Spectacle!

In America we love spectacle. We love a parade. Especially when someone else is paying for it.

Today all sets will be tuned to the Royal Wedding. Also Twitter feeds, Facebook posts, and blog entries. I counted over 100 Apple App Store applications dedicated to the event, and who knows how many online news stories.

There’s something deeply satisfying about a grand celebration. From graduations to weddings to funerals, they all have similar characteristics: an introductory procession, a series of speeches, and a party (or parties) afterwards. There’s been a lot of nonsense about how the spending will stimulate the English economy, and I suppose it will, temporarily. But as I mentioned when stimulus spending was discussed back in 2009, if you want permanent changes to the economy, you need permanent changes to infrastructure. A once-every-30-year party won’t do that.

But there are some lessons to be learned from the celebration. One has to do with institutional stability. England has had a reigning monarch for the last 1500 years or so, excepting Cromwell’s 10-year Protectorate. Institutions that have been around a long time tend to stay around a long time. The same goes for technologies; and professions.

The celebration tends to validate the event. Here’s hoping it works for William and Kate.

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

Boring Ben

Zzzzzzzz. The Fed is hosting a snooze-fest.

The outcomes of recent Fed meetings have recently been about as exciting as watching paint dry. Month after month we hear the same story: interest rates will remain exceptionally low for an extended period. Recent energy and food price increases are expected to be transitory. The economic recovery is proceeding at a moderate pace. Blah blah blah.

Encouraged by the sleepy character of Fed statements, Ben Bernanke has decided to up the ante by offering a press conference following the meeting. The one yesterday was as boring as the announcement itself, and about as informative. While he doesn’t speak in Greenspan’s tortured prose, his discussions with the press were as animated as the introductory college courses I was forced to sleep through as an undergraduate. Cruel and unusual punishment!

All kidding aside, a boring Fed is exactly what we need. Congress is playing chicken with a $1.5 trillion deficit; US cities are looking at an estimated $20 billion shortfall; Greek two-year notes yield 25%; and the dollar has fallen through its 2009 lows. There are plenty of sources of excitement in the markets.

Ben Bernanke is an open, decent man who believes that opening up Fed policy, with certain caveats, is the best way to run a central bank. The European Central Bank does it; the Bank of England does it; there’s no reason why the Fed can’t. Moreover, Bernanke has continued the trend towards greater openness that began in 1994.

My only concern is what comes after? Bernanke seems ready and able to put us all to sleep. What happens if a more colorful character becomes Fed chair?

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

The Rose of Education

Is education the future?

Economists of all stripes have trumpeted education as a key to improving economic outcomes. Whether it’s literacy, math skills, or technical knowledge, our society has become so technological, they state, that an extensive education is necessary to take advantage of our productive potential.

But this is nothing new. Education has been considered a critical element of any state since Plato wrote The Republic 2400 years ago. In fact, Plato expected that a complete course of education would take about 40 years! It doesn’t look like we’ve gone that far. And Plato noted that the main goal of education was moral, not technical. Nonetheless it is striking that the philosopher noted how a well-rounded education is a key components of a just society.

Fast forward to the Middle East in the late 20th century. Countries across the region invested in educational institutions, calculating that a stream of remittances from skilled expatriates could lift their economies without necessitating the economic “shock therapy” of rapid liberalization. Unfortunately, immigration policies in Europe and the US failed to admit many of these highly skilled graduates. The resultant below-potential earnings of many of these engineers-turned-fruit-vendors contributed to the “Arab Spring” of demonstration, revolt, and regime change, particularly in Tunisia, Egypt, and Yemen.

William Blake wrote that “the modest rose puts forth a thorn.” Education lifts the economic potential of any society. But if the economy fails to utilize these resources, political unrest could be a thorny issue.

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

A Tale of Two Health Care Plans

It was the best of plans, it was the worst of plans.

Everyone agrees that Medicare has to be changed. Why? Put simply, it’s not paying for itself. Outlays are already greater than payroll tax receipts, and a combination of demographics, economics, and technology are expected to make the gap balloon. Over the next ten years, the deficit in Medicare funding is expected to average $340 billion annually, in an economy that should average about $19 trillion. In other words, the funding gap qill be almost 2% of the economy, apart from the additional 2% in Medicare spending. This is not sustainable.

