Darwin's Finance » Emerging Markets

The Common Thread Between the Housing Collapse, the Euro Crisis and Millions of Americans – Debt

Darwin — Mon, 17 May 2010 01:34:16 +0000

It’s amazing when you think of it. Virtually every major financial crisis of late has involved some sort of issue with debt. And there are millions of financial crises brewing in American households too:

The US housing market collapsed precipitously. No, not because Goldman Sachs sold a complex derivative to European clients which is garnering all the media attention these days, but because of lax underwriting standards and the realization that homeowners were unable or unwilling to repay their debt.
Greece unraveled taking the rest of Europe with it because of two types of debt – existing debt that the world viewed as unlikely to be rolled over at reasonable rates (I called it here)…and the debt of future obligations to a massive public sector without enough future tax revenues to cover. With the likes of hairdressers getting a government-sponsored FULL pension in their 50’s for life because it’s considered hazardous work (Ouch, those nasty chemicals), it’s no wonder that creditors/investors (endearingly referred to as a pack of wolves by European leadership) scoffed at the initial modest austerity measures and said “no way, show us more cuts”. Tax evasion in Greece is so pervasive that while only 300 swimming pools were reported, satellite imagery estimated there were actually 17,000 in an area that requires increased tax payments. Greeks are now resorting to covering their pools with tarps to avoid the satellites rather than just paying the tax (CNBC). This type of behavior and sense of entitlement coupled with the street protests over austerity measure has not helped the case for the bailout of first, Greece and now, the Euro.
US Households aren’t exactly the poster-child for fiscal restraint from either standpoint – existing debt or future debt obligations.

Do You Need an Austerity Plan?

As uncomfortable as introspective self-assessment and criticism is, the answer for many people reading this is a resounding “Yes”. Similar to a government running a deficit during a recession which is then (in theory) supposed to be eliminated and turned into a surplus during boom times, many individuals and families rightly take on some long-term debt to fund say, a college education or a new home purchase with the thinking that over time, these debts are eliminated and benefits are incurred as a result of that upfront spending – i.e. higher income through a degree, a place you can call home with some potential for capital appreciation to boot, etc.

The problem is, much like western governments have done for decades, not only is there a deficit spending during recessions, but at all times good and bad. So, in the individual example above, the debt doesn’t stop at a degree and a home. It then extends into new car debt, credit card debt, buying a new flat-screen for no money down and no payments for 12 months.

Next, there’s the future debt obligations. Similar to US states and municipalities making promises of lifetime pensions and healthcare for public workers, there’s just not enough future income to cover it. Politicians are ignoring the issue and kicking the can down the road because the one who finally tries to turn it around has limited their chances of reelection (Governor Christie in New Jersey ring a bell?). So, for individual Americans, these future obligations include retirement and your kids’ 529 college plan to fund before you know it.

Debt is a Universal Killer

We all know this. We’ve had it pounded into our heads. If you’re watching, you’re seeing it unfold before your eyes in the US and EU, while emerging economies continue to fund our lifestyles by buying our sovereign debt and storing as reserves.

What is it about debt that we just continue to ignore? The Depression generation was notoriously frugal and cautious with their money – and many of them died multi-millionaires while living the life of a pauper as a result. Meanwhile, subsequent generations have become increasingly liberal with their fiscal restraint to the point that we will be known by our progeny as the Debt Generation.

Some of the things that have likely contributed to the trend include how much easier it is to get access to unsecured credit these days, coupled with a new generation of young adults that grew up seeing how their parents didn’t live within their means.

What To Do About the Debt Threat

Just like our family’s doing, it may be high time to make a thorough assessment of current debt load and future obligations matched with a conservative estimate of likely cash inflows over time. As ugly as the picture might look, have you taken out a canvas and painted this picture?

3 Lessons I Learned from the Greek Riots and Market Panic

Darwin — Sat, 08 May 2010 13:11:27 +0000

The World is a Very Small Place

As the New York Times so eloquently envisioned in the Web of Debt infographic, as Greece goes, so does the rest of Europe due to the incestuous relationships of virtually every large bank. And lest we don’t forget, much of Europe, and the rest of the world for that matter, is still paying the price for the US export of toxic mortgage instruments to their banks. Likewise, US markets suffered yesterday as it became clear that we’re not entirely de-linked back from Europe either. It’s a small world. Who would have thought a year ago that riots in Greece could cause US investors to lose billions in a day? But as Greece found little interest in their bonds, the speculators pounced. It just puts into perspective that markets are complex, nobody has it all figured out and ALWAYS lurking around the corner is another crisis that could very well impact holdings in the US you may have thought were insulated.

