The Guy Who Called It Right
October 16th, 2008 - 9:22am ET
Nouriel Roubini is one of the few economists who warned about the housing bubble and predicted the financial collapse before it occurred. His alarms — dismissed as extreme by Wall Street nabobs and most economists — turned out to be right. Now he details the scope — and the limits of the global financial rescue plan announced this week.
And he issues an urgent call for a $300 billion right-now stimulus plan — investing in green energy, retrofitting buildings to make them energy efficient, rebuilding infrastructure etc.
He sees a two year recession as inescapable, but argues that we must act now and boldly to avoid a decade long downturn.
Read the piece. This is the guy who called it right while most were still "dancing" to the music, in the immortal words of former Citibank president Charles Prince.
Religion (And Keynes) To The Rescue
Nouriel Roubini
I spent the weekend in Washington attending the International Monetary Fund annual meetings. After last week's crash in stock markets and financial markets — and it was, indeed, a crash, as during the week equity prices fell as much as the two-day crash of 1929 — policy makers finally realized the risk of a systemic financial meltdown. They peered into the abyss a few steps in front of them and finally got religion.
With this newfound fear of God, they started announcing radical policy actions: the G7 statement; the European Union leaders agreement to bail out European banks; the British plan to rescue — and partially nationalize — its banks; the European countries' plans along the same lines; and the Treasury plan to ditch the initial TARP that was aimed only at buying toxic assets in favor of a plan to partially nationalize (aka recapitalize) U.S. banks and broker-dealers.
Here are the main policy actions that will be undertaken:
--Preventing systemically important banks and broker-dealers from going bust, i.e., the U.S. made a mistake letting Lehman fail; so Morgan Stanley and other systemically important financial institutions will be rescued.
--Recapitalization of banks and broker-dealers via public injections of capital in the form of preferred shares (i.e., partial nationalization of financial institutions as is already occurring in the U.K., Belgium, Netherlands, Germany, Iceland and, soon enough, the U.S.) matched by private equity injections.
--Temporary guarantee of bank liabilities: certainly all deposits; possibly interbank lines, along the lines of the British approach; likely other new debts incurred by the banking system.
--Unlimited provision of liquidity to the banking system, and to some parts of the shadow banking system, to restore interbank lending and lending to the real economy.
--Provision of credit to the corporate sector via purchases of commercial paper (certainly in the U.S., possibly in Europe).
--Purchase of toxic assets to restore liquidity in the U.S. mortgage-backed securities market.
--Implicit triage between distressed banks that will be solvent if given liquidity support and capital injection and non-systemically important and insolvent banks that will need to be closed down/merged/resolved/etc.
--Use of the IMF and other international financial institutions to provide lending to many emerging-market economies--and some advanced ones such as Iceland--that are now at risk for a severe financial crisis.
--Use of any other tools that are available and necessary to avoid a systemic meltdown (including implicitly more monetary policy easing as well as, possibly, a fiscal policy stimulus).
At this stage, central banks that are usually supposed to be lenders of last resort need to become the "lenders of first and only resort." Why? Under conditions of panic and total loss of confidence, no one in the private sector is lending to anyone else since counterparty risk is extreme. Private lending will only recover over time.
While most of the economic and financial damage is already done, and the global economy will not be able to avoid a painful recession and a financial and banking crisis, the rapid and consistent implementation of these and other actions will prevent the U.S., European and global economies from entering an even more severe, L-shaped, decade-long stagnation like the one experienced by Japan after the bursting of its real estate and equity bubble.
So, are we close to the bottom of this financial crisis? Financial markets will remain volatile, with significant downside risks, over the next few weeks. This is because:
--Details of these government plans are still very fuzzy, and contain uncertain effects on various asset classes (common shares, preferred shares, unsecured debt of financial institutions, etc.)
--Macro news will surprise on the downside as the economies sharply weaken and contract while fiscal policy stimulus is lagging.
--Earnings news for financial and nonfinancial firms will surprise on the downside.