There are two basic approaches to dealing with medical costs. The current law calls for a government-sponsored board of experts to approve or disapprove certain treatments. The Board would be given budget targets and would make recommendations for cost control that would go into effect unless Congress intervenes. Cont control would come from the top down.

The Republican alternative would replace direct payments to providers with health-care vouchers. Taking a page out of Milton Friedman’s book, they propose to devolve cost-control to the consumer, mediated through insurance companies. Consumers would supposedly be able to decide what level of care they want, or can afford. Government payments would be limited.

It’s an honest debate: consumers versus experts. It gets at the heart of the problem. What’s not responsible is to pretend the problem isn’t there, and kick the can down the road.

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

Global Growth Generators

Where will global economic growth come from in the next 40 years?

Right now the world economy is about $75 billion. By 2030 it’s expected to more than double to $180 billion, and by 2050 it could double again to $380 billion. That’s a 4.1% annual growth rate. At the same time, population is only supposed to grow .6% annually to about 9 billion people.

This means that global wealth is increasing like never before. The policies that generate wealth in developing nations are no secret: an expansion of global trade, provision of basic infrastructure to previously marginal populations—like roads, education, and basic healthcare—and technological innovations like cell phones and messaging. It also helps to start with a large, young population. Where will the growth come from?

Not surprisingly, emerging Asia is a key location. China is forecast to have a larger economy than the US in 15 years or so, but India should overtake China in another 15 years. Bangladesh, the Philippines, and Indonesia, Sri Lanka, and Vietnam round out the Asian growth engines. Nigeria and Egypt are also numbered among the fast-growers.

But growth is never smooth. Even as these large populations emerge from poverty and their increasing economic contributions lift us all, potential for conflict, corruption, and political backlash increase. These countries don’t have the institutional stabilizers of the developed world. Nevertheless, the world’s economic future has never been brighter.

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

Right and Left

Why do business people lean right and academics lean left?

It’s not that business people are greedy exploiters and academics are compassionate analysts. And it’s not that business people are practical realists and academics are idealistic dreamers. We’ve all seen plenty of counter-examples to put the lie to these stereotypes.

One possibility has to do with status. In business your status comes from market acceptance. Holding onto your status requires you to compete for consumer acceptance. In academics, status comes from credentials. Achieving higher degrees confers increases in both pay and influence. Maintaining your status means maintaining a good working relationship with the conferring authority, usually a centralized body.

People on the right tend to be distrustful of centralized authority and skeptical of claims of market failure. People on the left tend to see market failures all around and rely on governments to regulate markets. Both sides have a point—but where you stand may depend upon where you sit.

The question is how we handle the inherent conflict. A 50/50 political world isn’t necessarily dysfunctional—it’s more competitive. And healthy debate usually leads to better outcomes. The key is respect. Respect for differences, respect for integrity, and ultimately respect for the process. That’s what’s made the American Experiment prosper thus far.

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

Philadelphoa Story

Chalk up another victim of the recession.

On Saturday the Board of the Philadelphia Orchestra voted to file for bankruptcy. The Orchestra said that their operating balances are dwindling and that without relief they will run out of cash by the middle of May.

The Orchestra has no long-term debt and has an endowment valued at over $110 million, but the endowment is restricted to paying for musician salaries and educational outreach. This is not uncommon among nonprofits, where endowed chairs are funded, in part, by income generated by donated funds. If expenditures are restricted to income and the endowment’s various sub-accounts are invested according to rigid strictures, the Fed’s zero interest rate policy may have claimed an unforeseen victim.

Management claims that it needs bankruptcy protection in order to renegotiate its pension obligations, musician and administrative salaries, and occupancy costs. The musicians union has opposed the filing, noting that they are willing to have the Orchestra use the endowment for operating expenses. That may not be their prerogative, however, if the funds donated with court-approved restrictions.

