|
Read Latest >>
Archives >>
|
Investment Commentary
March, 2010
By Richard W. Boyer, CFP, CFA
Greek Tragedy
You may intrinsically have an idea of when a recession begins (when your
neighbors lose their jobs) or when a depression begins (when you lose your
job). You might even feel like you know when it has finally ended (when your
401K has returned to the value it was 2 years ago). But did you know that there
is an organization that is entrusted with announcing when such periods begin and
when they end? Actually they announce when recessions BEGAN and when they ENDED
since it is always a backward looking exercise. Located in Cambridge,
Massachusetts, the National Bureau of Economic Research (NBER) is widely
respected as the authority for such announcements.
If you check out their website (www.nber.org), they list the last four
recessions (including this one) dating back to 1981. They show you which month
each recession began, which month it ended and how many months it lasted. The
recession in which we find ourselves today began in December, 2007 but the NBER
doesn’t list an ending month for this recession because they have not yet
decided it has ended. At 26 months, it is already 10 months longer than any of
the previous three recessions…..and it’s not officially over.
What will determine when it is over? Well, the NBER is not very clear about how
they make that determination. In all fairness, economic indicators are not
always that clear. According to their website, they examine and compare various
measures of broad economic activity including but not limited to employment,
real income and real GDP (Gross Domestic Product).
Industrial production is up. No question about it. GDP increased 5.7% in the
last quarter of 2009 (this was recently revised upward to 5.9%). It will almost
certainly be a healthy increase this quarter. This is consistent with the
endpoint of previous recessions. Manufacturing is slowly beginning to increase
although at a slower pace relative to previous “post-recession” periods. The ISM
(Institute for Supply Management) Index increased in January for the sixth month
in a row.
What has probably kept the NBER from announcing “it’s OVER!” is that real income
is flat (although it has stopped declining) and unemployment is remaining
stubbornly high. An additional 20,000 jobs were lost in January, although the
official unemployment rate remained at 9.7%. The Labor Department stated that
there are 6.1 unemployed workers for every available job opening, up from 3.4
one year ago. Nevertheless, I think the NBER will eventually look back and
proclaim that this most recent recession ended at the end of 2009.
Meanwhile, across the ocean, many economies are not faring
much better. There are several European nations which seem to have the problem
of spending more than they are producing which means they have to borrow money
from other nations (sounds familiar). When a country falls into a recession,
being a debtor nation becomes an even more troublesome issue. I made a passing
reference last month to five countries that are a cause for concern….Portugal,
Ireland, Italy, Greece and Spain. They are also referred to as the PIIGS.
The one getting most of the attention is Greece. Greece all by itself is not a
huge problem. It only has a population of 11 million. To put that in
perspective, Tokyo has a population in excess of 12 million. Greece likes to
spend but apparently is not very efficient about collecting taxes from its
citizens. So instead of getting more efficient about increasing its revenues, it
has simply turned to the world to borrow….which is kind of like your unemployed
cousin telling you he’s having trouble scraping together enough money to take
the family on a cruise, could you spot him $10,000?
But Greece’s problems are a little more complicated than your cousin’s. Back in
the previous century, all the various European countries each issued their own
currencies. There was the French Franc, the German Mark, the Italian Lira,
etc. Greece also had its own currency, the drachma. A little over ten years ago,
27 of the European nations banded together to create one currency, the euro. No
more francs, marks, liras or drachmas. It’s kind of like if Alabama, New York
and California all used one currency. Oh, wait, they do. The Europeans figured
that if 50 states could successfully run an economy with one currency, surely 27
nations could manage. Never mind that they all speak different languages but
that all 50 of the United States speak English (except a couple of the Southern
states).
A few European nations declined the invitation to the one currency
party. Britain still uses the Pound. Sweden still uses the Kroner. But most of
the European nations adopted the euro.
As long as the world economy is humming along nicely, having one currency works
well. Recent economic events, however, are causing a little bit of a strain on
the euro and an even bigger strain on Greece. Prior to adopting the euro, the
economic malaise in Greece would play out a little differently. If Greece spent
more than it earned, it would have to borrow (sounds familiar). If it continued
to spend more than it earned and continued to borrow, it might find itself
without the ability to repay what it had borrowed. One solution is to crank up
the printing presses and print more drachma (sounds familiar). At some point,
excessive printing of currency causes the value of the currency to decline
relative to other currencies. This is not all bad. If the value of the drachma
declined significantly, Greece’s products would become cheaper to foreign
consumers like us. A cheaper currency can actually help countries recover from
their economic problems.
