respective policy for these central banks is beyond my ability. But one thing I do know is that each of these central banks has the capability to print their own currency in times of strife and all of them did during this last crisis. Greece, on the other hand, is part of the EU and, therefore, does not have the ability to print its way out of this corner. The EU can print Euro’s and they probably will. However, that’s way beyond Greece’s influence. So, the Greek government has little control over its own fate. In the longrun, austerity and restraint are the realsolutions to a national budget problem. But that doesn’t comfort anyone holding Greek debt right now. The only way we can prosper in the long term is to make sure our money is around in the short term. To my knowledge, no one has mentioned any of these root issues thatare pressuring Greece. But these basic points are way too stark to be coincidental.
In recent weeks many scathing headlines havecome out about the manner in which investment companies manage their clients’ money and where their moral responsibilities lie. I completely understand this scrutiny as we are in a high profile business, and the ethics and performance track records of many of our competitors are less than stellar. But let this piece stand as proof that not all of us in the industry are highly overpaid regurgitators of modern investment theory who simply spout the “buy and hold” mantra until a portfolio is decimated. Some of us actually enjoy applying thought and discipline to investment strategy. Land mass, direct access to the seas and central bank independence are factors that, I believe, increase our odds of success as we determine where in the world to deploy capital. I also realize that these observations might counter the opinion of the average investment professional. But that’s the point and why we will continue to produce original thought and results that better the average in this constant battle.
As always, I appreciate your continued trust and confidence.
Warren Capital Group is a registered investment advisor specializing in private wealth management and protection and growth for high net worth individuals, institutions, foundations, and corporations. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth. As a fee-based personal wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services.
January 01, 2010
Commentary by Joseph Warren
As the year kicks off, I’d like to provide some aspects of our outlook for 2010. While some expectations for the Market's value are more apparent, others will come as complete surprises. Whatever the case, we expect all of these to be factors in investment strategy if they begin to unfold as follows:
1) Mortgage rates sky rocket from less than 5 percent today to more than 7 percent as the Fed moves away from buying mortgage‐backed securities. While disruptive in the short term, the rise proves to be constructive as it demonstrates at what rate the private market is willing to lend to those seeking mortgages. Longer‐term Treasury rates get blown out as investors balk at getting paid so little to sit on 30‐year paper. Expect 30 year Treasury rates to hit 6 percent, up from 4.6% today.
2) The programs implemented to aid banks during the recession are gradually removed and the Fed increases interest rates. Both circumstances dramatically increase bank borrowing costs and banks start lending to consumers and businesses again as they are forced to find new places for return outside of buying longer‐dated Treasuries.
3) Global GDP growth comes in around 4.5 percent, well ahead of the 3.1 percent expectation. The Netherlands, Australia, Belgium, Brazil, South Africa and countries dependent on exports outperform.
4) The net interest cost for Treasury debt doubles and the U.S. is downgraded by the rating agencies. Because of the difficulty the Treasury has funding itself, new debt instruments that pay interest in relationship to economic growth become a vital revenue source for the Treasury.
5) Revelations from Henry Paulson’s upcoming book and an audit by the Congressional Budget Office shed light on the extent to which the Fed utilized its seemingly unlimited power to thwart the Great Recession. In reaction, Congress clamps massive restraints on the Fed and, despite being named The Times person of the year in 2009, Ben Bernanke resigns out of frustration.
6) Following the lead of New York, multiple states reduce payments of principle on debt that matures during the year. Fiscal budgets become the political issue and Republicans make substantial gains in both state and national governments.
7) The U.S. government collects the highest level of tax ever as the ability to convert traditional IRA’s to Roth IRA’s as well as new taxes on buying and selling stocks generate huge tax revenues for the IRS. The Obama administration painstakingly recognizes the need to reduce the deficit and begins the process of paying off U.S. creditors.
8) Risk becomes a factor again in 2010. Credit once again rears its head and several countries are unable to roll their debt. Those countries not able to print their own currency struggle.
9) The green movement takes full effect as creative concepts, government subsidies and technological enhancement combine to produce a few cost equivalent alternatives to fossil fuels. The U.S. imports less oil and the growth of the trade deficit slows.
Best wishes to everyone out there this year and as always, I appreciate your continued trust and confidence.
Warren Capital Group is a registered investment advisor specializing in wealth protection and growth for high net worth individuals, institutions, foundations, and corporations. As a fee-based private wealth management firm, Warren Capital Group assists clients with asset allocation, risk management, estate planning and liability management via mortgage services. Warren Capital Group wealth managers use their collective expertise to invest in stocks, bonds, real estate, money markets and other alternative assets on behalf of clients and advise them on mortgages, insurance and other aspects of their net worth.
