Archive for June, 2010
With Europe’s Eurofirst 300 Index down close to 20%, and the MSCI Emerging Markets Index down 9.5% so far this year, you’d have to search far and wide to find a stock market on Planet Earth where investors have made money this year. As a U.S.-dollar investor, only your savvy and uncannily well-timed investments in the unlikely combination of Indonesia, Malaysia, Thailand, Colombia, Pakistan and Chile would have made you money this year. Thanks to the exploding number of exchange-traded funds (ETFs) in recent years, you actually could have invested in each of these markets. But I’d hazard it’s a rare fund manager who bet on this strange admixture of second- and third-tier global markets when the clock struck midnight on New Year’s Eve 2010.
Perhaps surprisingly, some of the world’s top hedge funds are finding the current environment even more challenging than the fall of 2008. Louis Bacon’s Moore Capital Management recorded its worst month in its 20-year-plus history in May. Only those funds that suffered mightily during last year’s bull run — likePeter Theil’s long-suffering Clarium Capital — benefited from a modicum of comeuppance during an otherwise devastating May.
Currency Movements: The Wrench in the Works
Currency effects have been particularly nefarious for U.S.-dollar investors in 2010. More often than not, the declining U.S. dollar has acted as a tailwind to returns in global stocks. This year, it’s been the opposite. With the U.S. dollar soaring — even a (barely) positive local return in a global export powerhouse like Germany — has translated to a loss of about 15% for U.S investors. And, if you failed to cut your losses in Greece or Spain, your investments have almost halved in U.S.-dollar terms.
U.S. Dollar Versus the Euro
Nor were the strong dollar’s negative effects limited solely to Europe’s economic ne’er-do-wells. Virtually every one of the currencies of the BRIC countries — Brazil, Russia, India and China — have tumbled against the Greenback in 2010.
Global Markets over the Last 12 Months… Not So Hot, Actually
You’re probably feeling lousy about the state of your portfolio… especially after everyone else racked up those huge gains in the S&P 500 last year. As recently as early May, the media was still widely quoting the 70%-plus gains of the S&P 500 during the past 14 months.
A scant few weeks later, the picture could hardly look more different. Just look at the 12-month chart of the S&P 500 below. It turns out the S&P 500 is now up a mere 15% over the last 12 months — a far cry from the widely quoted figure of 70%. For all of their better prospects, emerging markets have scarcely fared better.
S&P 500 versus Emerging Markets
Frankly, when I first pulled up this chart, it left me scratching my head. But over the last few months, the strong gains between March and May of 2009 during last year’s market bounce have dropped out of the 12-month data set. The take-away? Even the relatively strong U.S. market has made precious little headway since last summer.
But more than anything else, the choppiness of global stock markets has been the most gut wrenching. Just look at how the MSCI Emerging Markets Index performed over the last six months. Unless you’re a 100% buy-and-hold investor, you’ve been whipsawed in and out of markets during the sharp pullbacks at the end of January and April — all the while lulled into a false sense of security by a two-month stretch of record-low volatility. And even if you’ve had the enviable psychological stamina to stay fully invested, you haven’t made any money. It’d be hard to design a more frustrating and outright nefarious market if you tried.
Emerging Market Stocks over the Past Six Months
Thanks to the crisis in Europe, global developed markets have fared even worse — though at least there, thanks largely to a collapse of the euro, the downward trend is solidly in place.
MSCI EAFE Index over the Past Six Months
Markets on a Knife’s Edge
The game of financial prognostication is all about divining the future — whether you choose to use astrology, the entrails of sheep, Elliot Waves, Modern Portfolio Theory or any other similarly irrelevant psychological crutch. Here opinion, as always, is divided. Technical experts like John Bollinger have declared — with almost reluctant boldness — that for the U.S. stock market, “things could hardly be more bullish.” Other pundits ranging from George Soros to perma-bear Nouriel Roubini argue that we are in the eye of the financial hurricane, and that the worst is yet to come. Meanwhile, gold buffs happily point out that the yellow metal now is outperforming the S&P 500 over the past 12 months — just like they knew it would all along.
Of course, making predictions is a tougher game than actually making money from them. It’s the difference between standing in the batter’s box, and trying to hit a curve ball, as opposed to just commentating on events from behind home-plate.
The lesson? If you know of a money manager who has made money consistently in markets over the last 18 months, shoot her and stuff her.
She is a rare bird, indeed…
“Nothing focuses the mind like a hanging.”
— Samuel Johnson
Like a criminal confronting his imminent hanging, governments across Europe in recent months have been reluctantly forced to focus on the uncomfortable reality of their out-of-control fiscal spending. It turns out the Greek bailout was just the beginning of the end. Although neither are members of the eurozone, new governments in both the United Kingdom and Hungary suddenly discovered that their fiscal house was in greater disarray than they had first believed.
