Fed, FDIC among agencies warning lenders about interest-only and option adjustable-rate mortgages.
December 20, 2005: 2:39 PM EST
WASHINGTON (Reuters) - U.S. bank regulators issued proposed guidance Tuesday telling mortgage lenders they should take caution with innovative new mortgage products that may strain the finances of borrowers and banks as interest rates rise.
"While innovations in mortgage lending can benefit some consumers, the agencies are concerned that these practices can present unique risks that institutions must appropriately manage," bank regulators said in a statement accompanying the proposal.
The guidance targets interest-only and payment option adjustable rate mortgages and the practice of pairing exotic loans with second mortgages and reduced documentation for borrowing.
The proposal was issued by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration.
Regulators proposed that banks assess a borrower's ability to repay a loan with the higher rates and balances that kick in after an introductory "teaser" period.
They also called on banks to be sure they have adequate capital and loan loss reserves on hand as buffers against potential losses because such loans are untested in a "stressed environment."
The agencies further said banks should make certain borrowers have sufficient information to understand loan terms and risks.
Financial institutions have two months to comment on the proposals.
Interest-only mortgages, in which the borrower pays only the interest due, and option adjustable-rate mortgages, which allow borrowers to pay less than the interest due, have joined adjustable rate mortgages as ways borrowers can reduce monthly payments when they buy a house.
Some lenders are waiving detailed documentation to speed the borrowing process. Lenders are also approving second loans simultaneously to keep the primary mortgage under the rate cap for loans that can most easily be sold into secondary markets, thus ensuring a lower interest rate.
Tuesday, December 20, 2005
Monday, December 19, 2005
The Billionaire Pessimists Club
We've heard many times from Warren Buffet about the difficult road ahead for the U.S. economy - the dollar, the perils of living in Squanderville, and the ascendant Sharecropper Society are his most notable objections to the rosy picture painted by Wall Street economists and government officials.
Even Mr. Buffet's much younger, slightly richer, sometimes side-kick, and occasional bridge buddy Bill Gates has been rather down on the dollar lately due to rapidly accumulating debt and the plethora of promises made by the U.S. government.
George Soros and Jim Rogers of Quantum Fund fame are bearish on Bush economic policies and bullish on commodities, respectively. Both of these views bode ill for the American way of life as it has been known for the last half century. That is, the American way of life for most of the citizenry - for the upper few percent of the populace, rising energy and raw material costs are more than offset by a reduced tax burden.
Sir John Templeton has been predicting a U.S. real estate disaster for some time now, and Bill Gross at Pimco has likened the current state of affairs to Rome burning, and much worse.
What do all these gentlemen have in common?
They are all billionaires, they all speak freely, and they all have very serious concerns about the course that the nation's economy has charted.
Is anyone listening to them?
Very few - clearly, not enough. Maybe if there were more billionaires out there talking about issues like this, they could really make a difference. But who? Don't look for the Walton clan of Wal-Mart fame to start talking, or Larry Ellison of Oracle, or Michael Dell of Dell. They don't want to ruin the good thing they all have going.
And certainly don't look for Oprah Winfrey or Donald Trump - they are likely weak on macroeconomics in general and global imbalances in particular.
Just when it looked like the outspoken "Billionaire Pessimists Club" was beginning to lose their momentum, along comes Richard Rainwater.
Richard who?
Good question. Appearing in the current issue of Fortune Magazine, meet Richard Rainwater, billionaire pessimist, dour survivalist, peak oil alarmist, and new hero to this humble blog:
Richard Rainwater doesn't want to sound like a kook. But he's about as worried as a happily married guy with more than $2 billion and a home in Pebble Beach can get. Americans are "in the kind of trouble people shouldn't find themselves in," he says. He's just wary about being the one to sound the alarm.
Rainwater is something of a behind-the-scenes type—at least as far as alpha-male billionaires go. He counts President Bush as a personal friend but dislikes politics, and frankly, when he gets worked up, he says some pretty far-out things that could easily be taken out of context. Such as: An economic tsunami is about to hit the global economy as the world runs out of oil. Or a coalition of communist and Islamic states may decide to stop selling their precious crude to Americans any day now. Or food shortages may soon hit the U.S. Or he read on a blog last night that there's this one gargantuan chunk of ice sitting on a precipice in Antarctica that, if it falls off, will raise sea levels worldwide by two feet—and it's getting closer to the edge.... And then he'll interrupt himself: "Look, I'm not predicting anything," he'll say. "That's when you get a little kooky-sounding."
