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

“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 »

You have to give the Spanish style points. The country that gave the world the gallant Don Juan and the ridiculous Don Quixote has now introduced the gentleman bill collector, “El Cobredor del Frac,” which translates loosely to “the debt collector in top hat and tails.”

The Christian Science Monitor wrote a hilarious piece on the Cobredor (”Where debt collectors use shame as a tactic“).

Collecting debts in Spain via the court system is a difficult and time-consuming process.  So instead, collectors appeal to a debtors sense of shame:

Last year, for example, the agency had a case of a couple who did not pay the €60,000 ($83,000) bill for their fancy wedding. “The wedding company contacted us, we got a guest list and started phoning up the guests one by one…,” recalls Pablo, “asking them if they had had the lobster or the chicken – and then asking them where to send the bill.” Eventually, the embarrassed bride and groom decided to pay up.

Desperate times call for desperate measures.  And with global deleveraging still continuing to suck liquidity out of the system, don’t be surprised to see more…shall we say, “innovative,” ways for desperate lenders to collect debts.

For most of the post-WWII era, there was a distinct demographic trend in force: fleeing urban crime and decay, middle class and affluent families moved further and further into the suburban hinterlands in search of white picket fences and neighborhood homeowners associations.  The old urban cores were left to rot.

Interestingly, this trend appears to be in at least partial reverse.  The housing bubble and bust left behind the kind of blight in the suburbs — empty homes and boarded-up storefronts — that  Americans were accustomed to seeing in inner cities. Meanwhile, major urban renewal efforts are underway in several large American cities.  I’ve witnessed it myself in my hometown of Dallas, Texas.  Not too long ago, large swaths of the Uptown neighborhood were a no-mans land of streetwalkers and dope pushers.  Now, it’s a highly sought-after neighborhood filled with $500,000 townhomes.

As prices rise in the cities, lower income Americans are being pushed out into the suburbs, where the largest percentage of the American poor live.  But since most suburbs are car-centered bedroom communities, they lack the infrastructure to deal with their needs.  The Christian Science Monitor writes,

Because the suburbs have not been accustomed to helping the poor, they lack the services to cope with issues such as homelessness. Emergency and social services, for instance, are traditionally concentrated in urban centers…

Suburban communities may also lack social coping mechanisms. Residents worried about property values or safety have in the past resisted the establishment of homeless shelters in neighborhood church basements or community centers. But…the recession is making residents more compassionate.

Full article: “Poverty’s New Face: Suburbs“

Suburbs are also generally absent of public transportation, or transportation is limited to a small number of infrequent and inconvenient buses.  Attempting to get around the suburban fringes of Dallas, Houston, Atlanta, Miami, or any other major sunbelt city using public transit would be time-prohibitive.  If you can’t afford a car, don’t plan on leaving your house in these cities.

It remains unclear whether the demographic convection current will continue or if it is merely an aberration caused by the housing bubble and bust.   In the meantime, America’s suburban mayors and city councilmen are looking for ways to accommodate the newly poor among them.

The Baby Boomers seem bound and determined to prove that they are NOT, in fact, too old to rock ‘n roll: “Marijuana use by seniors goes up as boomers age”

It appears that, with the kids now out of the house, Mom and Dad no longer feel obligated to set an example and can revisit their libertine days of the 1960s and 70.

Perhaps this is exactly what America needs; seniors who are stoned out of their minds and thus pacified.  Hey, it’ll make Social Security and Medicare reform a little easier to take.  If President Obama were smart, he’d make sure to legalize marijuana for seniors BEFORE he cuts their pension and health benefits and raises their taxes.   And if that fails to ease the pain, he might have to start legalizing harder drugs too.

It really brings new meaning to “Stimulus Bill.”