First as Tragedy, Next as Farce

Is history repeating itself?

After Greece accepted a bailout and then imposed austerity measures, to European approbation but to domestic riots, is Ireland doing the same thing?

Greece needs to restructure its debt because it borrowed way more than anyone thought it did to pay for an economy where everyone is cheating the system and expects to retire at age 50 or 55. Germans understandably objected to supporting this, so Greece adopted austerity measures in exchange for European support.

Ireland needs support for its banks because in the midst of the financial crisis the Irish government made a plenary guarantee of Irish bank debt. This kept the Euro financial system alive, as most Irish bank debt is owned by other European banks. Since the deal with Greece was penned in May, the biggest purchaser of Irish bank debt has been the European Central Bank.

The problem is that the ECB stopped buying Irish bank debt in October, and that has created a liquidity problem. As a side note, the Irish economy is 170 billion Euros. The three largest banks have three times that in assets. (In the US, the four largest banks total only half of our economy.) Clearly, Ireland needs help supporting its banks.

But help for the Irish banks has come, at the price of government austerity. Again we see protests. Will the government enact these cuts, as Greece, France, and England did, in spite of the protests?

Marx was right. The second round of history is farce.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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direct: 603-252-6509
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First as Tragedy, Next as Farce

Is history repeating itself?

After Greece accepted a bailout and then imposed austerity measures, to European approbation but to domestic riots, is Ireland doing the same thing?

Greece needs to restructure its debt because it borrowed way more than anyone thought it did to pay for an economy where everyone is cheating the system and expects to retire at age 50 or 55. Germans understandably objected to supporting this, so Greece adopted austerity measures in exchange for European support.

Ireland needs support for its banks because in the midst of the financial crisis the Irish government made a plenary guarantee of Irish bank debt. This kept the Euro financial system alive, as most Irish bank debt is owned by other European banks. Since the deal with Greece was penned in May, the biggest purchaser of Irish bank debt has been the European Central Bank.

The problem is that the ECB stopped buying Irish bank debt in October, and that has created a liquidity problem. As a side note, the Irish economy is 170 billion Euros. The three largest banks have three times that in assets. (In the US, the four largest banks total only half of our economy.) Clearly, Ireland needs help supporting its banks.

But help for the Irish banks has come, at the price of government austerity. Again we see protests. Will the government enact these cuts, as Greece, France, and England did, in spite of the protests?

Marx was right. The second round of history is farce.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

All Grown Up (Part 2)

Another sign emerges of Google’s maturity.

The company that popularized “Don’t Be Evil” as a corporate slogan has learned of another way that it is “one of the crowd.” Innovative engineers are leaving for newer start-ups. Google now has 23 thousand employees—4 and a half times more than the 5 thousand it had five years ago. Every day some of its legendary engineers are wooed by Facebook or some start-up that offers simplicity, autonomy, and a chance to get into a new company before its initial stock offering.

The global war for talent is standard fare for large companies. Google is finding that in order to grow it needs to add new talent and stop the exodus of the old. So it is making counteroffers, raising all salaries by 10%, and offering some key employees six-figure retention bonuses.

But often these rear-guard actions are a losing proposition. Programmers attracted to the “small-is-beautiful” ethos won’t stay on when they have to CC twenty-five other team members in order to add a comma to an error message. Of Facebook’s 1700 employees, 10% are Google alumni. A cadre of former colleagues at a smaller, more nimble rival offers a powerful pull.

The solution is to create your own talent. Google already does this by sending representatives to top college campuses, having active Facebook and LinkIn presences, and using headhunters to fill key positions. Eric Schmitt noted recently that Google fills more spots in one week than they have lost to Facebook it its lifetime.

But he’d better be careful. Such comments smack of competitive hubris. Those whom the gods would destroy, they first make proud.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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Giving Thanks

On the eve of the Thanksgiving Holiday, I have a lot to be thankful for.

I’m thankful that Ben Bernanke is running the Fed. The Chairman had made The Great Depression the focus of his academic career. Who knew in February 2006 when he was selected to succeed Alan Greenspan that he would be presiding over a financial crisis that would threaten to create Depression 2.0? Clearly he was the right man for the job.