Rainwater is no crackpot. But you don't get to be a multibillionaire investor—one who's more than doubled his net worth in a decade—through incremental gains on little stock trades. You have to push way past conventional thinking, test the boundaries of chaos, see events in a bigger context. You have to look at all the scenarios, from "A to friggin' Z," as he says, and not be afraid to focus on Z. Only when you've vacuumed up as much information as possible and you know the world is at a major inflection point do you put a hell of a lot of money behind your conviction.
Such insights have allowed Rainwater to turn moments of cataclysm into gigantic paydays before. In the mid-1990s he saw panic selling in Houston real estate and bought some 15 million square feet; now the properties are selling for three times his purchase price. In the late '90s, when oil seemed plentiful and its price had fallen to the low teens, he bet hundreds of millions—by investing in oil stocks and futures—that it would rise. A billion dollars later, that move is still paying off. "Most people invest and then sit around worrying what the next blowup will be," he says. "I do the opposite. I wait for the blowup, then invest."
The next blowup, however, looms so large that it scares and confuses him. For the past few months he's been holed up in hard-core research mode—reading books, academic studies, and, yes, blogs. Every morning he rises before dawn at one of his houses in Texas or South Carolina or California (he actually owns a piece of Pebble Beach Resorts) and spends four or five hours reading sites like LifeAftertheOilCrash.net or DieOff.org, obsessively following links and sifting through data. How worried is he? He has some $500 million of his $2.5 billion fortune in cash, more than ever before. "I'm long oil and I'm liquid," he says. "I've put myself in a position that if the end of the world came tomorrow I'd kind of be prepared." He's also ready to move fast if he spots an opening.
His instincts tell him that another enormous moneymaking opportunity is about to present itself, what he calls a "slow pitch down the middle." But, at 61, wealthier and happier than ever before, Rainwater finds himself reacting differently this time. He's focused more on staying rich than on getting richer. But there's something else too: a sort of billionaire-style civic duty he feels to get a conversation started. Why couldn't energy prices skyrocket, with grave repercussions, not just economic but political? As industry analysts debate whether the world's oil production is destined to decline, the prospect makes him itchy.
"This is a nonrecurring event," he says. "The 100-year flood in Houston real estate was one, the ability to buy oil and gas really cheap was another, and now there's the opportunity to do something based on a shortage of natural resources. Can you make money? Well, yeah. One way is to just stay long domestic oil. But there may be something more important than making money. This is the first scenario I've seen where I question the survivability of mankind. I don't want the world to wake up one day and say, 'How come some doofus billionaire in Texas made all this money by being aware of this, and why didn't someone tell us?'"
Global imbalances, the U.S. dollar, unsound fiscal policies, raging commodities markets, a real estate crash, and Rome burning all seem to be manageable, but an economic tsunami as the world runs out of oil?
That sounds like something that we should keep an eye on.
Even Mr. Buffet's much younger, slightly richer, sometimes side-kick, and occasional bridge buddy Bill Gates has been rather down on the dollar lately due to rapidly accumulating debt and the plethora of promises made by the U.S. government.
George Soros and Jim Rogers of Quantum Fund fame are bearish on Bush economic policies and bullish on commodities, respectively. Both of these views bode ill for the American way of life as it has been known for the last half century. That is, the American way of life for most of the citizenry - for the upper few percent of the populace, rising energy and raw material costs are more than offset by a reduced tax burden.
Sir John Templeton has been predicting a U.S. real estate disaster for some time now, and Bill Gross at Pimco has likened the current state of affairs to Rome burning, and much worse.
What do all these gentlemen have in common?
They are all billionaires, they all speak freely, and they all have very serious concerns about the course that the nation's economy has charted.
Is anyone listening to them?
