A Bear Too Far

If everyone is entitled to only one truly brilliant insight during his or her career, the New York Fed‘s President Tim Geithner may be pushing his luck.

Geithner is a career civil-servant who took over at the New York Fed in 2003. A few years ago he made banks standardize their credit default swaps. The result was spectacular. The growth of these swaps has allowed banks to diversify, selling their risk to parties who want it, like hedge funds or others.

Some say that the Fed’s arranged takeover of Bear Stearns was Geithner’s idea. Unlike standardizing swap language, it’s pretty controversial. For example, it encourages investors to relax when they do business with a big dealer. After all, if the Fed is the backstop, why worry?

Tim’s rise has been meteoric. The 46-year old Asian Studies major is now one of the Masters of the Universe. Here’s hoping that his big Bear deal doesn’t prove to be a bridge too far.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Home Sweet Savings

Today we hear about the savings rate. Actually, what we hear about is the growth in personal income and personal consumption. The difference is assumed to be savings. And a whole host of scolds will tell us that we’re just not saving enough.

Earlier I mentioned how the “Great Moderation” has improved our economic security. Another factor in the low savings rate in the US is the high rate of homeownership here.

By convention, my entire mortgage payment is considered to be spending, even though a large portion of that payment may go to pay the loan’s principal. As ownership has risen in the US, more and more people are building equity in their homes. But this trend isn’t captured.

I don’t want to bore you with the numbers. But it’s curious that countries where more people rent their residences have higher savings rates. While real estate may no longer be considered a fool-proof investment, it should still count for something. The scolds just don’t seem to get that.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Hold the Hysteria

Paul Samuelson says to hold the hysteria, and for once, I agree with him.

Samuelson is famous for saying that just because Milton Friedman claimed something doesn’t mean it is automatically false. While I usually find Friedman’s writings much more original and insightful than Samuelson, in this case, they agree.

The core of our problem is housing. People who view the economy as inherently unstable see lower prices leading to more foreclosures leading to more supply leading to more foreclosures. Just as in the depression, the resulting vicious cycle will spread the slump through the economy.

By contrast, Samuelson notes that if lower prices bring more buyers to the market, as appeared to happen last month, then the cycle will be self-correcting. So far, the correction in housing has been unexceptional. If disaster strikes, it will probably come from some source we haven’t yet imagined. I’m betting that it isn’t so different this time.


Douglas R. Tengdin, CFA
Chief Investment Officer
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National Savings, National Shame?

Friday we’re going to hear about the savings rate. And a whole host of economic scolds will berate the US consumer for his profligate ways.

It’s no secret that the savings rate has declined. 25 years ago US workers set aside over 10% of their reported income. Now the rate is about zero—or even negative.

Many observers look at this and only see the wastefulness of the American public. “Goodness,” they exhort. “People should be more careful.”

I look at it another way. People tend to save money when they are uncertain about the future. The savings rate was pretty high from  World War 2 until the early ‘80s, when Paul Volker began to slay the inflation dragon. Since then, during what economists call the Great Moderation, the savings rate has been falling.

By this view, the low savings rate is not a sign of national weakness. Rather, it is an indicator of economic security.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Modern Cassandras?

They’re back. Those disciples of the dismal science, the neo-Malthusians, are knocking on our door. And they won’t go away.

Thomas Mathus was an 18th-century economist who predicted widespread starvation because food production can’t keep pace with population growth.  He was wrong then, and his disciples, who keep banging the same drum, are wrong now.

Because speculators have recently driven the prices of oil, gold, copper, zinc, and other resources to record levels, the “Limits to Growth” crowd predicts that wars, famines, and economic disasters will result. They needn’t worry. The input Malthus failed to consider was human intelligence. As prices rise, ingenious and enterprising people adapt to higher prices by developing substitutes or using the materials more effectively. There’s no reason to think that the current resource crunch is any different.

The neo-Malthusians are often called modern-day Cassandras because, like the Trojan princess, they are always predicting disaster. But the difference is this: Cassandra’s prophecies, although not followed, were accurate. The neo-Malthusians have yet to get one right.


