“Cassandra’s curse was that her warnings would never be believed,” writes the Economist. “Doom-mongers in the Japanese government-bond market have suffered a milder fate: they were just far, far too early.”

At HS Dent, we’ve been firmly in the Japan “doom-monger” camp for quite some time.  We’ve hesitated to take active bets against the Japanese bond market (believing that deflationary forces would keep bond yields low), and have even held out hope that the country might enjoy a mild “mini boom” with the maturing of that country’s small Echo Boomer generation.  But our long-term view has remained unchanged — that Japan, as a country and economy, was on a slow, steady track to oblivion.

The Economist largely agrees though thinks that Japans day of reckoning could be at least a few years off.  But come it will:

It certainly seems likely that at some point the worst fears of the bears will come to pass. Debt servicing already uses up some 35% of government revenues. Imagine what that figure would look like if Japan paid the same level of yields as Germany (or worse still, Greece). A fair chunk of Japanese debt is owned by government agencies, a financing pyramid that will eventually collapse. Historically countries with very high levels of government debt have defaulted or, more usually, inflated the problem away.

From “Apocalypse, Not Now“

It remains to be seen how the Japan saga will end.   It’s hard to imagine a good ending for the country’s bondholders, however.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

I read in the Financial Times today that Israel is to be officially upgraded from “emerging market” to “developed market” by Morgan Stanley Capital International (”MSCI”), the creator of the popular index that the EEM exchange-traded fund is based on (see “Israel Set for Bumpy Ride to the Top“).

Well, it’s about time.    Israel has had a standard of living comparable to Western Europe for years.  The country has world-class high technology companies and some of the world’s best scientists.   The same can be said for Taiwan and South Korea, two of the largest countries by weighting in the EEM.

This is not a personal gripe; it’s a portfolio management problem.  When investors want exposure to “emerging markets,” they’re not getting it when they benchmark to the standard emerging market indexes.  They are getting only minimal exposure to up-and-coming countries like Brazil, China, and India.  Instead, they are getting oversized exposure to countries like Israel, South Korea, and Taiwan — countries whose high-growth emerging phase has largely passed.

This is not to say that Israel, South Korea, or Taiwan are bad investments.  All three have fine, world-class companies.  But if you want real exposure to emerging markets, you might have to look beyond the popular mutual funds and ETFs and dig a little deeper.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Everyone knows what ails Detroit.  The inexorable decline of America’s auto manufacturing has created a large city with a gaping black hole where its leading industry used to be.  So, there is no real reason to dwell on how Detroit got into its current state.  What is interesting is how the city is attempting to cope with its demise.  Take a look at this AP headline:

“Detroit wants to save itself by shrinking.”

The AP writes,

Detroit, the very symbol of American industrial might for most of the 20th century, is drawing up a radical renewal plan that calls for turning large swaths of this now-blighted, rusted-out city back into the fields and farmland that existed before the automobile. Read the rest of this entry »

Dallas was not exactly ground zero in the mid-2000s real estate boom and bust.  Outside of a few isolated neighborhoods, prices never rose very much.  And outside of a few new developments on the suburban fringe, oversupply was never much of a problem.   It was as if the city were splendidly isolated from the problems of the rest of the country.

So, when I went to visit my mother at her house in Dallas, I was a little surprised to see her trash bin overflowing.

“They only pick up the trash once per week now,” she told me, shaking her head.

The city of Dallas, in an attempt to rein in costs, has cut its garbage collection  services in half.  Of course, they have not cut the fees charged to homeowners by a single red cent.

This is not technically a tax hike.   But effectively, it is the same thing.  Homeowners are paying more for a given level of service.   And I expect this trend to be the norm at all levels of government.

We’ve written about this for years at HS Dent.  The “solution” for the government budget and debt crisis is some combination of lower services and higher taxes.  It’s as true for Social Security and Medicare as it is for Dallas trash collection.  We will all be paying more to all levels of government and getting less in return.

It doesn’t make for happy taxpayers and voters, of course.   But there is little alternative.  “Cutting spending” sounds like a better alternative than raising taxes or cutting service, but how do you cut spending on something like Social Security?  These are contractual obligations, and millions of seniors depend on it.