In any case, it’s very sad that one of the world’s finest symphony orchestras has been reduced to bankruptcy. The “Fabulous Philadelphians” have a storied history and have been a key inspiration for many aspiring musicians. It’s hardly conceivable that they would dissolve, but it’s possible. Honolulu’s orchestra did just that a few months ago. A society has the culture that it can afford. Let’s hope that this isn’t their final song.

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

Downgrade?

Can the US be downgraded?

The philosophical answer is, of course. Three decades ago I heard someone asked a political speaker how a nuclear-tipped ICBM could become obsolete, and he flippantly said, “knock it out with a laser.” When the practical obstacles to such an anti-missile defense were raised, he got philosophical, and said that any weapon can become outmoded.

The point of that discussion is that missile defense and obsolete ICBMs were political issues. S&P’s lowering of the outlook on US debt from negative to neutral reflects a similarly political judgment. They framed their discussion of credit risk in the US in explicitly political terms: they estimated that there is a one-in-three chance that Congress will not reach an agreement on how to address the medium and long-term budgetary challenges by 2013.

Well, I’m shocked. Predictions about Congressional consensus? That must have really strained S&P’s financial analysis models. I wonder: did they conduct extensive district-by-district polling? Did they analyze Congressional leader’s former and current positions and do some trend analysis? Did they even look at historical precedents, like the ’94 Congress, or 1956? When did S&P become political prognosticators?

This reminds me of when a prominent bank analyst started making predictions on municipal finance, or when Ted Turner started evaluating policy at the Vatican. In both cases it was an embarrassment. S&P’s credibility has already suffered from the sub-prime fiasco. They’re now jumping into political waters during a heated budget debate. S&P should stick to financial analysis, and leave politics alone.

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

Of Horses and Riders

Do you bet on the horse or on the rider?

When you evaluate a company, which matters more, the business model and competitive landscape, or the managers that run the company? It’s a question that has plagued analysts for years. For one thing, measuring management effectiveness is difficult. “Hard” skills like use of performance evaluations and budget goal are tough enough, let alone “soft” skills like effective communication and integrity. It’s enough to make many researchers give up on the question.

But that doesn’t mean that the question is meaningless. Intuitively, we know the answer: good management helps companies do better. Just because a skill can’t be quantified doesn’t mean it’s unimportant. A recent study of 20 large textile firms in India introduced key operational practices common in European and American firms. Quality defects fell 50%, inventories fell 40%, and productivity rose 10% in a six month period!

There are lots of reasons that best management practices don’t always get implemented. Protected local industries with captive markets don’t need to improve; an overwhelmed court system means that fraud often goes unprosecuted, so owners limit the management pool to family members where they can exercise control. But the key takeaway is that management matters, and that investing in better management helps everyone.

As global competition and an improving legal infrastructure expand in the developing world, better management and improved profitability should result. This phenomenon is a key reason why global growth is being fueled by better performance in China, India, and Brazil.

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

Understanding the Sell Side

Never mind when or what to buy. Do you know when to sell?

Knowing when to sell a stock or bond out of your portfolio is critical to managing your money. But most people don’t think about it very much. They figure that if you own the right stocks, the rest will take care of itself. A quick survey of the literature comes up empty. And when did you ever see the financial press feature “Stocks to sell in the next year?” But few people have a “forever” investment horizon. Buying a stock ultimately means selling it, sooner or later.

There are as many approaches as there are investment styles: sell the stock when it reaches a price target; set a trailing “stop loss” signal 15% below the stock’s high price; hold the stock as long as its fundamental value continues to rise, rebalancing occasionally; sell when the stock becomes too volatile. The critical issue is to have a plan and stick to it.

The problem is, most of us fall in love with the things we own. People who bet on horses almost always raise the chances of their horse winning once they place the bet. Folks who might value Super Bowl tickets at $500, if given those tickets, wouldn’t sell them for less than $1000. And once people own a stock they invent all kinds of reasons to keep holding it, even if the original premise for buying it is no longer valid.

Selling a stock—especially one that’s fallen—is hard. It invokes feelings of regret and failure that most of us would rather not face. But mistakes are inevitable in life. It’s only as we face them that our portfolios can advance, and that we can grow as people.

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