I’m thankful that New Hampshire’s economy is the strongest in the East and one of the best in the nation. With unemployment at 5.4% our policy mix of low taxes and limited government still boasts one of the best school systems in the country, and it doesn’t depend on oil revenues or Federal subsidies to keep it going.

I’m thankful that my job puts me into daily contact with thoughtful, generous clients who ask good questions and who have stuck with us through rocky times. They’ve trusted Charter to manage their hard-earned funds and it’s an awesome responsibility. We strive continually to prove worthy of that trust.

And I’m thankful for the talented and hard-working group I work with. After almost 30 years in finance around the country and around the world, I can honestly say that this lineup can stand with the best of them. The combination of experience, sophistication, and common sense makes for an outstanding team.

There’s lots more to give thanks for, but it’s always people: family, friends, colleagues with whom I’ve been privileged and honored to share my hopes and challenges. May all your Thanksgivings be so full!

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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The Bonds and the Banks

Greece isn’t Ireland. That’s clear.

Six months ago the global equity markets fell by almost 20% in the wake of the Greek debt crisis. Now, with Irish banks threatening to take down another EU government, the markets have declined maybe 5%. What’s the difference?

One big difference is the nature of the debt. Bank debt is private. It’s never enjoyed the assumption of being risk-free. There’s an implicit assumption that government debt is the perfect credit. Even though tax-evasion is a Greek national sport, and hair-dressers draw a full government pension at age 50 because their work is "arduous," investors buying Greek debt entertained the fiction that this credit could not default.

When Greece disclosed that its deficit was 13% of GDP and its debt came to 200%, that assumption was revised. But the Irish don’t play catch-me-if-you-can with their revenue service. They don’t retire at 50. They do give tax-breaks to pub-singers and poets, but their major problem is the banks. Their banks made real estate loans, and when the "Celtic Tiger" stumbled, crashing property markets wiped bank equity. Now they need Euro-TARP because these banks are bigger than their economy.

So for all their Celtic pride, the Irish will take the bail-out money and shore up their financial system. In the US TARP was a spectacular economic success. Temporary capital infusions shored up confidence in a shaky system and prevented a financial meltdown. There’s no reason to expect otherwise from Ireland.

Sometimes the best way out is by offering a hand up. It looks like the Europeans have seen this.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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“Not In Front of the Kids!”

Who are the grown-ups?

When I was a child, we knew that any uncertain situation would be resolved by the grown-ups. Moving, job-loss, school: they would all be decided by the adults in the room and presented to the kids as a done deal. The same thing is happening in the world right now.

I’ve written before how the global economy will be resolved by China and the US. The other countries can look on if they want to, but the world’s economy really is a bilateral issue. China is the banker, and the US drives the engine.

That’s not to say that the rest of the world doesn’t have issues. It does. The Euro is a big one. Europe has integrated to such an extent that if the Euro-zone breaks up and the currency fails the fallout would be extreme. They can’t de-integrate without dire consequences.

In Europe, the grown-ups are Germany and France. Those two countries account for over half of the Euro-zone’s economy. They will bear the majority of the cost of any bail-out. So they’re the ones who have to decide whether to hold the union together in spite of Greek bonds and Irish banks. For the moment, it looks like their elites are still committed to the integration project that began with the Treaty of Paris in 1951.

But it bears watching. Because while the kids may not make major decisions in the family, they can sure knock things off-track.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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Ramblings on Risk (Part 3)

So what are the different kinds of risk do we face?

Financial risk comes in many varieties, but it boils down to not being able to get your money when you need it.

If an asset can’t be easily converted into cash, that’s liquidity risk. For example, a home may be a great place to live, but it takes a while to sell one. By contrast bank deposits are usually available the same day.

We know about credit risk. That’s the risk that a loan you made won’t come back. Anyone can go broke—companies, cities, people—if they lose enough money. And the main way people lose money is through business risk. Business risk is the risk that people won’t buy your product or service at a price high enough for you to make a profit. If this happens on a large enough scale you’re out of business.