Douglas R. Tengdin, CFA
Chief Investment Officer
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Housing Water Torture

Today we hear more about the housing market. I don’t know about you, but these housing reports are beginning to wear on me. They’re like the drip, drip, drip of a leaky faucet.

Well, today we hear how existing home sales did for the month of February. I’ve got a prediction: they were lousy. Not only is the housing market in the worst recession it has seen since the early ‘90s—and  it’s been that way since late 2006—but the weather was lousy, too. Then you multiply these effects by all the “seasonal adjustment factors” that the government uses to get an annualized number, and February’s number will look terrible.

This is a theme I’ve hit on for a while: housing numbers issued in the dead of winter don’t really mean much. All they say is what we already know. Housing has pulled back.

The one silver lining in this cloud is the stocks of homebuilders. Call it foolish optimism, or bad money chasing good, but the stocks of these companies hit at least a temporary bottom a couple of months ago, and are up almost 50% from their lows. That’s real people putting real money to work. And I’d be surprised if it doesn’t indicate some real activity out there.


Douglas R. Tengdin, CFA
Chief Investment Officer
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The Strong Hand (Part 2)

So how do you strengthen your hand? How do you develop the convictions that will help you weather the storms of market turmoil like we’re experiencing now?

Strange as it may seem, the best ally I’ve ever had in dealing with market volatility has been my kitchen table. Sitting down and working through my numbers, from how much I’m making and saving to how much my kids’ tuition is going to be is the best way to come up with a plan for investing. And the best place to work through those numbers had been my kitchen table.

For one thing, spreading out my papers there means I have to talk about them with my family. For another, having the papers where we’ve got to sit down and eat means a.) there’s going to be an end to this; and b.) fighting should be limited to words alone. No throwing food!

It’s been said that people never plan to fail, but they often fail to plan. By planning around the kitchen table, failure is just not palatable.


Douglas R. Tengdin, CFA
Chief Investment Officer
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The Strong Hand

Winnowing. That’s what the market is doing now. It’s winnowing out the weak players, and rewarding those who are disciplined enough — or bored enough — to avoid panicking just as the market bottoms.

It’s a paradoxical fact, but it’s true: people who fidget and adjust their investment portfolios tend to do worse than the buy-and-hold investor. Studies have shown that just looking at a portfolio too often causes investors to adjust it and underperform the underlying index.

The dictionary defines winnowing as separating the stronger elements from the weaker. In this period of high market volatility, the best thing a lot of investors can do is go take a nap.


Douglas R. Tengdin, CFA
Chief Investment Officer
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The Maestro Speaks

Monday Alan Greenspan, “The Maestro,” told us what he thought the problem is. In a Financial Times op-ed piece Saint Alan says that our financial calculators are just  too simple–if we only had more complex computer models, we never would have gotten into this pickle.

Is he serious? Complexity helped cause this mess. Talk about not seeing the forest for the trees!

By some estimates, we have about $50 trillion of real assets in the world. Factories, land, buildings. But we have about $150 trillion of financial assets. When times are good, lots of people load up on debt and try to exploit the growth with leverage. When times are bad, the assets get sold and the loans paid off. That deleveraging can be really destabilizing. And that’s what’s happening now.

The problem was an excess of leverage combined with a deficit of wisdom. The solution will be fewer loaned dollars, and more common sense.


Douglas R. Tengdin, CFA
Chief Investment Officer
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The Latest Shoe

Okay, so now we know the latest shoe to drop.  One of the oldest firms on Wall Street got caught by a lack of cash, and now it is no more.  Bear Stearns is being acquired by JP Morgan for the princely sum of $2 per share. They’ll play the Good Samaritan and assume all of Bear’s liabilities as well.

When will all this bad news end? When the financial markets finish de-leveraging and stabilize. Right now there’s a lot of borrowing and buying that has to be undone. There are people with cash out there, but they’re on the sidelines, and they’re not opening their checkbooks until things get really cheap. How cheap? It depends on the asset, but from my experience, not a lot further down from here.

Someone once said that the time to buy is when the blood is running in the streets. With Bear Stearns the latest casualty, that time just got a little closer.


Douglas R. Tengdin, CFA
Chief Investment Officer
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