Very few - clearly, not enough. Maybe if there were more billionaires out there talking about issues like this, they could really make a difference. But who? Don't look for the Walton clan of Wal-Mart fame to start talking, or Larry Ellison of Oracle, or Michael Dell of Dell. They don't want to ruin the good thing they all have going.
And certainly don't look for Oprah Winfrey or Donald Trump - they are likely weak on macroeconomics in general and global imbalances in particular.
Just when it looked like the outspoken "Billionaire Pessimists Club" was beginning to lose their momentum, along comes Richard Rainwater.
Richard who?
Good question. Appearing in the current issue of Fortune Magazine, meet Richard Rainwater, billionaire pessimist, dour survivalist, peak oil alarmist, and new hero to this humble blog:
Richard Rainwater doesn't want to sound like a kook. But he's about as worried as a happily married guy with more than $2 billion and a home in Pebble Beach can get. Americans are "in the kind of trouble people shouldn't find themselves in," he says. He's just wary about being the one to sound the alarm.
Rainwater is something of a behind-the-scenes type—at least as far as alpha-male billionaires go. He counts President Bush as a personal friend but dislikes politics, and frankly, when he gets worked up, he says some pretty far-out things that could easily be taken out of context. Such as: An economic tsunami is about to hit the global economy as the world runs out of oil. Or a coalition of communist and Islamic states may decide to stop selling their precious crude to Americans any day now. Or food shortages may soon hit the U.S. Or he read on a blog last night that there's this one gargantuan chunk of ice sitting on a precipice in Antarctica that, if it falls off, will raise sea levels worldwide by two feet—and it's getting closer to the edge.... And then he'll interrupt himself: "Look, I'm not predicting anything," he'll say. "That's when you get a little kooky-sounding."
Rainwater is no crackpot. But you don't get to be a multibillionaire investor—one who's more than doubled his net worth in a decade—through incremental gains on little stock trades. You have to push way past conventional thinking, test the boundaries of chaos, see events in a bigger context. You have to look at all the scenarios, from "A to friggin' Z," as he says, and not be afraid to focus on Z. Only when you've vacuumed up as much information as possible and you know the world is at a major inflection point do you put a hell of a lot of money behind your conviction.
Such insights have allowed Rainwater to turn moments of cataclysm into gigantic paydays before. In the mid-1990s he saw panic selling in Houston real estate and bought some 15 million square feet; now the properties are selling for three times his purchase price. In the late '90s, when oil seemed plentiful and its price had fallen to the low teens, he bet hundreds of millions—by investing in oil stocks and futures—that it would rise. A billion dollars later, that move is still paying off. "Most people invest and then sit around worrying what the next blowup will be," he says. "I do the opposite. I wait for the blowup, then invest."
The next blowup, however, looms so large that it scares and confuses him. For the past few months he's been holed up in hard-core research mode—reading books, academic studies, and, yes, blogs. Every morning he rises before dawn at one of his houses in Texas or South Carolina or California (he actually owns a piece of Pebble Beach Resorts) and spends four or five hours reading sites like LifeAftertheOilCrash.net or DieOff.org, obsessively following links and sifting through data. How worried is he? He has some $500 million of his $2.5 billion fortune in cash, more than ever before. "I'm long oil and I'm liquid," he says. "I've put myself in a position that if the end of the world came tomorrow I'd kind of be prepared." He's also ready to move fast if he spots an opening.
His instincts tell him that another enormous moneymaking opportunity is about to present itself, what he calls a "slow pitch down the middle." But, at 61, wealthier and happier than ever before, Rainwater finds himself reacting differently this time. He's focused more on staying rich than on getting richer. But there's something else too: a sort of billionaire-style civic duty he feels to get a conversation started. Why couldn't energy prices skyrocket, with grave repercussions, not just economic but political? As industry analysts debate whether the world's oil production is destined to decline, the prospect makes him itchy.
"This is a nonrecurring event," he says. "The 100-year flood in Houston real estate was one, the ability to buy oil and gas really cheap was another, and now there's the opportunity to do something based on a shortage of natural resources. Can you make money? Well, yeah. One way is to just stay long domestic oil. But there may be something more important than making money. This is the first scenario I've seen where I question the survivability of mankind. I don't want the world to wake up one day and say, 'How come some doofus billionaire in Texas made all this money by being aware of this, and why didn't someone tell us?'"