Suppose, for example, a jar of Greek olives normally cost 1 drachma and I could
purchase 1 drachma with $1.00. If the drachma significantly declined in value,
it might eventually reach the point where I could purchase 2 drachmas with $1.00
which would allow me to buy two jars of olives. The devalued currency would make
all Greek products seem less expensive to consumers from other countries. It
would also make products manufactured in other nations more expensive to the
Greek consumers. Greece would soon be exporting more products and importing
fewer products. When I purchase those two jars of olives, I must first take my
dollar and purchase Greek drachmas. If I purchase very many olives, the value of
the drachma would eventually increase, possibly rising back to where it was
before the economic indiscretions. The resulting increase in exports and demand
for the Greek currency would eventually pull Greece out of its economic
doldrums.
So what’s the problem? The problem is Greece is not in charge of printing the
Euro. Although the Euro has recently declined against most currencies, the
healthier economies of countries like France and Germany are keeping it from
declining enough to benefit Greece. And you can bet the countries which are
managing their economy more prudently are not very happy with THEIR cousin who
wants to borrow money to take the family on a cruise (Greece). Meanwhile, not
far away, Spain continues to experience 19% unemployment and a budget deficit
that is above 11% of GDP. Stay tuned. This could get uglier.
You are probably tired of reading about mortgages and foreclosures in my
Investment Commentary every month. So I will only tell you that there were
315,000 new foreclosures in February which completes a string of 12 consecutive
months with over 300,000 foreclosures.
The U.S. has issued a couple trillion dollars in new debt with hardly a hint of
higher interest rates. Industrial production has ticked up (at least
temporarily) with hardly a hint of higher interest rates. Inflation still seems
to be a distant consequence. Although we are reluctant to extend security
duration, at Boyer & Corporon Wealth Management we are relying less on debt from
governments and agencies while adding some yield through corporate bonds and
dividend paying equities.
 Investment advisor firms like BCWM are subject to rigorous regulatory
requirements, both at the federal level, through the Securities and Exchange
Commission (SEC) and at the individual state level.
For example, an SEC-registered firm must have a written policy in place on a
wide range of topics affecting its fiduciary, operational and regulatory
obligations. These written policies must be implemented, and procedures put in
place, to ensure the firm is in compliance with the Investment Advisers Act.
All investment Advisors are also required to appoint a Chief Compliance Officer
(CCO). This individual is responsible for administering the firm's compliance
program. At BCWM, Brian Hackleman is the CCO.
With over 10 years of experience in the financial services industry, Brian's
primary responsibility is to ensure that our systems, processes and data are all
kept compliant with SEC rules and regulations. As the individual who handles all
security transactions for BCWM, he shoulders the responsibility for limiting
account transaction errors.
There is no one-size-fits-all compliance program, however. Each firm must tailor
its policies to its unique set of business activities and services. In addition,
the compliance environment changes constantly and rapidly. A CCO must pursue
ongoing professional development opportunities in order to succeed at their job.
As a member of the KC Compliance Group, Brian meets regularly with other
professionals to stay current on compliance topics and review SEC procedures. He
also attends multiple webinars, seminars and meetings throughout the year. To
give you an idea of the time and dedication involved in Brian's ongoing
compliance education we have provided a list of his 2009 professional
development activities:
Webcast/Webinars/Meetings attended
New Ideas to Jumpstart Your Program with Effective and Workable Forensic Testing
Presented by IA Week & IA Watch
Testimony Concerning Enhancing Investor Protection and Regulation of the
Securities Markets
Presented by Chairman Mary L Shapiro, U.S. Securities and Exchange Commission
Alternative Investment Custody Update
Presented by Charles Schwab
2009 Investment Adviser Compliance Seminar
Sponsored by the Office of the Kansas Securities Commissioner
2009 CCOutreach Regional Seminar
Presented by the Securities and Exchange Commission
Understanding How the SEC's Proposed Custody Rule Changes Will Affect You
Presented by IA Week/IA Watch
Knowledge Forum: Regulatory Challenges Facing Investment Advisors
Presented by Charles Schwab
Best Execution Update for Advisers - Handling Current Compliance Challenges
Presented by Charles Schwab
SEC Compliance Issues - A Discussion
Presented by ByAllAccounts
Insights from the 2009 Investment Management Compliance Testing Survey
Presented by Charles Schwab
Your 90-Minute Guide to Realistic Forensic Testing
Presented by IA Watch
Legislative and Regulatory Reform Proposals: Impacts on the Industry, and
Schwab's Perspective
Presented by Charles Schwab
|