--The damage done to confidence, and to leveraged investment, is already severe and the process of deleveraging the shadow financial system will continue.
--Major sources of future stress in the financial system remain. These include the risk of a credit default swap market blowout; the collapse of hundreds of hedge funds; the rising troubles of many insurance companies; the risk that other systemically important financial institutions are insolvent and in need of expensive rescue programs; and the risk that some significant emerging-market economies, and some advanced ones too (Iceland), will experience a severe financial crisis.
More aggressive, consistent and rapid implementation of the policy plans will increase the likelihood that risky asset prices will bottom out sooner rather than later and then start recovering. A key policy tool — one that is currently missing in G7 and E.U. plans — is to use fiscal policy to boost aggregate demand.
Indeed, given the current collapse of private aggregate demand, it is urgent to provide a boost to aggregate demand to ensure that an unavoidable two-year recession does not become a decade-long stagnation. Since the private sector is not spending and the first fiscal stimulus plan (tax rebates for households, and tax incentives to firms) bombed, it is necessary now to boost directly public consumption of goods and services via a massive spending program (a $300 billion fiscal stimulus).
The federal government should have a plan to immediately spend on infrastructures and new green technologies. Also, unemployment benefits should be sharply increased, combined with targeted tax rebates only for lower income households at risk, and federal block grants should be given to state and local governments to boost their infrastructure spending (roads, sewer systems, etc.). If the private sector does not/cannot spend, then traditional Keynesian spending by the government is necessary.
It is true that we already have large and growing budget deficits, but $300 billion of public works is more effective and productive than spending $700 billion to buy toxic assets. If such a fiscal stimulus plan is not rapidly implemented, any improvement in the financial conditions of financial institutions provided by the rescue plans will be undermined — in a matter of six months — with an even sharper drop of aggregate demand that will make an already severe recession even more severe.
If Main Street goes bust in the next six months, a short-run rescue of Wall Street will certainly not stop Wall Street from going bust again.
A large fiscal stimulus plan, and a plan to reduce the debt overhang of distressed homeowners, will also ease the political economy of the financial bailout. As the debate in Congress showed, the American public is enraged by a system where gains and profits are privatized while losses are socialized — a welfare system, in other words, for the rich, the well-connected and Wall Street.
Nouriel Roubini, a professor at the Stern Business School at NYU and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.
Mutual-fund investors pull out $52 billion in just the last week
01:00 AM EDT on Friday, October 10, 2008
Investors pulled a record $52.1 billion from U.S.-managed stock and bond mutual funds in the past week, seeking the safety of government-insured bank deposits as the financial crisis worsened.
Shareholders took $43.3 billion from stock funds and $8.8 billion from bond funds in the week ended Oct. 8, according to data released yesterday by TrimTabs Investment Research in Sausalito, Calif. The exodus followed $72.3 billion of outflows in September, the most in a single month. Investors deposited $185.5 billion into bank accounts last month through Sept. 22, TrimTabs said, citing U.S. Federal Reserve data.
“People are scared,” Conrad Gann, TrimTabs’ chief operating officer, said. “This market is different from what we’ve seen before.”
The five largest diversified U.S. stock fund managers, including Fidelity Investments and Vanguard Group Inc., posted an average 28-percent loss this year through Oct. 6, about 2 percentage points worse than the Standard & Poor’s 500 Index, according to Morningstar Inc. Investors mostly switched into fixed-income through August, putting $97 billion into bond funds while withdrawing $74 billion from stock funds, TrimTabs said.
“A lot of our favorite stock funds had financial bets that hurt heavily,” said John Coumarianos, a stock analyst with Chicago-based Morningstar. “Others were heavily weighted in international stocks to boost returns, a move that backfired.”
Stock-fund withdrawals represented 1.3 percent of equity assets, said Brian Reid, chief economist at Investment Company Institute, a Washington, D.C.-based mutual-fund industry organization. During the market crash of 1987, stock fund outflows were 3 percent of assets, the ICI said.