Don’t get me wrong, there is plenty of government waste that can be cut.  But one man’s government waste is another’s pet cause.

And it gets worse at the local level.  Everyone is “for” cutting government spending in the abstract.  But what if that means that your favorite local park has to be closed? Or that you have to store a week’s worth of rotting trash in the baking Texas sun?

I have no solution to this problem because there is no solution.   We could take to the streets and protest like the Greeks are doing over that country’s proposed austerity measures, but that would be no more effective than English King Canute’s attempt to command the tides.

Perhaps the only advice I can give is to prepare to fight hard for your piece of what promises to be a shrinking pie for the next several years.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

 Interesting chart from Chart of the Day forwarded to me by one of our Dent advisors:

It appears that there really is a benefit to higher education in the form of greater job security.  As you can see in the chart, unemployment is higher the lower on the educational scale you go.

There are several points to take from this chart.  Those workers without high school diplomas are the most “marginal.”  That is, they are the last workers to get hired when times are good, and they are the first to get laid off when times are hard.  Their employment is clearly the most volatile of all the groupings on the chart.

Another interesting point is that the unemployment rate for those with college degrees is only around 5%.  This says nothing of underemployment, of course.  Some of these college grads may well be employed as pizza deliverymen.  But the fact remains that unemployment is lowest and least volatile the higher up the educational scale you go.

It’s important not to confuse correlation with causation, of course.   There are qualitative factors at work here as well.  People who are not motivated enough to graduate from high school are also not likely to be the most assertive job seekers.  At the same time, someone who invested the time and money to go to college is going to be hungry to get a return on that investment and will thus make more of an effort to get a job.

Still, all things considered, it would appear that the advice from the old 1980s commercials is sound.  If you want job security, “be cool, stay in school.”

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

The Greek debt crisis is now reaching the levels of the absurd.   There seems to be a growing consensus that Germany will step forward and bail Greece out.  The problem with this?  The idea is WILDLY unpopular in Germany.  In fact, German lawmakers have suggested Greece sell off its island to pay off its debts rather than run to the EU’s more responsible members for help: “Greece Can Sell Islands to Cut Debt.”

Even if Germany wanted to help Greece, it’s not entirely clear that they can.  According to the Financial Times, Germany is
forbidden by a 1993 Constitutional Court decision that stipulated that Germany would be forced to leave the eurozone if the union did not follow the principles of monetary stability.  So, in a nut shell, if Germany bails out Greece to save the euro…Germany will have to leave the euro.

Politicians are masters at circumventing laws and court rulings, of course, and it is entirely possible that Germany may still come to Greece’s rescue.  But for now, the crisis continues, and investors are left to ask “what next?”

Charles Sizemore, CFA

Related posts:

Greek Mythology

Update on Greece

“Who’s creating U.S. jobs?” asks the Christian Science Monitor.  In this era of multi-decade highs in unemployment, it’s a valid question.  The answer, which will surprise many, is Mexican immigrants.

The immigration debate turned downright nasty in the final years of the housing boom.  There was an enormous public backlash against what was viewed by many as an excessively lax immigration policy that rewarded those who came illegally.  The housing bust and the rapid evaporation of construction-related jobs caused a significant reversal in migration flows and public anger found new targets.  But the perception remained that immigrants were a major negative for the U.S. job market and that immigrants “took” American jobs.

This is not an argument I’d like to revisit at the moment.  Instead, I’d like to give the Christian Science Monitor’s account of the recent surge in entrepreneurial visas given to affluent Mexicans fleeing drug violence and extortion to start businesses in the United States.  The Monitor writes,

As Mexico’s drug wars escalate, businessmen and families have become a natural target for traffickers looking to extortion to finance their operations, says Art Martinez de Vara, a San Antonio-based immigration lawyer. Some 17,000 people have been killed in drug violence since President Felipe Calderón took office in December 2006 and vowed to take on the drug traffickers.

In fiscal year 2008, the US issued E-1 and E-2 visas to 1901 Mexicans and their families, nearly three times the level of a decade before.

The natural target for Mexican immigrant investors? San Antonio.

