Market Update – March 18, 2010

Please continue to help the blog grow.  Forward this to others who may be interested.  At the bottom of the article, you can find out how to sign up for the email service.




I’ve written today’s blog in two parts.  Part 1 is a summary of a great letter that the Chairman of Oaktree Capital Management sent to his clients yesterday.  I think it’s incredibly clear thinking.




Part 2 contains just a few news pieces that are related to stories that I’ve written about in the last few days.




Here’s what I’ve read…




Part 1: Howard Marks’ Letter

Howard Marks, the Chairman of Oaktree Capital Management, wrote a piece today that I totally agree with.  He wrote about our political problems.  Here’s a summary of his key points:

1. We have long term problems – deficits, debt level, healthcare costs, Social Security and Medicare.  We must address them as soon as possible.






2. The pain of fixing the problems will be felt in the short-term; the benefit will be long-term.  Unfortunately, politicians are concerned with the short-term as they want to be re-elected.






3. Both the NY Times (which some people consider Democratic) and the WSJ (which some people consider Republican) recently ran editorials stating that politics appear more toxic – there is no room for compromise.






4. One of today’s greatest stumbling blocks is the lack of bipartisanship.  Marks said that the party that has control feels like they have a mandate and “bipartisan” means that the other party should give in.  The party that is out of office feels that it is their duty to use all possible procedures to protect their rights.






5. When power is split, both sides feel some responsibility to solve problems.  When one party has all the power (like today), neither party feels any obligation to compromise.






6. It’s hard to believe that either side is arguing out of principle.  Rather they seem to be fighting to win elections.  There also seems to be a desire to vote against anything which would allow the other side to claim any accomplishment.






7. At this point, both sides seem unyielding.  Conservative Republicans want politicians to stick to a “no-tax” pledge; liberal Democrats want their politicians to prevent any spending cuts for domestic programs.






8. This is like a situation where a seller says that he’ll never sell for less than $20 and a buyer says that he’ll never buy for more than $18.  Principles are great, but we might all be better off if the deal was done at $19.






9. It’s hard to see how the deficit is going to be narrowed when we can’t raise taxes or cut spending.  Same with Social Security…if we can’t raise taxes or delay benefits, it’s unlikely to be solved.  Similar situations exist at the state level with underfunded pensions.

10. This isn’t about parties.  The Republicans are frustrating the Democrats now.  When the Republicans eventually return to power, there’s little doubt that the Democrats will do the same to them.




11. An important part of leadership is compromise, finding solutions and explaining to the voters why compromise is necessary.




12. The fact that you don’t have to speak for hours in order to filibuster means that you now have to have 60 votes in order to move forward.




13. If getting re-elected is what matters, politicians will never do the right thing – because these aren’t easy decisions.




14. We need to elect moderates.




15. Marks quoted Hank Paulson who recently said that at the family level, we’re working to leave the next generation better off than we are; but at the national level, we’re living for the present and we’re ignoring the problems which will saddle the next generation.




Part 2: Follow Up on Some Stories




People are crazy. Here are some numbers from a Rasmussen survey that describe how people react to the recession:

48% have decreased the amount they are saving for retirement!  (I don’t know if they have given up on retirement or they are making less.)

12% have increased the amount they are saving

35% are saving the same amount




53% say that the economic conditions will result in delaying retirement; of those people, 64% say the delay will be more than three years




41% say they have moved their money into less risky investments as a result of the recessions




30% of Americans believe that it is possible for a middle-income family to save for a secure retirement




Greece to leave EU?

Harvard Professor Martin Feldstein suggested that Greece’s austerity plan will fail and the country may need to leave the EU in order to solve their crisis. (If Greece left the EU, they could devalue their currency.)  Greece has promised to cut its deficit down to 3% of GDP by 2012.  The European Central Bank President (Jean-Claude Trichet) said Greece’s strategy is convincing and it’s absurd to speculate that Greece may leave the EU.  Who are you going to trust…a Harvard professor or a French guy that hyphenates his name?

S&P affirmed its BBB+ credit rating of Greece, although the longer term outlook remained negative. This move increased confidence that Greece can raise $27 billion in the next two months.




Fed Almost Done Buying MBS

The Fed will end its purchases of $1.25 trillion of mortgage backed securities.  Currently, 30 year fixed rates are around 5.05%.  Interestingly, mortgage demand is very low.  No one knows what the impact will be when the Fed stops their purchases.




China’s Currency

The World Bank recommended higher interest rates and a stronger currency for China.  The IMF director also said that the Chinese currency was valued too low.
________________________________________
If you want to be on my email list:

1.      go to www.leedsonfinance.com

2.      toward the top right corner is a place to click on for email service—click and enter your email address
3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.