Mutual funds held a total of $11.6 trillion on Aug. 31, including $5.6 trillion in stock investments, $1.8 trillion in bonds and about $4.2 trillion in money-market assets, according to ICI data.
Boston-based Fidelity’s U.S. stock funds lost an average of 32 percent, the most among the group, Morningstar said. The $29-billion Magellan Fund has plunged 44 percent this year through Wednesday, the worst performer among actively managed U.S. stock funds with assets of more than $20 billion, according to Bloomberg data.
“Nine months is a short time to assess properly a fund’s performance,” Fidelity spokeswoman Sophie Launay said in an e- mail. “This is even more relevant in the type of market environment we have seen so far this year, when the market’s higher volatility may cause some long-term investors overwrought with fear to make rash decisions that alter a well diversified portfolio.”
At American Funds, run by Los Angeles-based Capital Group, the average U.S. stock fund declined 28 percent this year. Growth Fund of America, the largest U.S. mutual fund with $179 billion in assets on Aug. 31, fell 33 percent, lagging behind 63 percent of its peers, Bloomberg data show.
Stock funds managed by Vanguard, based in Valley Forge, Pa., and Baltimore’s T. Rowe Price Group Inc. fell an average of 27 percent. At Franklin Resources Inc. in San Mateo, Calif., stock funds dropped 28 percent.
The S&P 500 fell 8.9 percent in September including reinvested dividends, the worst one-month performance in six years. The index has fallen 37 percent this year, and yesterday slipped to its lowest level since April 2003.
Bond mutual funds have fallen 4.5 percent this year, Morningstar data show, as investors have shunned all but the safest government- backed debt.
Top Money Managers
Know Who You Own
10.06.08, 6:00 PM ET
One of the flaws in popular mutual fund ratings and rankings services like Morningstar and Lipper is that the performance analysis is fund-focused rather than manager-focused. Thus, a fund will continue to maintain a favorable rating for a period of time even if the star stock picker responsible for its great performance has moved onto another firm.
For example, Driehaus Emerging Markets Growth Fund (DREGX) currently gets a four-star rating from Morningstar. However, if you check the fund's disclosures you will find out that its lead manager, Howard Schwab, only took the reins in January 2008 after its long-running star stock picker, Emery Brewer, retired. Since the beginning of the year, Driehaus Emerging Markets has underperformed relative to the other emerging-markets funds in its peer group.
James Lowell, Forbes exchange-traded funds columnist and chief investment officer of Newton, Mass.-based Adviser Investments, an investment advisory firm specializing in mutual fund allocations, believes he has devised a better way of uncovering the best funds for his clients. "Our core investment philosophy, put simply, is buy the manager, not the fund," he says.
His new data analysis system, the Ranking Service (TRS), analyzes more than 8,000 managers and more than 27,000 funds quarterly. "The system allows us to see who the best, middling and worst managers are in every asset class, every investing style and capitalization range, and any investment sector," he says. "Not only versus relevant market benchmarks but also as specifically measured against their peer group."
This allows Lowell to track portfolio managers even if they are prone to job hopping.
For example, Lynette Schroeder, portfolio manager of the $576 million Driehaus International Discovery Fund (DRIDX), earns high marks according to TRS, despite having been with her current fund since only 2005. TRS's number crunchers have dug back into Schroeder's past and determined that her risk-adjusted returns have outpaced her peers for years, including stints at previous employers like American Century Investments, and before that, when she was with Driehaus.
"Just as Peter Lynch admonishes stock investors to 'know what they own,' TRS's Advisor Pro service is designed to enable advisers to know who they own--or who they should consider owning," Lowell says.
Over the coming months, Forbes.com's Financial Adviser's Network and TRS will be profiling top managers in various asset classes and investment styles.
Listed below, you will find the top 10 mutual fund managers overall, according to TRS. These men and women are the cream of the crop among mutual fund portfolio managers and are members of Lowell's TRS 100. For more information on TRS rankings and to obtain more detailed analysis of fund managers, visit www.trsreports.com.
