This is our solution to the current crisis? A war between the young and the old?

It’s clear that the next stage in the global financial crisis/Great Recession/painfully slow recovery is a war between the young and old. In the United States, for example, sequester has left payments to the older generation under Social Security and Medicare largely untouched while leading to a wave of cuts to Head Start across the country. In Spain unemployment among the population as a whole was 27% in the first quarter. But for the youngest Spaniards who might be looking for work—16 to 24—the unemployment rate is above 50%.

It shouldn’t be any surprise that the next stage in this crisis—and I’d call everything from the U.S. mortgage meltdown to the current worsening recession in the EuroZone part of a single crisis—is about demographics.

Because I think the roots of the entire crisis lie in demographics. Debt and demographics fit together in really toxic ways, I’m afraid, that go a long way to explaining the current mess.

And I find that awfully depressing. If the cause of the global financial crisis, the Great Recession, the ongoing euro debt crisis, and the very slow economic recovery in the United States are all the result of an aging world, the global economy is likely to show both slow growth and destructive volatility for a long time. There’s very little we can do about the aging of the world’s population. And on the record so far we’re handling the transition to an aging world and its effects really, really badly.

This crisis is going to be even worse than it needs be, if our “solution” is to pit the old and the young against each other. Read more

Slower growth in China is necessary to avoid a bust–but it will reshape the investing landscape

Okay, I know that news that China’s economy grew at a slower than expected 7.7% rate in the first quarter—coupled with worries about a deepening recession in much of the EuroZone and that the U.S. economy might itself be slowing—knocked the stuffing out stocks on Monday, April 15. And that the China news looks like it has broken the momentum of the recent rally, at least for a while. Believe me, I’m not fond of drops of this magnitude.

But…

In slightly longer-term I think this slowing in China’s growth rate is good news.

You see I think it’s intentional. (Which means that a return of fears about an unintentional hard landing aren’t justified.) China’s government is trying to slow its growth rate because its afraid of setting off another bout of real estate speculation, of increasing the flow of hot money into China’s economy, and of the rising tide of borrowing and debt in China especially at the local level.

Investors around the world who had decided that they could count on China revving up its economy again to 9% or 10% growth were indeed disappointed. They’d placed their bets, especially in the commodities sector, based on those expectations. And when those expectations weren’t met they sold and sold.

But the only way China could meet those expectations would be to go back to the old days of stimulus, stimulus, stimulus based on massive spending on infrastructure and other hard assets financed by loans that stood almost no chance of being repaid.

China faces a choice—a slowdown today or a crash tomorrow. And I think that China’s new leaders have picked “slowdown.”

Now like most medicine this one isn’t the tastiest thing to swallow. Read more

The world’s central banks run out of credit with the financial markets

Last week, on Thursday July 5, three of the world’s central banks moved virtually simultaneously to stimulate the global economy. And financial markets shrugged. (See my post http://jubakpicks.com/2012/07/05/global-central-banks-move-to-stimulate-their-economies-and-financial-markets-yawn-at-best-heres-why/ )

I think that “shrug” marks an important new stage in the torturously slow recovery from the global financial crisis and the Great Recession. It indicates that financial markets now agree that although central bank intervention, especially by the U.S. Federal Reserve, stabilized the global financial system, central banks are now relatively powerless. The next stages of the recovery are about deleveraging to reduce the huge debt load distributed throughout the global economy and then demand creation.

And central banks are simply not very well suited to either of those tasks. It’s normally up to central governments and fiscal policy to make moves that might accelerate progress at this stage of the recovery. But very few governments are in a position to take forceful fiscal action and in even fewer countries is there a political consensus that such action is necessary.

If I’m right, we’re headed for more years of a recovery that at times is going to be so painfully slow that it won’t feel much different from recession.

In this post I’m going to lay out, briefly, my view of where we are, where we’re going, and what kind of investment strategies might work best in what is likely to be a very tough investing environment for years. Read more

ECB lowers collateral standards signaling that stress is still rising in European banking sector

Watch what they do and not what they say, if you want to track the trend in the euro debt crisis.

This morning’s headlines from Rome, where the leaders of Germany, France, Italy, and Spain have just completed a mini-summit in advance of next week’s full European summit, are full of calls to action.

“There was an agreement between all of us to use any necessary mechanism to obtain financial stability in the EuroZone,” Spanish Prime Minister Mariano Rajoy said in the post-meeting press conference.

“I absolutely agree with what everyone else here has said–to devote 1% of the GDP of the European area additionally to growth, to efficiency in growth and to investment. That is a genuine signal that we need,” said Germany Chancellor Angela Merkel. (That 1% of GDP amounts to about 130 billion euros ($164 billion.)

Sounds like we might be on an upward track, right?

Well, in the world of actions and not words, today, the European Central Bank agreed to accept lower-rated asset-backed securities as collateral for loans to European banks. Asset-backed securities, including those backed by commercial mortgages, auto loans, and consumer finance loans, will now be eligible as collateral as long as they are rated at least BBB. In the Standard & Poor’s credit ratings system BBB is one grade above BBB-, the lowest investment grade rating, and just two grades above a speculative rating of BB+. The central bank will apply a haircut to these lower-rated credits so, for example, $100 in BBB-rated asset-backed securities could serve as collateral for just $84 in bank borrowing. But make no mistake about it, today’s action is a major expansion of the kinds of collateral that the central bank will accept.

Why is this important? Read more

Don’t fight the Fed (and the ECB and the Banco Central do Brasil and the People’s Bank of China) is good advice most of the time–here’s why it won’t work out quite so well in 2012

Don’t fight the Fed. It’s an important piece of Wall Street wisdom built on the often-repeated power of changes in the Federal Reserve’s policies on interest rates and the money supply to overwhelm all other financial market trends. When interest rates are headed down and the money supply is headed up,  most of the time, stocks will head up too.

Not always, of course, since the Fed itself can get overwhelmed by a global financial crisis here or a euro debt crisis there that can lead to a situation where the real economy doesn’t respond to the Fed’s monetary prodding.

But the saying is true frequently enough so that aligning your investment strategy with Federal Reserve policy makes sense most of the time.

So what about when it isn’t just the Federal Reserve that’s lowering interest rates and pumping money into U.S. economy, but the European Central Bank pursuing the same course in Europe, and the Banco Central do Brasil in Brazil, and, just beginning but accelerating, the People’s Bank of China in China?

Is this flood of cash enough, by itself, to push stocks higher in 2012—no matter what the real global economy is doing? Traders and investors have started 2012 by answering that question with an emphatic Yes. January’s rally in U.S., European, and emerging market stocks is based on a belief that the huge wave of cash that the world’s central banks have unleashed—or are about to unleash—on global economies will send stock markets higher and set economies to growing faster.

Let me give you two reasons why the global version of Don’t fight the Fed won’t work out quite as well as the current optimism suggests this time around. Read more