“San Antonio just came out … as probably one of the best cities to invest in,” says Alfredo Lozano, an immigration attorney who works in the same law firm as Mr. Martinez. It’s close to Mexico but considered less dangerous than cities like Brownsville and Laredo.

From “Who’s Creating US Jobs? Mexicans.“

Mexico’s loss is America’s gain.   These are not uneducated migrant laborers.  These are ambitious entrepreneurs with money to invest and workers to hire, and there are doing it here instead of there.

A few new small  businesses in South Texas are a drop in the bucket when we have 10% unemployment, of course.  But in a period of economic gloom, it is nice to get a little good news now and then.

Charles Sizemore, CFA

Kelly Evans has a short piece in the “Ahead Of The Tape” section of the WSJ this morning that highlights the lack of inflation.  The article, titled “Inflation Hawks Should Stand Down,” shows a tiny snippet of what we keep pointing out as one of the greatet economic drivers (in a bad way) of the next few years - deflation.

 The main chart shows money supply growth, which of course rose dramatically during the height of the crisis, but has since then fallen back and even dabbled with going negative.  Why?  The great retrenchment in lending.  As we lower the amount of debt outstanding through repayment or modification, it shrinks money supply.  This side of the equation is always left out by those who point to massive inflation being on the horizon.

This is not cause for celebration.  This is a fearful development that we have been forecasting, talking about, and generally shouting from rooftops for over a year.  The great de-leveraging is under way.  It won’t be pretty.

“What is a generation?” asks Ira Wolfe in his new book Geeks, Geezers, and Googlization.  “A generation is a group of people who are programmed by events they share in history while growing up… a common set of memories, expectations, and values based on headlines and heroes, music and mood, parenting style, and education systems.”

I would agree with this definition, and would add that it ties in with the concept of generation gap.  Parents (and sometimes even older siblings) often do not “get” their kids.  They don’t understand their vocabulary.  They don’t understand what motivates them.  And they absolutely, for the life of them, cannot understand why a pieced eyebrow is cool.  (Who am I to criticize…in my childhood, coolness was defined by acid-washed jeans that were tightly rolled around the ankles and permed hair and makeup on male rock stars.  Go figure.)

Mr.  Wolfe’s book is an interesting study on the relationships between the generations in the workplace.  It’s very similar in substance to the generational work done by William Strauss and Neil Howe (Generations, The 4^th Turning, Millennials Rising), but it’s much less academic and, frankly, quite a bit easier to digest.  Corporate executives who find themselves managing a multigenerational workforce should find the book quite valuable, as should anyone struggling to understand the generation gap in their own home, for that matter. Read the rest of this entry »

With March of 2010 upon us, many state legislatures are starting their sessions. Job one will be to figure out how to close the current budget gap.  Job two will be to develop a semblence of a credible budget for 2010-2011 budget year, which begins for most on July 1st. 

With traditional revenue sources dropping, state governments are in a quandry of their own making.  For decades they have gone along the politically easy path of continuing to promise and secure employment contracts for all levels of state workers.  Now that tax receipts ain’t what they used to be, these contracts (including pension benefits, healthcare, etc.) are crippling.  So, what to do?  Play hardball with the unions?  Not so fast. There is another way.

States have raised fees at an extraordinary rate (in the state of FL the tax on cigarettes increased by $1 per pack last year), even though this approach is most difficult on the lowest income earners.  Now states are beginning to take another look at taxing non-profits, pointing out that these organizations get the benefit if services (Fire, Police, Streetlights, etc.) without paying.  While that is true, the point of a non-profit is to provide services in the community that otherwise would not be available or would only be available at an increased cost to users.  Should non-profits pay some sort of tax?  I can’t say that I know the answer, but a piecemeal approach doesn’t strike me as appropriate. 

On another front, expect state legislatures to take another run at taxing internet transactions.  The sales tax lost to internet transactions is staggering, and definitely impacts the bottom line of taxing authorities.  The old argument of “It’s too hard to figure out who should pay what,” doesn’t hold water anymore either, as many retailers who have mulitple places of business in different states have already figured this out. 

My point is that as these legislative seasons get underway, look closely at what gets passed in the name of a balanced budget.  It will be much more about raising revenue than attacking the real problem - spending.  And grab hold of your wallet.  If you don’t, they will.