1. G. Kenneth Heebner
TRS Score: 14.21
Funds Managed:
CGM Mutual Fund (LOMMX), CGM Realty Fund (CGMRX), CGM Focus Fund (CGMFX), Natixis CGM Advisor Targeted Equity Fund Class A (NEFGX), Natixis CGM Advisor Targeted Equity Fund Class Y (NEGYX), Natixis CGM Advisor Targeted Equity Fund Class C (NEGCX), Natixis CGM Advisor Targeted Equity Fund Class B (NEBGX)
Career:
Heebner was previously a fund manager with Loomis, Sayles & Co.
Education:
B.A., Amherst College, M.B.A., Harvard University
Manager Notes:
Heebner has had success using a top-down style by first looking at the overall economic landscape. He then looks at various sectors and companies and performs fundamental analysis to find companies with attractive valuations. He will sell a stock if he feels it has reached its value or if there are better companies to invest in.
2. Michelle E. Stevens*
TRS Score: 14.11
Funds Managed:
Transamerica Premier Institutional Small-Cap Value Fund (TPSMX), Transamerica Small/Mid Cap Value Class C (IIVLX), Transamerica Small/Mid Cap Value Class B (IIVBX), Transamerica Small/Mid Cap Value Class A (IIVAX)
Career:
Prior to joining Transamerica, Stevens worked for Dean Investment Associates as vice president and director of small-, mid- and flex-cap funds. Stevens holds the chartered financial analyst (CFA) designation and has 13 years of investment experience.
Education:
B.A., Wittenberg University, M.B.A., University of Cincinnati
Manager Notes:
Stevens pursues a high total return by investing in equity securities issued by small- and mid-cap companies. She reviews many business characteristics, such as a company's products/services, market position, industry condition, management and financial/accounting policies.
*Stevens recently changed firms. She has joined Riazzi Asset Management, where she will head up RAM’s Small, Small/Mid and All Cap Value investment disciplines.
3. Gerald Reid Jordan
TRS Score: 12.57
Fund Managed:
Jordan Opportunity (JORDX)
Career:
Before joining Hellman, Jordan Management Co. in 1996, Jordan worked as a proprietary trader for Salomon Brothers from 1989 to 1992.
Education:
B.A. and M.B.A., Harvard University
Manager Notes:
Jordan looks for investment opportunities in companies that provide better than expected growth results. Along with extensive internal analysis of chosen ideas, he uses market sensitivity models to determine his investment decisions. His primary objective is capital appreciation.
4. Manu Daftary
TRS Score: 12.44
Funds Managed:
Quaker Strategic Growth (QAGIX), Quaker Strategic Growth Fund Class C (QAGCX), Quaker Strategic Growth Fund Class B (QAGBX), Quaker Strategic Growth Fund Class A (QUAGX)
Career:
Daftary holds the CFA designation.
Education:
Elphinstone College-University of Mumbai, California State University at Long Beach
Manager Notes:
Daftary's main focus is to look for companies that are growing their revenues and earnings at a high rate. He is a big believer in the notion that earnings are what drives stock prices. He will also look for certain qualities in a company, such as a quality management team and an attractive price-to-earnings ratio. He can be aggressive at times with frequent trading as well as short-selling.
5. Andy Wiles
TRS Score: 12.44
Fund Managed:
U.S. Global Accolade Eastern Europe [EUROX]
Career:
Wiles has been with Charlemagne Capital Management since 1995. Previously, he was with Buchanan Partners, a London-based global emerging markets hedge fund. He is an associate of the U.K. Society of Investment Professionals.
Education:
Masters London Business School
Manager Notes:
Wiles invests in companies located in emerging markets in Eastern Europe. This typically includes Russia, Poland, the Czech Republic, Hungary and Turkey. He looks for larger companies with name-brand recognition.
6. Lynette Schroeder
TRS Score: 11.45
Fund Managed:
Driehaus International Discovery Fund [DRIDX]
Career:
In 2000, Schroeder left Driehaus for American Century Investment Management. She rejoined Driehaus in 2005. Schroeder began her investment career as an analyst for Scudder, Stevens & Clark in 1993.
