American households, it seems, have finally gotten the message that too much debt is a problem. Here are some great graphics from The Atlantic that show how households have gone to a net savings position.
Maybe someday our legislators will be inspired by their example.
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Posted by: Mike Moody
If the world economy gets pulled out of recession, it will likely be from consumer spending. The U.S. economy is the largest in the world and consumer spending accounts for approximately 2/3 of our economic activity. A reviving U.S. consumer will be a big help not just domestically but globally.
The U.S., however, is not in the midst of a consumer spending boom and the prospect for one does not seem to be on the horizon either. The ongoing consumer spending boom that I am referring to is going on in China. This year, China expects to overtake the U.S. in auto sales, refrigerators, washing machines, and desktop computers. The biggest consumer market in the world in a few years may no longer be the U.S.—it will be China.
The “new normal” that Bill Gross likes to talk about is going to be a global investment marketplace, not one that is focused on the U.S. only. Globalization already has all kinds of problems and the increasing pace of globalization will create even more issues that investors will have to deal with. It may not be comfortable to move toward a global investment policy, but it might be the only way to earn a decent return.
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Posted by: Mike Moody
CNN Money is currently running an informal poll on their website. They are asking investors “Which type of investments will you focus on in 2010?”
The results so far are:
U. S. Stocks 35%
Emerging Markets 15%
Bonds 10%
Commodities 6%
Bank accounts 33%
The portfolio, you may note, is cash-heavy and U.S.-centric. Instead of getting bogged down in a possibly outmoded policy portfolio, why not select “all of the above?” With the exception of bank accounts, all of these asset classes are also choices available in our Systematic Global Macro portfolio. (The Global Macro strategy is available both as a separate accounts and a mutual fund.) Instead of bank accounts, Global Macro substitutes short-term U.S. government bonds—but it also covers a much broader range of asset classes, including domestic and international equities, fixed income, inverse funds, commodities, currencies, and real estate. Rather than guessing what may work in 2010, it might be more prudent to use a disciplined and rigorously tested method to select investments.
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Posted by: Harold Parker
Municipal bonds are heavily owned by individual investors because of the income tax exemption and they are widely considered to have safety characteristics second only to U.S. Treasury debt. Money has been pouring into bond funds this year, a fair amount of it into municipal bond funds.
Be careful: the credit characteristics of this market are not what they used to be. According to an article in the Wall Street Journal, “over the past decade, municipal debt has doubled, to nearly $2.93 trillion.” Yes, that’s trillion with a T. The article goes on to note that
Over all, state and local governments’ total liabilities—including loans and accounts payable as well as bonds—exceeded their assets by $319.3 billion at the end of the second quarter, the Fed said in its quarterly Flow of Funds publication.
That can’t be good. When your liabilities exceed your assets, you’ve got a big problem. Of course, governments can raise taxes to cover the debt service, but right now that’s like trying to get blood from a stone. Continuing high unemployment is going to make it difficult to convince the electorate that they need to pay more taxes. Additionally, voters are not happy about the continuing ramp-up in local government spending. Since many local governments cannot balance their budgets, they are borrowing even more money to cover the gap. In 2009, muni bond issuance topped $400 billion for only the third time ever ($493 billion), and even more issuance—$560 billion—is expected for 2010. In other words, the hole is already deep and local governments are still digging.
Taxable U.S. investor portfolios are still often cast in the 60% blue chips/40% muni bonds mold. In the past, that has worked pretty well. Maybe it will continue to work in the future, but there’s certainly a possibility that the financial crisis has pushed many muni bond issuers past the tipping point. Portfolios may need to be significantly more flexible and more tactical to navigate the financial markets of the future.
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Posted by: Mike Moody
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