Don’t Touch That Trading Account!

Much like many of my friends and family who panicked and sold off all stock investments at the bottom in March 2009, many investors saw the S&P500 down almost 10% in a single day and said, “Get me out of here before it gets worse!”. Within minutes, markets returns to relative normalcy (back to the down ~3% on the day from earlier in the afternoon) and they in essence sold at the bottom – and they were probably buying back in on Friday at a higher price. Personally, I made a volatility trade which had me up over 20% in minutes, but alas, I didn’t sell and it came back to earth within minutes.

Now, many trading experts recommend you put stop-limit orders in place which will automatically trigger stock sales in the event your shares drop to a certain level so you don’t lose more. Well, as a result, investors lost Billions yesterday on what may have actually been an error. As outlined in this CNBC article, since so many traders had order in to trigger if the market dropped say, 5%, even though it just dipped below for a few minutes, millions of trades were executed which probably shouldn’t have been – and then shares rose back to levels above those sales.
All this supports the notion that a) most retail investors probably shouldn’t be “traders” and b) while buy-and-hold failed over long periods in the past decade, at least during shorter periods of crisis and volatility, retail investors are probably best off making more thoughtful, strategic investments, rather than trying to react to daily events.

This Could be the US within Years

Let’s see…Greece is having trouble with unfunded liabilities, runaway debt and constituents that demand they live off the public largess while much of the world recognizes that the current situation as unsustainable. I don’t see how the US is much different. While there are rosy projections that we’ll eventually be decreasing our deficit over the next few years if all goes well, what’s clear even in the most optimistic government models is that in 2030 and beyond we have a runaway situation. We’re seeing states and municipalities struggling to control debt and most of it stems from the overly generous pension and healthcare obligations they’ve made to generations of public-sector workers that is unsustainable. While the private sector has cut jobs, real wages and forced increased employee contributions to benefits for a decade, public workers have pretty much maintained the status quo as if they live in a vacuum. I can’t blame the workers for doing they best they can for their families, but politicians and fiscal oversight decision makers have some tough choices ahead of them. Cut the lavish spending now or face default later due to the generational debt we’ve burdened future generations with. When the time of reckoning comes for the US – we may very well see public workers, school teachers and city employees rioting in Washington.

As far-fetched as it sounds now, are we really that different from the Greeks?

Greece Looking To Sell Bonds to US Investors – Are You Kidding?

Darwin — Wed, 07 Apr 2010 10:38:18 +0000

The Greek economy appears to be very much the welfare state to me. I don’t see innovation and exports coming out of Greece, but I see a lot of public union strikes over their insistence that excessive pay, pensions and subsidies continue as if they live in a complete vacuum.

Since Europeans have lost their appetite for funding Greece’s debt, the next stop is Us investors. While Greece may want to blame Easter (yeah right!) on the tepid interest in their debt, the reality is investors are saying “not so fast”. According to the Financial Times, Greece is looking to sell 5-10 Billion Dollars in bonds to US investors to roll over its debt to existing creditors. The 10-yr benchmark yield stands at 6.5%.

HairDressing is Hazardous Work? Full Pension at 50?

Seriously, on the same day the US is learning of a mine explosion in west Virginia that killed 25 workers, hairdressers in Greece are considered to be employed in a hazardous industry that requires early retirement (NYTimes) and they enjoy a full pension at age 50.

Verbatim:

“The law… also covers radio and television presenters, who are thought to be at risk from the bacteria on their microphones, and musicians playing wind instruments, who must contend with gastric reflux as they puff and blow.”

While there’s a large contingent of Americans that would gladly “puff and blow” just for a paycheck, let alone a guaranteed full pension at 50, this is the world Greeks live in. It’s absurd and I want no part of supporting this lunacy. At its most basic level though, even at yields of 6.5%, I’m just not attracted to Greece as an investment. I can easily buy a high yield ETF or US corporate bonds from blue chip names which would bring both a better credit rating and diversification to my existing portfolio. And while many US municipalities are in trouble, I even view muni bond ETFs as a safer alternative – and they’re tax free to boot!

It is a free market after all, and given the right yield, there will eventually be adequate demand to roll over this debt, but I wouldn’t touch Greek debt even at double this yield. The situation simply seems untenable to me and eventually investors will balk at the modest austerity measures proposed.

What About You?

Would you Invest in Greece?

At What Yield?

Why Do We Demonize Outsourcing?