Global imbalances, the U.S. dollar, unsound fiscal policies, raging commodities markets, a real estate crash, and Rome burning all seem to be manageable, but an economic tsunami as the world runs out of oil?
That sounds like something that we should keep an eye on.
Sunday, December 18, 2005
Nope -- we're too gloomy
It's chic to be down on the market. But positive omens abound -- not the least of which is pessimism
December 17, 2005: 8:57 AM EST
By Andy Serwer, FORTUNE editor-at-large
NEW YORK (FORTUNE) - During the darkest days of October -- when the S&P 500 dropped below 1200 and became mired there -- life got a little scary for bulls like Tobias Levkovich.
"There were some anxious moments," acknowledges Citigroup's chief U.S. equity strategist, who had predicted that the markets would rise nicely in 2005, "but you ask yourself, 'Has anything really changed?' And if the answer is no, you stay the course." With the S&P 500 now returning a tidy 6 percent for the year as of presstime, it appears that staying the course was the right move.
Of course, to some nattering nabobs, the good news is actually the bad news. The higher stocks go, the handwringers argue, the further they must fall. Well, I'm not buying it. And Levkovich makes a pretty compelling case that it's best to keep the tiller steady again in 2006. For the record, he is calling for the S&P 500 to hit at least 1400 by the end of next year -- that would be an 11 percent gain from here.
Let the doom-and-gloom crowd cluck. I would simply point out that the economy is sailing right along. The latest GDP readings show us expanding at 4.3 percent. Job growth has rebounded despite the miserable hurricane season, and the unemployment rate hovers at a mere 5 percent. Interest rates and inflation remain relatively low. Meanwhile, corporate earnings are coming in according to plan.
Yes, there's terrorism, global warming and bird flu to worry about. But what's a market without fear to balance greed? Plus, there are plenty of potential catalysts for a rally in 2006. The Fed is expected to stop raising interest rates after the first quarter. And Levkovich also argues that energy prices could be lower in 2006 than in 2005.
But is the market overvalued, as Yale's Robert Shiller argues? Levkovich doesn't think so, Professor. "Stocks are, at worst, fairly valued," he says. "And probably they are attractively valued."
Let Levkovich -- who enjoys working some fairly esoteric models -- count the ways. Yes, the S&P 500 is trading about 17 times trailing earnings, which is above the historical norm. But when Levkovich adds the 4.5 percent yield of the ten-year Treasury bond to his 3.5 percent estimate of the risk premium (the return investors expect from stocks over Treasuries) and compares that 8 percent level with historical charts of the market's P/E, he concludes that the S&P 500 is 25 percent undervalued.
Stocks have been similarly undervalued by this measure 87 times, according to his charts. "And every time the market has gained over the next six months and 12 months
Levkovich is undeterred by the angst of the naysayers. In fact, he's encouraged by it. Consider his Citigroup Panic/Euphoria index, a contrarian indicator if there ever was one. It is a deep, dark, black box of eight measures of investor confidence including everything from Nasdaq daily volume as a percentage of NYSE volume and margin debt, to the put/call ratio and gasoline prices.
In early 2000, his contrarian index was go-go green euphoric, reaching peak levels. Right now it's signaling the brightest-red panic (it hit an eight-year low in October). To Levkovich this means there's a 95 percent chance the market will be higher a year from now.
Sure, investors were irrationally exuberant during the bubble years. And that's exactly why the shrewd market players today should be feeling confident. Look at it this way, says Levkovich: "Six years ago we could do no wrong, and everything was possible in the world. Today everything seems exceedingly challenging. We were wrong six years ago. And I think we could very well be wrong today."
On Wall Street, it most often pays not to follow the leader.
December 17, 2005: 8:57 AM EST
By Andy Serwer, FORTUNE editor-at-large
NEW YORK (FORTUNE) - During the darkest days of October -- when the S&P 500 dropped below 1200 and became mired there -- life got a little scary for bulls like Tobias Levkovich.