The good news is that just within the last six weeks, there has been a sea-change in attitudes of many European governments toward their relentless spending habits. “Denial” and “Anger” are slowly yielding to “Acceptance” in mourning the passing of the boondoggle that was the European welfare state.
Europe’s State of Play
While the headlines trumpet on the fiscal irresponsibility of PIGS like Greece, it turns out that “responsible” governments like the United Kingdom were scarcely better.
The slow creep of government in the United Kingdom over the past 13 years of the Labor government’s rule under Tony Blair and Gordon Brown has been as relentless as it has been surreptitious. The services that the U.K. government provides to its citizens are close to ludicrous. Among my favorites: baby massage classes for all new mothers; free taxi transportation for all middle school students who live farther than two miles away from school in Devon; and state-of-the-art climbing walls to keep neighborhood kids off the streets — and away from their homework.
But it’s the cultural change that has been most nefarious. “Doing nothing” has become socially acceptable, even among the educated classes. Consider the case of a 50-something judge I know of. Perfectly healthy, he has been “on benefit” for the last seven years. He receives well over 50,000 GBP ($72,500) a year while the U.K. government pays the rent on his house in Richmond, a tony suburb of London. His malady? His wife has lost all sexual interest in him. Today, his routine consists of seeing a pretty young psychologist once a week (compliments of government healthcare, of course) — visits he squeezes in between trips to the National Ballet, where he is a season-ticket holder. Under a progressive labor government, being a wussy now counts as a debilitating illness. No wonder there is little incentive for your average Brit to pry herself away from the Telly.
Signs that the public sector in the United Kingdom has spiraled out of control abound. Public sector wages have soared in the past decade. Ten years ago, you’d have to look long and hard to find an administrative public sector job that paid more than 40,000 GBP ($58,000). Now, the starting point seems to be around 120,000 GBP ($174,000) — plus generous benefits. Meanwhile, the basic salary for a banker in the City of London rarely exceeds 100,000 GBP ($145,000). Yet it is the evil “private sector” that is bearing the entire burden of the economic slowdown — job losses, pay cuts, and de-leveraging process — even as government employees spend their days in meetings giving each other raises.
The State of Play in the United States
As Irwin Seltzer pointed out yesterday at The Henry Jackson Society here in London, if you set the basic indicators of the macroeconomic health of Greece, the United Kingdom and the United States alongside each other, but took off the labels, you’d be hard-pressed to tell the difference among them.
Seltzer failed to point out one big difference, though. Both Greece and the United Kingdom’s new government now realize that their fiscal profligacy can’t go on. Former Greek prime ministers suddenly are finding themselves in poorly lit rooms, interrogated about their undeclared wealth and property. Newly minted British Prime Minister David Cameron is warning Brits that their lives will change substantially as a result of deep government spending cuts.
Yet, there is no similar sense of urgency on the part of the White House. Never having met a problem that couldn’t be solved by a committee of “top experts,” President Obama has set up “The National Commission on Fiscal Responsibility and Reform” to address government spending. Yet, back in the real world, government spending is spiraling out of control and economic advisor Larry Summers is floating the prospect of a second stimulus package. More obscure Keynesian professors are wielding their pens in the Huffington Post arguing (with a straight face, no less) that “Payments on Treasury securities are a matter of data entry, not a financial burden.” Unlike on the rest of planet earth, in Keynes’ (and Obama’s) world, life is one big economic free lunch.
What Is to Be Done?
For all the hand wringing by pundits and politicians, the solution is surprisingly simple — but not easy. If all the diets that work can be reduced to four words — “eat less and exercise” — then the equivalent for the United States is: “Cut spending and raise taxes.”
If real “change you can believe in” is to happen, here’s what it will look like:
Step one: “The situation is much worse than we expected. ”
Step two: “We have to take radical — and painful — action.”
This is exactly what happened in crises-ridden Hungary last year. It’s what is happening in Greece today. And it’s the road the United Kingdom’s new government is about to embark upon.
In contrast, the impetus for any serious government spending cuts in the United States is essentially zero. After all, this is tough work — and can be taken on only by the political equivalent of a kamikaze pilot. Plus, it’s hard to look cool doing it. It’s only taken two weeks in office for the boyish 43-year-old British Prime Minister David Cameron to start looking his age. And Obama can’t risk ruining his youthful profile for that coveted spot on Mt. Rushmore.
The good news, according to Seltzer, is that people in the United States — in contrast to the government — are getting fed up. Although deficits were already out of control under Bush, no one really got that excited about it. Now, thanks to the Obama administration’s off-the-charts profligacy, they have. The irony is that in a White House chock full of expert committees, former Harvard Presidents (Larry Summers) and Stanford Nobel Prize Winners (Steven Chu), it’s the great unwashed of the Tea Party movement that is the last and best hope of the United States.
As Winston Churchill observed: “The Americans will always do the right thing… after they’ve exhausted all the alternatives.”
Let’s hope he’s right.
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