That may be because the inputs cost too much, or because your competitors can undersell you if they have an undervalued currency. You may have currency risk without ever selling overseas. Currencies can fluctuate for lots of reasons, and one of the most common is unexpected changes in interest rates. Interest rate risk affects borrower payments and bond prices.

Which brings us to price risk—the variability in an asset’s value. All these other risks affect asset pricing. As risk goes down, asset prices go up, but return potential goes down, too.

Risk is like a diamond. It’s hard and has many facets. But also like a diamond, it can be a great source of wealth.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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Ramblings on Risk (Part 2)

So how do you control your investment risk?

When you don’t know the future, how do you structure your investments? After all, investing is a bet on the future. The essence of risk management is the admission that we don’t know what the future holds.

The first tool is diversification. By placing small sums in different types of assets in different industries with different payout structures you minimize the chances that a single mishap will overtake your entire nest-egg. Some might cite the financial crisis of 2008 as a counter-example where a 100-year flood seemed to overwhelm every investment. But it didn’t overtake Treasuries—their prices rose.

Diversification is admission of our ignorance about the future. What else can we do? Another approach is to guess. I don’t mean “get a hunch, bet a bunch” sort of guess. I mean construct some reasonable scenarios about the future—guesses—and devote part of your portfolio to each one. That is, diversify, but not like a shotgun blast is diversified. Focus your investments on different scenarios.

Two years ago I looked at the government’s stimulus and guessed that it would lead to inflation. I was wrong about that. But my investments profited because they were linked to government bonds, which have performed well.

Risk means you might be wrong. Management means limiting your downside. Sometimes risk management actually makes money.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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Ramblings on Risk (Part 1)

What is risk? Inquiring minds want to know!

The second line is not misplaced. It is, of course, the tagline from the National Enquirer, the flagship publication of American Media. American Media plans to file for bankruptcy later this month in a prepackaged Chapter 11 filing. The risks of publishing in the era of the internet, iPad, and smart-phone news caught up with the tabloid producer.

So what is risk? Many economists have tried to define it as the volatility of return. Certainly American Media’s return was volatile—their revenues have declined so much that they can’t make their debt payments. But volatility seems too insipid a term to describe the loss of millions of dollars and hundreds of jobs. A squiggly line doesn’t capture the gut-wrenching fear that risk brings.

Some have described risk as the permanent loss of capital. This seems appropriate. The owners of The Inquirer certainly saw their investment depreciate. But what do they mean by loss? The original cost? The high-water mark? Something else?

Risk is uncertainty. There would be no such thing as risk if everything were known. Intense focus on measurement tools—bell curves, probability, statistics—can obscure the fact that investors can simply be wrong. Markets have a way of consistently finding new ways to make you look like an old fool. In the long run, risk control wins the game.

But this begs the question as to how to control risk. In the end, we don’t know what the future holds. Our investments need to reflect this.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Ramblings on Risk (Part 2)

So how do you control your investment risk?

When you don’t know the future, how do you structure your investments? After all, investing is a bet on the future. The essence of risk management is the admission that we don’t know what the future holds.

The first tool is diversification. By placing small sums in different types of assets in different industries with different payout structures you minimize the chances that a single mishap will overtake your entire nest-egg. Some might cite the financial crisis of 2008 as a counter-example where a 100-year flood seemed to overwhelm every investment. But it didn’t overtake Treasuries—their prices rose.

Diversification is admission of our ignorance about the future. What else can we do? Another approach is to guess. I don’t mean “get a hunch, bet a bunch” sort of guess. I mean construct some reasonable scenarios about the future—guesses—and devote part of your portfolio to each one. That is, diversify, but not like a shotgun blast is diversified. Focus your investments on different scenarios.

Two years ago I looked at the government’s stimulus and guessed that it would lead to inflation. I was wrong about that. But my investments profited because they were linked to government bonds, which have performed well.

Risk means you might be wrong. Management means limiting your downside. Sometimes risk management actually makes money.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net