"There were some anxious moments," acknowledges Citigroup's chief U.S. equity strategist, who had predicted that the markets would rise nicely in 2005, "but you ask yourself, 'Has anything really changed?' And if the answer is no, you stay the course." With the S&P 500 now returning a tidy 6 percent for the year as of presstime, it appears that staying the course was the right move.
Of course, to some nattering nabobs, the good news is actually the bad news. The higher stocks go, the handwringers argue, the further they must fall. Well, I'm not buying it. And Levkovich makes a pretty compelling case that it's best to keep the tiller steady again in 2006. For the record, he is calling for the S&P 500 to hit at least 1400 by the end of next year -- that would be an 11 percent gain from here.
Let the doom-and-gloom crowd cluck. I would simply point out that the economy is sailing right along. The latest GDP readings show us expanding at 4.3 percent. Job growth has rebounded despite the miserable hurricane season, and the unemployment rate hovers at a mere 5 percent. Interest rates and inflation remain relatively low. Meanwhile, corporate earnings are coming in according to plan.
Yes, there's terrorism, global warming and bird flu to worry about. But what's a market without fear to balance greed? Plus, there are plenty of potential catalysts for a rally in 2006. The Fed is expected to stop raising interest rates after the first quarter. And Levkovich also argues that energy prices could be lower in 2006 than in 2005.
But is the market overvalued, as Yale's Robert Shiller argues? Levkovich doesn't think so, Professor. "Stocks are, at worst, fairly valued," he says. "And probably they are attractively valued."
Let Levkovich -- who enjoys working some fairly esoteric models -- count the ways. Yes, the S&P 500 is trading about 17 times trailing earnings, which is above the historical norm. But when Levkovich adds the 4.5 percent yield of the ten-year Treasury bond to his 3.5 percent estimate of the risk premium (the return investors expect from stocks over Treasuries) and compares that 8 percent level with historical charts of the market's P/E, he concludes that the S&P 500 is 25 percent undervalued.
Stocks have been similarly undervalued by this measure 87 times, according to his charts. "And every time the market has gained over the next six months and 12 months
Levkovich is undeterred by the angst of the naysayers. In fact, he's encouraged by it. Consider his Citigroup Panic/Euphoria index, a contrarian indicator if there ever was one. It is a deep, dark, black box of eight measures of investor confidence including everything from Nasdaq daily volume as a percentage of NYSE volume and margin debt, to the put/call ratio and gasoline prices.
In early 2000, his contrarian index was go-go green euphoric, reaching peak levels. Right now it's signaling the brightest-red panic (it hit an eight-year low in October). To Levkovich this means there's a 95 percent chance the market will be higher a year from now.
Sure, investors were irrationally exuberant during the bubble years. And that's exactly why the shrewd market players today should be feeling confident. Look at it this way, says Levkovich: "Six years ago we could do no wrong, and everything was possible in the world. Today everything seems exceedingly challenging. We were wrong six years ago. And I think we could very well be wrong today."
On Wall Street, it most often pays not to follow the leader.
We're still too exuberant
The man who wrote the book on irrational investing says we haven't learned our lesson. I believe him
December 17, 2005: 9:00 AM EST
By Geoffrey Colvin, FORTUNE senior editor-at-large
NEW YORK (FORTUNE) - One of the most important lessons you can ever learn about markets is also one of the easiest to forget: Just because prices are more reasonable than they were doesn't mean they're reasonable. I'm sorry to report that it's absolutely the lesson to keep in mind now that the Dow has hit 42-year highs and crept back up near 11,000.
The preeminent teacher of that lesson is Robert Shiller, a Yale professor with a strong record of thinking independently and being right. His book "Irrational Exuberance," arguing that stock prices were insanely high, appeared almost precisely at their peak in March 2000. Now he has updated the book to reflect 2005 valuations and concludes that, believe it or not, the market is still irrationally exuberant.
How does he come to this conclusion? After all, stocks are generally lower than back in the bubble days, and we've had four years of economic growth to rehabilitate corporate profits. His answer is simple. As he told me the other day, all the competing theories boil down to one easy-to-understand calculation: "The trailing P/E ratio for the S&P composite is still around 25, vs. a long-term average of 15."
