Why Italy Isn't In Such Bad Shape, But the U.S. and UK Are

Bill Gross runs PIMCO's huge flagship bond fund which, having engaged in an untimely shorting of U.S. Treasuries, has hit a bit of a rough patch in recent times. Some have suggested that the 69-year old might be a few years past the recommended portfolio manager retirement age and that it's no longer as useful as it once was to read his monthly investment newsletters.

Think again.

While Gross's timing on shorting U.S. treasuries has been poor, and his revealing in this month's column of memory issues is a little unnerving, his analysis of the fundamentals and medium to long-term sovereign fiscal picture remains sound.

Take his updated 'Ring of Fire II' chart, the first version of which he first published a few years back. The chart (below) plots countries by both their annual public sector deficit (y-axis), which is the difference between government spending and taxes, and what is termed a 'fiscal gap' (x-axis). The fiscal gap takes into account future expenditures, which in the U.S.'s case include entitlements such as Social Security, Medicare, and Medicaid.

As you can see from the chart Italy appears to be in better fiscal shape than several 'Ring of Fire' members like the U.S., Japan and the UK.  How is this possible? Italy has been experiencing what economists refer to as a 'speculative attack' from the sovereign bond market, while the three Ring of Fire countries are currently enjoying record low yields on their government debt. 

Continue reading the full article here.

Jeremy Grantham's Full December 2011 Quarterly Letter

JGLetter_ShortestLetterEver_3Q112

Guest Post: Investing Simplified for Senior Citizens

Investments for senior citizens are no different than those made by a person of any age; however, it may be in their best interest to make investments with low risks since many are retired and are on a fixed income.  Here are some typical investments:

Stock Investments- You buy an equity ownership interest in a publicly traded companies. The price of a stock can fluctuates; as it fluctuates investors either make or lose money on their initial investment.  Stock prices can be unpredictable and risky but has the potential for very high returns if you invest smartly. Some stocks also pay dividends, although the amount of the dividend can be changed by the company.

Stock Mutual Fund Investments- You choose a manger and they invest your money into diversified set of assets. Mutual funds are available for stocks, bonds, short-term money market instruments, and other securities. A mutual fund can less risky than investing in a single or small number of companies due to diversification. However, fund fees can reduce the total investment return.

Savings Deposit Investments- Deposits you make into your savings account with your bank.  Money must be moved into your checking account for use.  While in your savings account, your bank pays you interest based on current interest rates and your money is insured by the FDIC up to $250,000 per despositor, per insured bank.

Certificate of Deposit Investments (CD)- You deposit a fixed amount of money for a fixed amount of time into account with a bank or thrift institution.  Once the maturity date is met, your bank pays you back your initial investment plus any interest you accrued. Bank CDs are also often covered by FDIC insurance.

Treasury Bill Investments (T-Bills)- Short-term debt sold by the U.S. Treasury, usually at a discount from the par amount, i.e. amount the bill will be worth upon maturity. For example, you might buy multiple bills for $98 and get $100 for each when the bills mature at a later date; the lowest bill you can buy is worth $100 upon maturity. Treasury Bonds are longer-term debt sold by the U.S. Treasury for periods up to 30 years. The Treasury also sells Treasury Inflation Protected Securities (TIPS) which have feature and adjustable coupon payment based on the changes to Consumer Price Index.

Money Market Account (MMA) or Money Market Deposit Account (MMDA) Investments- A deposit account offered by banks.  Upon deposit, your bank will invest your money into government and corporate securities. You will be paid interest based on current money market rates of interest.

Money Market Mutual Fund Investments- A deposit fund offered by brokers who invest your money in short-term government and corporate debt securities. This investment is very similar to MMAs except that they are through a broker and not insured; they are more risky than MMAs, but you may receive a higher rate of return on your investment.

Below is an easy to read chart for senior citizens; it lists general details about these investment types.

Shannon Paley is a guest post and article writer bringing to us her simplified explanations on investments for senior citizens. She writes about nursing home abuse for nursinghomeabuse.net.


Note: please see the Disclaimer on the right side of this website. Before considering any investment you are encouraged to consult with a professional investment advisor.

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Investment Implications of Prolonged Financial Repression

Interesting read from Joe Roseman, former head of Moore Capital PM and Head of Macro Research, on the investment implications of 'prolonged financial repression'. Some highlights:

One of the issues that appears to have really confused economists is why corporates have steadfastly refused to participate in a new capital investment cycle? Why has new hiring been virtually non-existent? 

Standard econometric equations get this wrong because equations can’t think. Econometrics will look for the last time that interest rates were this low, looking at what worked before. 

I would argue that such equations do not have the requisite history built into them to recognise a period when three out of four cylinders in the engine of growth have been impaired. Econometric equations can’t think, but Sir Martin Sorrell of WPP certainly can. 

To quote Sorrell; “Most importantly, post-Lehman and the several corporate crises, we have seen a concern, or even fear, amongst Chairmen and CEOs and in the boardroom about making mistakes and a consequent emphasis on cost containment and unwillingness to add to fixed expenses and capacity.” 

Sorrell goes on to say that “Western-based multi-nationals are said to have over $2tr in cash on their balance sheets, but unemployment remains at stubbornly high levels, with only increases in temporary employment and limited expansion in fixed capacity in Western markets. Hence, a willingness to invest in the brand and maintaining or increasing market share, rather than increasing capacity and fixed expenses.” 

Governments don’t have the cash so print it. Households don’t have the cash so borrow it when they can. Banks don’t have the cash so skim it from savers. Corporates have the cash and just hoard it.

And the possible investment implications?

Not everywhere in the world has the same macro-impairment as the major Western economies, thereby allowing many corporates to develop growth strategies based outside of the G7. Having a cheap(er) currency certainly helps those companies. 

The market seemingly does not value cash sitting on the balance sheet highly. I wonder if that is a mistake. Cash, it is argued, offers optionality to the holder to take advantage of falling (asset) prices should they occur. On the same basis it may also be being undervalued on balance sheets.

I wonder if standard tests of “value” are missing the true value of the cash sitting on balance sheets? In a world where black swans are as common as starlings, having high net cash balances is a major plus. I also wonder whether that same optionality to use cash to buy cheap assets should also be valued higher.

In closing, he wondering whether the M&A department of foreign corporates would view weak currencies, like the pound or U.S. dollar, as an opportunity to acquire cash-rich businesses in the UK or U.S., respectively.

Full writeup here.

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Interview with Jim Grant on Bernanke's press conference today, the coming of QE3, and why the Federal Reserve should "be run by someone with a degree in unintended consequences" after the break.

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