Darwin — Wed, 10 Feb 2010 22:59:45 +0000

I read with interest a rather lengthy and angry comment chain on this recent post from Get Rich Slowly, one of my favorite blogs. Essentially, a guest poster highlighted how she’s outsourced several things in her life that most of us do ourselves ranging from cooking to virtual assistants. I can understand how most people don’t identify with this mentality now, but I believe in 10-15 years the same article may not raise an eyebrow.

People, let’s be honest here. We all outsource parts of our lives.

If you go to Jiffy Lube, you outsource doing your own oil changes. When you get a haircut, you are outsourcing a job you could do yourself. Many people rely on landscapers to do their lawns. Two generations ago that was unheard of. Our grandparents all mowed their own lawns. Why? Because someone else can do it a) better b) cheaper or c) because you just don’t want to do it. You just take these tasks for granted now and say, “Well, that’s not really outsourcing”. Well, it is.

So, we’re all guilty as charged.

It just comes down to personal preferences. I don’t outsource much of what the author does, but I understand the perspective.

“Theory of Comparative Advantage”

It’s the way the world works. The sooner people understand it and stop resisting it, everyone would understand outsourcing is an efficient and appropriate activity in the vast majority of cases. This goes not only for personal activities, but applies to the corporate setting as well. Should the US still be in textiles and assembling circuitry? No, we outsource that to Asia as we’ve become more of an innovator/knowledge economy and shifted away from industrial manufacturing. This isn’t a welcome message to someone who lost their job to outsourcing. But this is a force that cannot be stopped. People must adjust (see How to Avoid a Layoff) and accept this evolving reality.

Regarding paying someone in a developing country 1/10 of what an American would demand for the same job, is that really any less outrageous than paying an American 10 times more to do the same job someone else could do? Seriously, if you’re paying someone in the US to perform a virtual task or a task that requires very little special training/experience that could be done anywhere in the world, you’re overpaying for no reason.

Is this exploitation?

Let’s consider the alternative – poverty, starvation, rape, genecide, slavery. These are some pretty harsh terms but look around. These are all alive and well around the world (actually, 4 of these are within the US still as well), but the more the world is “flattened” by spreading technology, opportunity, jobs, technology, etc., the more these horrific human conditions are diminished. Without stereotyping by naming countries, it is still common practice for a man to rape a 7 year old girl on her way to school with the belief that he can “transfer” his HIV condition to her and cure himself and it is still acceptable to sentence a woman to death for being raped because she dishonored her family. As women especially, but men as well, begin to earn a decent wage with the advent of virtual work and technological progress, the standard of living improves and more “western” behaviors and beliefs begin to take hold. Given that the US isn’t especially welcome in much of the world, it’s tough to argue that a transition toward a western mindset and economy isn’t beneficial to much of the world.

This isn’t exploitation. This is opportunity.

2009 Global Stock Market Returns – Every Country ETF Ranked

Darwin — Mon, 04 Jan 2010 12:49:45 +0000

Following the most tumultuous investment environment many have seen in their life, it’s worth reviewing the 2009 stock market performance for equities globally. Interestingly, the US (ticker SPY) ended up toward the bottom of the list from an annual performance standpoint. Reason being, while the US declined ~50% from its peak, many emerging market stock exchanges declined 75% or more. As such, when it became evident that at least a mild economic recovery was in hand and crisis was averted, these emerging market economies rocketed back with massive gains from the pivot bottom, which was around March 2009, but still showed as nice gains on the full year 2009. Without further ado:

2009 Stock Market Performance:

163%   IDX Market Vectors Indonesia Index ETF
130%   TKF Turkish Investment Fund
128%   RSX    Market Vectors Russia ETF Trust
126%   EWZ   Ishares Msci Brazil Index Fund
124%   ISL     First Israel Fund
109%   INP Ipath Msci India Index Etn
105%   HAO Claymore AlphaShares China Small Cap Index
104%   IF     Indonesia Fund
103%   EPI   WisdomTree India
90%   CH    Chile Fund
89%   GXG Global X/InterBolsa FTSE Colombia 20 ETF
86%   SGF    Singapore Fund
84%   IFN    India Fund
81%   EWT Taiwan Index Fund
77%   KEF    Korea Equity Fund
73%   EWY Ishares Msci-south Korea Index Fund
69%   EWS Ishares Msci Singapore Index Fund
63%   EWC Ishares Msci Canada Index Fund
61%   TTF    Thai Fund
60%   EWD Ishares Msci Sweden Index Fund
58%   IRL   New Ireland Fund
58%   EWO Ishares Msci Austria Index Fund
56%   EZA    Ishares Msci South Africa Index Fund
53%   MAY Malaysia Fund
44%   MXF   Mexico Fund
41%   SNF    Spain Fund
41%   EWN Ishares Msci Netherlands Index Fund
38%   EWU Ishares Msci United Kingdom Index Fund
28%   EWQ Ishares Msci France Index Fund
28% SPY   SPDR S&P 500 (ETF)
27%   EWL Ishares Msci Switzerland Index Fund
24%   EWG Ishares Msci Germany Index Fund
21%   EWI   Ishares Msci Italy Index Fund
9%   JEQ Japan Equity Fund