That's a huge difference, much greater than what you read about in the newspapers. The commonly cited figures -- a current market multiple of 17, vs. a historical average of 15.2 -- are based on the previous 12 months' earnings. But, as Shiller points out, that's foolish: "Twelve months is kind of short, only a fraction of one business cycle."
So he uses a ten-year earnings average, an approach advocated by Graham and Dodd in Security Analysis, the value investor's bible. And while prices are clearly above the long-term trend any way you cut it, by that measure they are still mountainously beyond normal.
For some people -- I don't want to mention any names, but cast a glance at "Nope -- We're Too Gloomy" -- that conclusion is impossible to accept. So they contort the numbers and cook up theories about why today's prices aren't really as high as they appear. The most significant theory, which surveys show is believed by vast armies of investors, is that stocks aren't as risky as we used to think they were, so they're actually worth more than investors have historically been willing to pay. In other words, we were simply wrong for the past several decades but at last have seen the light, and in that light today's overall market valuations make sense.
Shiller would hoot at that one if hooting were his style. Instead he just mentions that this is "the Dow 36,000 theory." That 1999 book by investing columnist James Glassman and former Fed economist Kevin Hassett, you'll recall, argued that prices would rocket as the populace realized that in the long run, stocks always beat other investments, so they're really safer than conventionally thought.
We must all thank Shiller for reminding us of this prediction from the book: "... a sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier." Or not.
It's easy to make fun of Dow 36,000, but it's more important to recognize that the theory behind it is still at work, and it still doesn't add up. As Shiller points out with voluminous support, it just isn't true that stocks always outperform other investments over long-term periods, and, he says, "there is certainly no reason to think they must in the future." If that's true, then stocks would appear to be just as risky as ever. We are not in a "new era." Math still works the same way. And today's valuations are too high.
No one wants to hear that. It's almost irresistible to believe that after all we investors have endured -- the hellish bear market, the recession, the scandals -- we've emerged from the crucible sadder but wiser, finally willing to face the truth about stock values. But it isn't so. The amazing reality is that we haven't learned our lesson even yet.
December 17, 2005: 9:00 AM EST
By Geoffrey Colvin, FORTUNE senior editor-at-large
NEW YORK (FORTUNE) - One of the most important lessons you can ever learn about markets is also one of the easiest to forget: Just because prices are more reasonable than they were doesn't mean they're reasonable. I'm sorry to report that it's absolutely the lesson to keep in mind now that the Dow has hit 42-year highs and crept back up near 11,000.
The preeminent teacher of that lesson is Robert Shiller, a Yale professor with a strong record of thinking independently and being right. His book "Irrational Exuberance," arguing that stock prices were insanely high, appeared almost precisely at their peak in March 2000. Now he has updated the book to reflect 2005 valuations and concludes that, believe it or not, the market is still irrationally exuberant.
How does he come to this conclusion? After all, stocks are generally lower than back in the bubble days, and we've had four years of economic growth to rehabilitate corporate profits. His answer is simple. As he told me the other day, all the competing theories boil down to one easy-to-understand calculation: "The trailing P/E ratio for the S&P composite is still around 25, vs. a long-term average of 15."
That's a huge difference, much greater than what you read about in the newspapers. The commonly cited figures -- a current market multiple of 17, vs. a historical average of 15.2 -- are based on the previous 12 months' earnings. But, as Shiller points out, that's foolish: "Twelve months is kind of short, only a fraction of one business cycle."
So he uses a ten-year earnings average, an approach advocated by Graham and Dodd in Security Analysis, the value investor's bible. And while prices are clearly above the long-term trend any way you cut it, by that measure they are still mountainously beyond normal.
For some people -- I don't want to mention any names, but cast a glance at "Nope -- We're Too Gloomy" -- that conclusion is impossible to accept. So they contort the numbers and cook up theories about why today's prices aren't really as high as they appear. The most significant theory, which surveys show is believed by vast armies of investors, is that stocks aren't as risky as we used to think they were, so they're actually worth more than investors have historically been willing to pay. In other words, we were simply wrong for the past several decades but at last have seen the light, and in that light today's overall market valuations make sense.
