January 29, 2010 There is an emerging real-estate bubble in China. Ultra-loose monetary policy in the U.S. and an over-the-top stimulus plan in China, coupled with a pegged yuan, have created optimal bubble conditions. BusinessWeek reports that in Beijing's Chaoyang district, a typical 1,000-square-foot apartment sells for 80X the income of the average resident. Sound troubling? The Chinese leadership is concerned. Monetary policy is being tightened, and the government is reimposing a tax on home sales. A hard landing for the Chinese real-estate market is a real risk to global economic and … [Read more...]
Archives for January 2010
A Guide to 2010 Investment Returns
In 2010, the monetary policies of the world's three largest central banks are likely to play a big role in the performance of global equity markets. The vast majority of the world's wealth—close to 80%, by some estimates—is concentrated in the U.S., Japan, and the euro area. My chart shows that the GDP-weighted risk-free rate in these three economies is only 0.14%. A 0.14% T-bill rate would not be a concern if the global economy were still in free fall, but it isn't. The global economy bottomed in the second quarter of 2009. The IMF projects that the global economy will grow by 4% in 2010. … [Read more...]
How to Boost the Yield on Your Portfolio
January 22, 2010 Punishing yields of 0.05% on three-month T-bills and .85% on short-term Treasury notes are devastating to the millions of investors who rely on income from their portfolios to fund living expenses. The temptation for many of these investors is to reach for yield. Some investors are loading up on long bonds. You can pick up an additional 3% in yield by moving into long bonds, but you also add an extraordinary amount of risk. If rates move up, investors in long bonds will get creamed. I’m talking about losses that dwarf what many investors experienced in the recent bear market … [Read more...]
The World’s Most Profitable Trade
January 15, 2010 In 2009, one investor earned more than the combined profits of Exxon Mobil, Microsoft, and Wal-Mart by employing a common Wall Street trading strategy-the carry trade. The carry trade is a strategy where an investor borrows money at a low rate and invests the proceeds at a higher rate. To make substantial profits from the carry trade, you have to use gobs of leverage. The investor I am talking about used leverage of more than 40 to 1-enough to make even Goldman Sachs blush. What investor in his right mind would use leverage of 40 to 1 so soon after the worst credit crisis in … [Read more...]
Pull Your Head Out of the Sand
In a recent speech to the American Economic Association, Fed Chairman Bernanke offered his explanation of the causes of the housing bubble. Mr. Bernanke contends that easy money in the early years of this decade did not cause or even significantly contribute to the housing bubble. He also contends that the housing bubble was caused by a global savings glut and the growth in non-traditional mortgage products-option ARMs, Alt-A mortgages, and negative amortization loans. Mr. Bernanke ran through simulations and mortgage statistics, and he even broke out fancy equations. His explanation was very … [Read more...]
Harry Reid’s Resignation?
January 8, 2010 While today it appears probable that Senate majority leader Harry Reid (D-NV) will be defeated in his 2010 bid for reelection, an increasing number of Americans must in fact want to see Senator Reid resign. The Senate health-care bill transfers massive regulatory power to the federal government, erects massive federal controls over private health insurance, dictates the content of insurance benefits packages, reduces many seniors’ access to Medicare benefits and services, provides federal funding for abortion, and increases the Medicare payroll tax for individuals making … [Read more...]
Investment of the Decade
Trust has been kicked to the curb by Washington and Wall Street. Not a smart move, as the former prepares for mid-term elections and the latter feels the effects of investors voting with their feet. Many clients and brokers have fled the big Wall Street firms for independent advisors. Washington and Wall Street may realize too late that trust is a terrible thing to waste. The bailout of Bear Stearns, Lehman's bankruptcy, the controversial merger between Merrill Lynch and Bank of America, and Citigroup's near collapse had little to do with their client brokerage accounts. In fact, brokerage … [Read more...]