September, 2012 Archives


QE3 Is Launched – Q&A On Some Implications

by Riaan Nel in Global Investments

What are the consequences of the continued stimulus efforts by the Federal Reserve?

The FOMC in an 11 to 1 vote on Thursday, September 13, 2012 launched Quantitative Easing 3 – the third round of bond buying since the onset of the 2008 financial crisis.  Given that the Fed target rate is already in the zero-bound range I suspect that the impact of QE3 will be less effective, or more diluted, than the first two rounds.  This notwithstanding, QE3 will help both GDP growth and the labor market, but only marginally.  Unfortunately, the extensive expansion of the monetary base through Quantitative Easing is interfering with the proper functioning of money markets, banks, insurance companies and pension accounts due to repressed Treasury yields.  Monetary policy alone will not be able to kick start our anemic economy.  We need some form of fiscal stimulus – tax reform and government investment, particularly infrastructure.

What are the implications of the repressed low yields for savers?

We have entered a new era where dividends and income will be the main drivers of total return as opposed to the 1980’s and 1990’s reliance on price movements (capital gains).  Investors will have to adjust their expectations of investment returns.  We are in the midst of a secular shift to a lower return world.

What are the asset classes investors should invest in given this lower return environment?

We are all concerned by the daunting task of guarding our investments against severe losses, while maintaining our purchasing power over the long haul.  In the money and Treasury markets almost all real interest rates are currently negative.  Asset classes to consider are tangible and hard assets, global dividend-paying companies with stable cash flow, low leverage and exposure to emerging market middle classes, and high dividend paying alternatives.  It is furthermore imperative to focus on not only asset allocation, but also risk allocation through the utilization of different investment instruments that hedge against the following three risks: longevity risk, sequence of returns risk, and inflation risk.

What will it take to restore confidence in Europe?

The decision by the German Constitutional Court clearing the way for German participation in the bail-out fund for the Eurozone was a critical step to start the slow process of restoring confidence in Europe.  I remain hopeful that the EU countries and banking system can be stabilized and recapitalized.  The recent bond buying commitments by the ECB are positive, however, the Eurozone is facing long-term structural issues that will need to be addressed before full confidence is restored.

What are the implications of the “fiscal cliff”?

QE3 cannot offset this calamitous event.  Political courage and leadership are needed to prevent the scheduled tax increases and budget cuts coming into effect January 2013 from dragging the US economy into a recession.  Will Congress be able to prevent the economy from falling over this cliff?  I expect Congress will take action after the November elections to prevent this fiscal calamity from causing a recession; however, I doubt that this action will be some kind of grand bargain that will significantly change our long-term debt outlook.  The global financial system has been fueled by an ever expanding supply of credit over the past 30 years.  We are now in the process of very necessary deleveraging, which could take up to 10 years to unwind.  The implication of this deleveraging is a slow growth environment, making it very difficult to address the long-term structural deficits of our economy.  Moreover, this slow growth world means lower returns on investments. 

 Source: “Getting Real” from PIMCO


National Defense: The Mathematics of Aircraft Carriers

by Riaan Nel in Politics

“A visitor from Mars could easily pick out the civilized nations. They have the best implements of war.” Herbert V. Prochnow

 “Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed.”  General Dwight D. Eisenhower


In this article I want to compare the policies of the two presidential candidates as it relates to defense.  Of course it will be impossible not to insert my own political opinions and biases; however, my endeavor is to contrast the candidates’ views from the vantage point of my daughter, Mischa.  I will think of her long-term well-being and security when writing about Mitt and Barack’s opposing views.  This will not be an exhaustive analysis.   Being a true independent, I will refrain from rhetoric, and I will try and apply common sense logic to the debate.  Writing about political policy in an election year in a country so polarized is risky.  Politics and religion are topics to be avoided in polite conversation – or so I’ve heard.  Venturing into these fields are bound to tick someone off.  Heck, I might lose clients in my day job.  On the  other hand, I am disgusted by the quality of political discourse playing out on the news – especially cable.  If I have to hear one more time “Vote for me, I’ll make the rich pay their fair share in taxes,” or “Vote for me, I know how to create jobs” I’m going to be sick to my stomach!  Like raising taxes on the wealthy is really going to secure Mischa’s future, or like a politician can “create” jobs.  I hear the discourse, I look at Mischa marching back and forth from her mom’s closet trying on her big shoes (the indoctrination has already begun – investment tip: buy shoe companies now, my daughter is growing up), and I am so concerned for her future.  One of the reasons I immigrated to America, and took the oath of allegiance to become a citizen, was to raise my child where I thought she’ll have the best chance for a bright future, and a safe and fulfilling life with opportunities abound.  Now I see that playful little girl in oversized shoes and I’m scared witless for her future, with my stomach churning as Fox and CNBC spout off their camp’s opposing rhetoric.  So… I decided to enter the fray… for what it’s worth.  Maybe getting the 1,155 registered blog readers and 5,000 or so monthly visitors to our site to think well before they cast their votes.

 Security – that is our most basic human need – we’re alive, and most of us prefer to remain in that condition as long as possible before the universe reabsorbs us.  Looking at the platform positions of the Romney and Obama websites are only helpful to an extent.  Politicians can’t get too technical or offer too much detail about policy positions, that’s too dangerous given the 24-hour news cycle, blogoshere, and attention spans of busy Americans.  Of the two, Mitt Romney’s proposals have more detail, and there is much I agree with.  He is very specific on certain matters.  He wants to modernize and replace aging inventories; increase the Navy’s shipbuilding from 9 to 15 vessels per year; commit to a multi-layered national ballistic-missile defense system; and return to a budget baseline for the DOD of 4% of GDP.  Mitt believes the military bureaucracy is bloated and needs pairing.  So far I like what he has to say.  Hey, let’s modernize, let’s streamline, let’s build ships, Mischa’s safety is at stake here! 

 Obama is very light on detail.  He primarily focuses on his accomplishments of ending the war in Iraq, killing Al-Qaeda operatives, having an exit strategy in Afghanistan, ending torture and caring for veterans.  To learn more about his plans we have to look at his 2013 defense spending proposal.  The Pentagon’s 2013 budget would cut $487 billion in spending over the next decade by eliminating 100,000 ground troops, retire ships, trimming air squadrons, all in a bid to create a smaller, agile force with a new strategic focus in the Asia-Pacific region and the Middle East. It is the first time since the September 11, 2001 attacks that the DOD is asking for less money.  The 2013 ask is $525 billion, compared to 2012’s $531 billion.  Republican lawmakers were very critical, needless to say.  Their main complaint is the almost half a trillion dollar spending cuts over the next decade.  (Just remember, “spending cuts” in Washington-speak means “reduction in growth.”)  Interestingly the defense industry didn’t complain much.  Hey, $525 billion sounds like a lot of money, but that’s okay, remember Mischa’s safety is at stake!

  Read the rest of this entry »