Shiller would hoot at that one if hooting were his style. Instead he just mentions that this is "the Dow 36,000 theory." That 1999 book by investing columnist James Glassman and former Fed economist Kevin Hassett, you'll recall, argued that prices would rocket as the populace realized that in the long run, stocks always beat other investments, so they're really safer than conventionally thought.
We must all thank Shiller for reminding us of this prediction from the book: "... a sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier." Or not.
It's easy to make fun of Dow 36,000, but it's more important to recognize that the theory behind it is still at work, and it still doesn't add up. As Shiller points out with voluminous support, it just isn't true that stocks always outperform other investments over long-term periods, and, he says, "there is certainly no reason to think they must in the future." If that's true, then stocks would appear to be just as risky as ever. We are not in a "new era." Math still works the same way. And today's valuations are too high.
No one wants to hear that. It's almost irresistible to believe that after all we investors have endured -- the hellish bear market, the recession, the scandals -- we've emerged from the crucible sadder but wiser, finally willing to face the truth about stock values. But it isn't so. The amazing reality is that we haven't learned our lesson even yet.
Friday, December 02, 2005
Greenspan: U.S. Deficit May Hurt Globally
By MARTIN CRUTSINGER
AP Economics Writer
Dec 02 1:22 PM US/Eastern
Federal Reserve Chairman Alan Greenspan expressed concerns Friday that America's failure to deal with its exploding budget defict and worldwide efforts to erect trade barriers could disrupt the global economy. Speaking at an economic conference in London, Greenspan said so far the United States has had no problem financing its current account trade deficit, which last year hit a record $668 billion, because of the flexibility of the American economy.
But he said such flexibility would be threatened by rising protectionism, which would increase barriers to the flow of goods and investments across the U.S. border. He also worried about the harm that could be done if the United States and other nations do not get their budget deficits under control.
"If ... the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the adjustment process could be quite painful for the world economy," Greenspan said in his prepared remarks, which were released in Washington.
The London speech represented the second warning Greenspan delivered Friday on the threats posed by rising budget deficits. In an earlier speech, he had said that there could be severe consequences for the U.S. economy if policy-makers do not attack a federal budget deficit that is projected to soar with baby boomer retirements.
In that taped speech to a conference in Philadelphia, Greenspan said that Congress would likely have to make "significant adjustments" in reducing benefits for future retirees. He said it appears the country has promised more than it can afford to deliver in Social Security and especially Medicare payments, given that health care costs have been exploding.
Greenspan, who will step down as Fed chairman after 18 1/2 years on Jan. 31, used both of the Friday speeches to return to themes he has been emphasizing over the past two years.
He said that the looming retirement of 78 million baby boomers will put severe strains on the country's finances and without changes could disrupt the economy by driving up interest rates from the increased government borrowing.
And he said that the nation's huge trade deficits can be financed as long as the country does not jeopardize the flexibility of the U.S. economy in such ways as increasing protectionist barriers.
"If the currently disturbing drift toward protectionism is contained and markets remain sufficiently flexible," Greenspan said, then a rise in Americans' savings rates and other adjustments needed to reduce the U.S. trade deficit should proceed without problems.
Greenspan was in London to attend his final meeting of finance ministers and central bank president of the world's seven largest economies.
In addition to their normal discussions of the global economy, the Group of Seven finance officials were going to honor Greenspan with a retirement party, including a dinner Friday night, during the meetings.
In the Philadelphia speech, which had been taped earlier, Greenspan urged Congress to act quickly so that the baby boomers will have time to adjust to potential benefit cuts.
Greenspan did not outline what benefit cuts should be considered but in the past he has endorsed proposals such as raising the age at which retirees can draw full Social Security benefits.
"The likelihood of growing deficits in the unified budget is of especially great concern because the deficits would drain a correspondingly growing volume of real resources from private capital formation and cast an ever-larger shadow over the growth of living standards," Greenspan said.
"In the end," he warned, "the consequences for the U.S. economy of doing nothing could be severe."
In a brief mention of current economic conditions, Greenspan said that the economy had delivered a "solid performance" so far in 2005. "And despite the disruptions of hurricanes Katrina, Rita and Wilma, economic activity appears to be expanding at a reasonably good pace as we head into 2006," he said.