If some of the 2009 returns for these emerging markets ETFs stirred your interest, check out this review on Frontier Markets which are even more volatile and speculative than the more established western and emerging markets exchanges. Here’s a mid-year snapshot of stock market returns if interested in seeing how things shaped up in the back half of 2009.

2009 Stock Market Returns YTD from Around the World – Shocking!

Darwin — Wed, 11 Nov 2009 12:02:15 +0000

This emerging markets ETF list is illuminating in that while many of these same ETFs were the worst performers of 2008, they are now the strongest performers of 2009, especially compared to developed nation stock markets. While historical stock market returns are no guarantee of future results, it is instructive to evaluate which stock markets rebounded strongly in the post-crash environment compared to some that have remained stagnant. I’ve also included major industrialized market economies for comparison. As a reference for the stated return for each country, I’ve listed out a predominant ETF representing the requisite exchange, region, basket of stocks or whatever best represents the particular country’s equity markets. Sorted in order of highest performing first, here are the 2009 stock market returns by country 2009 YTD (UPDATE: See Full-Year 2009 Market Returns):

135% RSX    Market Vectors Russia ETF Trust
122% EWZ   Ishares Msci Brazil Index Fund
116% TKF   Turkish Investment Fund Inc
96%   IF     Indonesia Fund
96%   GXG   Global X/InterBolsa FTSE Colombia 20 ETF
96%   EWS    Singapore Fund
93%   HAO   Claymore AlphaShares China Small Cap Index
92%   INP   iPath MSCI India Index ETN
92%   INP   Ipath Msci India Index Etn
76%   IDX   Market Vectors Indonesia Index ETF
76%   ECH    iShares MSCI Chile Investable Mkt Idx
73%   EWO   Ishares Msci Austria Index Fund
72%   EIS     iShares MSCI Israel Cap Invest Mkt Index
67%   EWD   Ishares Msci Sweden Index Fund
66%   IRL   New Ireland Fund
65%   ISR    iShares MSCI South Korea Index
65%   EWY   Ishares Msci-south Korea Index Fund
63%   EWT   iShares MSCI Taiwan Index
53%   EWM   iShares MSCI Malaysia Index
49%   EWC   Ishares Msci Canada Index Fund
48%   EZA    Ishares Msci South Africa Index Fund
46%   EWW   iShares MSCI Mexico Investable Mkt Idx
42%   EWN   Ishares Msci Netherlands Index Fund
40%   EWP    Spain Fund
39%   EWU   Ishares Msci United Kingdom Index Fund
30%   EWQ   Ishares Msci France Index Fund
27%   EWI   Ishares Msci Italy Index Fund
24%    SPY   SPDR S&P 500 (ETF)
23%   EWL   Ishares Msci Switzerland Index Fund
21%   EWG   Ishares Msci Germany Index Fund
2%      EWJ   iShares MSCI Chile Investable Mkt Idx

2009 Stock Market Returns, especially in emerging markets, have been very volatile by historical measures following the financial collapse of 2008 and a follow-through into 2009 that resulted in complete capitulation the likes of which hasn’t been seen in decades. Following the March 2009 lows, stocks have rocketed back, many of them leveraged off of a US rally with triple digit returns in just 6 months. For pure speculation/trading near term on further explosive growth in emerging markets, there are even leveraged ETFs for emerging markets, one of which up 190% for the year. But that’s an anomaly to have a leveraged ETF up that much over a long period of time given the decay in value due to daily rebalancing. The only way that occurs is a prolonged upward trend with few or no downward corrections along the way.