Education:
A.B., University of Chicago, M.B.A., Darden Business School University of Virginia
Manager Notes:
Schroeder aims to maximize capital appreciation by investing in companies that are capable of rapidly increasing sales and earnings and that have potential for long-term growth. She primarily focuses on stocks of small to mid-size foreign companies. Normally, she invests a minimum of 65% of assets in no less than three different foreign markets.
7. Markus Brueck
TRS Score: 11.33
Fund Managed:
Metzler/Payden European Emerging Markets Fund (MPYMX)
Career:
Brueck joined Metzler/Payden in 2002. Prior to that, he held positions at Credit Suisse Asset Management, Deka Investment Management and WestLB Capital Management. He has worked in the investment industry for 15 years.
Education:
Justus Liebig University of Giessen/Germany
Manager Notes:
Brueck invests in developing economies of Central and Eastern Europe. When selecting stocks, Brueck uses both a top-down and bottom-up analysis. He focuses on economic conditions as well as the valuation and momentum of individual securities. As part of his analysis, Brueck will often visit companies and meet with management.
8. Team Managed J Hancock Balanced
TRS Score: 11.27
Funds Managed:
John Hancock Balanced Fund Class A (SVBAX), John Hancock Balanced Fund Class B (SVBBX), John Hancock Balanced Fund Class C (SVBCX), John Hancock Balanced Fund Class I (SVBIX)
Career:
Team members include Roger Hamilton, Jeffrey Given and Timothy Malloy.
Education:
Not available
Manager Notes:
This team invests in a mix of debt and equity securities. In particular, team members look to invest in companies that appear to be undervalued and in debt securities that will add current income and stability to the portfolio. Normally, the fund's assets are invested in at least 25% equity securities and 25% debt securities.
9. Team-Managed JHancock Large Cap Equity
TRS Score: 10.70
Funds Managed:
John Hancock Large Cap Equity Fund Class A (TAGRX), John Hancock Large Cap Equity Fund Class B (TSGWX), John Hancock Large Cap Equity Fund Class C (JHLVX), John Hancock Large Cap Value Fund Class I (JLVIX)
Career:
Team members include Roger Hamilton and Timothy Malloy.
Education:
N/A
Manager Notes:
The team looks to obtain long-term capital appreciation by investing primarily in equity securities issued by large-cap companies. They use proprietary financial models combined with a bottom-up analysis to identify the best investment options. They generally look for companies that are currently undervalued and offer better than average potential earnings growth.
10. David B. Iben
TRS Score: 9.94
Funds Managed:
ING Global Value Choice Fund Class I (NAWIX), ING Value Choice Fund Class A (PAVAX), ING Value Choice Fund Class B (PAVBX), ING Value Choice Fund Class C (PAVCX), ING Global Value Choice Fund Class Q (NAWQX), ING Global Value Choice Fund Class C (NAWCX), ING Global Value Choice Fund Class B (NAWBX), ING Global Value Choice Fund Class A (NAWGX), ING Value Choice Fund Class I (PAVIX), Nuveen Tradewinds Value Opportunities Fund Class R (NVORX), Nuveen Tradewinds Value Opportunities Fund Class C (NVOCX), Nuveen Tradewinds Value Opportunities Fund Class B (NVOBX), Nuveen Tradewinds Value Opportunities Fund Class A (NVOAX), Nuveen Tradewinds Global All-Cap Fund Class R (NWGRX), Nuveen Tradewinds Global All-Cap Fund Class C (NWGCX), Nuveen Tradewinds Global All-Cap Fund Class B (NWGBX), Nuveen Tradewinds Global All-Cap Fund Class A (NWGAX)
Career:
Iben served as CEO of Palladian Capital Management before joining Nuveen Asset Management in 2000. He also managed institutional accounts at Cramblit & Carney and served as CIO at the Farmers Group. He is a CFA charter holder.