However, he said the positive short-term outlook for the economy was occurring against a backdrop of concern about the government's long- term fiscal health.
"Our budget deficit will substantially worsen in the coming years unless major deficit-reduction actions are taken," Greenspan said, echoing comments he made most recently in an appearance Nov. 3 before Congress' Joint Economic Committee.
He again called for Congress to reinstate budget rules that expired in 2002 that required any future increases in benefit payments or cuts in taxes to be paid for by cutting government spending in other areas _ or by increasing taxes.
AP Economics Writer
Dec 02 1:22 PM US/Eastern
Federal Reserve Chairman Alan Greenspan expressed concerns Friday that America's failure to deal with its exploding budget defict and worldwide efforts to erect trade barriers could disrupt the global economy. Speaking at an economic conference in London, Greenspan said so far the United States has had no problem financing its current account trade deficit, which last year hit a record $668 billion, because of the flexibility of the American economy.
But he said such flexibility would be threatened by rising protectionism, which would increase barriers to the flow of goods and investments across the U.S. border. He also worried about the harm that could be done if the United States and other nations do not get their budget deficits under control.
"If ... the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the adjustment process could be quite painful for the world economy," Greenspan said in his prepared remarks, which were released in Washington.
The London speech represented the second warning Greenspan delivered Friday on the threats posed by rising budget deficits. In an earlier speech, he had said that there could be severe consequences for the U.S. economy if policy-makers do not attack a federal budget deficit that is projected to soar with baby boomer retirements.
In that taped speech to a conference in Philadelphia, Greenspan said that Congress would likely have to make "significant adjustments" in reducing benefits for future retirees. He said it appears the country has promised more than it can afford to deliver in Social Security and especially Medicare payments, given that health care costs have been exploding.
Greenspan, who will step down as Fed chairman after 18 1/2 years on Jan. 31, used both of the Friday speeches to return to themes he has been emphasizing over the past two years.
He said that the looming retirement of 78 million baby boomers will put severe strains on the country's finances and without changes could disrupt the economy by driving up interest rates from the increased government borrowing.
And he said that the nation's huge trade deficits can be financed as long as the country does not jeopardize the flexibility of the U.S. economy in such ways as increasing protectionist barriers.
"If the currently disturbing drift toward protectionism is contained and markets remain sufficiently flexible," Greenspan said, then a rise in Americans' savings rates and other adjustments needed to reduce the U.S. trade deficit should proceed without problems.
Greenspan was in London to attend his final meeting of finance ministers and central bank president of the world's seven largest economies.
In addition to their normal discussions of the global economy, the Group of Seven finance officials were going to honor Greenspan with a retirement party, including a dinner Friday night, during the meetings.
In the Philadelphia speech, which had been taped earlier, Greenspan urged Congress to act quickly so that the baby boomers will have time to adjust to potential benefit cuts.
Greenspan did not outline what benefit cuts should be considered but in the past he has endorsed proposals such as raising the age at which retirees can draw full Social Security benefits.
"The likelihood of growing deficits in the unified budget is of especially great concern because the deficits would drain a correspondingly growing volume of real resources from private capital formation and cast an ever-larger shadow over the growth of living standards," Greenspan said.
"In the end," he warned, "the consequences for the U.S. economy of doing nothing could be severe."
In a brief mention of current economic conditions, Greenspan said that the economy had delivered a "solid performance" so far in 2005. "And despite the disruptions of hurricanes Katrina, Rita and Wilma, economic activity appears to be expanding at a reasonably good pace as we head into 2006," he said.
However, he said the positive short-term outlook for the economy was occurring against a backdrop of concern about the government's long- term fiscal health.
"Our budget deficit will substantially worsen in the coming years unless major deficit-reduction actions are taken," Greenspan said, echoing comments he made most recently in an appearance Nov. 3 before Congress' Joint Economic Committee.
He again called for Congress to reinstate budget rules that expired in 2002 that required any future increases in benefit payments or cuts in taxes to be paid for by cutting government spending in other areas _ or by increasing taxes.
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