Recall that during the March capitulation, investors fled risky assets into Treasuries which in turn strengthened the US Dollar causing the gold-dollar correlation to break down for the first time in recent history. At that time, investors were so nervous that they were actually accepting negative yields on short term maturities just to maintain liquidity. As this was unprecedented and unsustainable in my view, I then utilized a short Treasury ETF which worked out quite well given the recent return to risky assets. Additionally, I still have long term positions in a high yield corporate bond ETF at a 12% yield and locked in an 8.5% tax-free yield in a high yield municipal bond ETF. What we’re seeing now is a prolonged weak dollar trend which has boosted all weak dollar ETFs – see how to play this trend with silver-platinum-gold ETFs and currency ETFs which are much easier to trade than relying on the futures market.

It’s handy to have this massive ETF list at your disposal for future reference Ã¢â‚¬â€œ bookmark this page or subscribe with the SHARE Button below!

(UPDATE: See Full-Year 2009 Market Returns)

2009 Stock Market Returns – Emerging Markets in Triple Digits

Darwin — Mon, 21 Sep 2009 02:10:13 +0000

2009 Stock Market Returns around the world have been anything but steady following the financial collapse of 2008 and a follow-through into 2009 that resulted in complete capitulation the likes of which hasn’t been seen in decades. Following the March low, stocks have rocketed back, many of them leveraged off of a US rally with triple digit returns in just 6 months. Earlier in the year, I had updated on 2009 stock market returns by country YTD June showing the US at a mere 3% return vs. several emerging market returns exceeding 50%. Well, rather than doing another YTD with a rather random 9.6 month window to look at, I thought it would be instructive to take a look at 6 month returns of several major bourses – both developed and emerging markets. The 6 month window not only roughly matches the same window as my last update, but also happens to start shortly after the global market resurgence began – so we can all feel bad (myself included) about the triple digit gains we could have been enjoying if we had participated in some of these emerging market ETFs in 2009. You’ll see that even some of the developed market indices had great returns as well. Rather than reporting index returns per se, I used the best proxy ETF I could find for various markets since it’s handy to have this massive ETF list at your disposal for future reference – bookmark this page!

(UPDATE: See Full-Year 2009 Market Returns)

2009 Stock Market Returns: By Highest Return prior 6 Month Period

% Return Ticker Country ETF

159.60%   TKF Turkish Investment Fund
144.00%   IDX Market Vectors Indonesia Index ETF
122.50%   IF     Indonesia Fund
113.40%   IRL   New Ireland Fund
106.50%   INP Ipath Msci India Index Etn
104.10%   EPI   WisdomTree India
93.30%   SGF    Singapore Fund
92.50%   HAO Claymore AlphaShares China Small Cap Index
92.30%   IFN    India Fund
86.80%   EWO Ishares Msci Austria Index Fund
85.20%   MXF   Mexico Fund
85.00%   RSX    Market Vectors Russia ETF Trust
84.30%   EWS Ishares Msci Singapore Index Fund
75.10%   SNF    Spain Fund
74.70%   EWY Ishares Msci-south Korea Index Fund
74.40%   ISL     First Israel Fund
72.60%   GXG Global X/InterBolsa FTSE Colombia 20 ETF
71.70%   TTF    Thai Fund
71.30%   EWZ   Ishares Msci Brazil Index Fund
70.20%   EWI   Ishares Msci Italy Index Fund
69.40%   EWD Ishares Msci Sweden Index Fund
69.00%   KEF    Korea Equity Fund
64.10%   EWN Ishares Msci Netherlands Index Fund
58.60%   EWT iShares MSCI Taiwan Index
58.50%   EWC Ishares Msci Canada Index Fund
58.20%   EZA    Ishares Msci South Africa Index Fund
56.30%   MAY Malaysia Fund
55.20%   EWU Ishares Msci United Kingdom Index Fund
52.80%   EWQ Ishares Msci France Index Fund
50.00%   EWG Ishares Msci Germany Index Fund
47.80%   EWL Ishares Msci Switzerland Index Fund
47.00%   CH    Chile Fund
44.50%   JEQ Japan Equity Fund
39.11% SPY   SPDR S&P 500 (ETF)

Analysis: Just as we saw during the 2008 stock market returns list where the US lost the least, during the rebound, the US has gained the least. While investors thought they were “daring” in tipping their toe back in to US stocks during March/April, the real volatility (and in this case, the real gains) have come from international stocks – primarily emerging markets. There were certainly a few surprises in there for me, most notably, that the proverbial BRIC countries didn’t have a terribly strong showing at the top of the list. I was also surprised to see how much stronger some of the old Europe countries performed compared to the US. Where from here? Who knows, but I don’t think any equities portfolio is complete these days without at least some exposure to some of the developed and developing markets here outside the US.

(UPDATE: See Full-Year 2009 Market Returns)

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