Education:
B.A., University of California at Davis, M.B.A., University of Southern California
Manager Notes:
Iben utilizes a value-driven investment strategy to achieve long-term total returns. He uses his expertise on market conditions to look for equity securities that may be undervalued due to investor overreaction, misperceptions and short-term focus.
Source: The Ranking Service, a Newton, Mass.-based ratings service and research boutique. For more information, visit http://www.trsreports.com.
So far this year, one issue of special importance to women has largely been ignored: pay equity. In 2004 election exit polls, sixty-percent of women said that “equal pay for women” was not discussed enough. In 2006, over half of women said that gender equality should be a high priority for Congress. Any progressive advocate seeking to persuade women this year should have the facts on pay equity.
So far this year, one issue of special importance to women has largely been ignored: pay equity. In 2004 election exit polls, sixty-percent of women said that “equal pay for women” was not discussed enough. In 2006, over half of women said that gender equality should be a high priority for Congress. [Lake Snell Perry & Associates [1]] Any progressive advocate seeking to persuade women this year should have the facts on pay equity.
Women are being denied equal pay for equal work. Women earn 78 cents for every dollar earned by men. Over the course of her career, the typical working woman loses almost a quarter of a million dollars in wages, simply for being female. [Institute for Women’s Policy Research [2]] Losses for women with advanced degrees or careers in high-paying fields can total as much as $2 million over their working lives. Across the nation, the gender pay gap costs families $200 billion every year. [AFL-CIO [3]]
Gender—not education, experience, or achievement—is the sole cause of the pay gap between men and women. A longitudinal study of male and female professionals found that the gender pay gap begins immediately after college, when women take first jobs that pay only 80 percent as much as men’s first jobs do, and continues throughout women’s lives. [American Association of University Women [4]] Women are paid less though they earn higher college GPAs, are more likely to complete graduate work or advanced training, and spend about as much time at work as men do.
Current efforts to ensure pay equality are insufficient. Since the Equal Pay Act was signed in 1963, the gender wage gap has narrowed by less than half a cent per year. At this rate, women and men will have to wait another fifty years to earn equal wages. [Congressman Dingell [5]] The Government Accounting Office reported that the federal government is not doing enough to address gender pay discrimination. [GAO [6]]
Conservatives have a terrible record on equal pay. Conservatives in Congress have called the proposed Paycheck Fairness Act “unnecessary” and blocked cloture on the Ledbetter Fair Pay Act in the Senate. [Center for American Progress [7]] George Bush’s Labor Secretary even recommended that he veto the bill. [Center for American Progress [8]] John McCain didn’t show up to vote on the Ledbetter Act and told a 14-year old girl at a townhall, “I don’t think [the Ledbetter Fair Pay Act is] doing anything to help the rights of women, except maybe help trial lawyers and others in that profession.” [Washington Post [9]]
Current economic conditions are likely to hit women hardest. Women are at risk in the current foreclosure crisis, since they were targeted by subprime lenders. Though women on average have higher credit scores than men do, women are 32 percent more likely than men to have subprime mortgages. [New York Times [10]] Women were also hurt by past recessions: during the 2001 recession, the rate of job loss among women was higher than it was for men in many industries. [Joint Economic Committee [11]]
Current laws haven’t brought the change we need; it’s time for a new solution. Current wage discrimination laws are full of loopholes and have been weakened by Bush-appointed judges. Without new legislation and improved enforcement, the gender pay gay will persist, as it has for years.
Pay discrimination lowers wages for all workers. When women are underpaid, men’s wages are also kept down. In states with strong equal pay laws, both men’s and women’s wages are higher. [AFL-CIO [12]]
Wage growth is essential for healthy economic growth. Economists agree that we will recover from the current recession much more quickly if middle-class wages rise. Ensuring equal pay for women will help drive the economic growth America needs.
The Paycheck Fairness Act [13] will make filing a discrimination claim easier, provide protection for workers who blow the whistle on pay discrimination, and strengthen the Department of Labor’s efforts to ensure fair pay for all workers.
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