Tuesday, 31 March 2009

Focus on Lifelong Investing

Focus on Lifelong Investing

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Yes, You Can Still Be Rich

Tuesday, March 31, 2009, 4:55AM ET -

Ramit Sethi: Yes, You Can Still Be Rich
by Kimberly PalmerTuesday, March 31, 2009

Ramit Sethi, 26, author of the just-released I Will Teach You To Be Rich (and blog of the same name), recently spoke with me about how young people are dealing with the recession. He also argued for why 20 and 30-somethings should continue to put money into the stock market, even if most of their so far have shrunk in half. Excerpts:

How do young people think about money?

More from USNews.com: • Smart Money-Saving Tips You Need NowThe Twenty-Something Financial Survival GuideHow to Plan for Your Financial Future

As young people, we don't pay attention to our money. When there's something you're neglecting and you just hear bad news, you again don't pay attention, but you feel guilty about it. It's a combination of apathy and guilt that comes with money, just like eating and working out. 'I know I should go to gym four days a week, I shouldn't eat that pizza.' We know that we should be figuring out something about money and should probably do a Roth IRA, but we don't know where to get started. There's so much conflicting advice out there.

Will the recession make 20 and 30-somethings more pessimistic and risk averse for the rest of their lives?
Yes. There's a lot of research to suggest that. It's a particularly bad situation for young people because we're already not investing as much as we need to. Going forward, there will be people who say, 'I'm not investing in the stock market,' or 'Crooks can still my money.' It's hard to convince people, 'No, you have to look long term.' In any 30-year period, the stock market has always gone up.

How can you encourage people to invest when those who were doing so have lost upwards of 50 percent of their money over the last eight months?
There are two separate things: The intellectual and mathematical part, and the emotional part. If I told you nine months ago that you could pick the same investments on a 50 percent sale, it sounds very attractive. But we think of it as a 50 percent loss. Tremendous wealth has been lost, nobody can deny that. But if you're in your 20s or 30s, you don't need money for 30 or 40 years. So on an intellectual and mathematical side, you think, 'I'm going to continue dollar-cost averaging into the market.'
As for the emotional part, I can understand the emotion of saying, 'I've lost so much, I'm going to pull it all out. People often think they have just two levers to pull, put money in or pull money out. But there are other options. You could pull less in, put more in savings, re-allocate investments to put more in fixed income -- there are so many different levers you can pull. If you pull money out, you're guaranteeing you won't be in the market when it returns.

But what if it doesn't return?
Japan's stock market has been virtually stagnant for decades.
There are functional and structural differences between us and Japan, but without getting too deeply into that, what strongly effects my belief going forward is what happened in the past. The past doesn't predict the future, but it gives us a fairly accurate view of what's likely to happen. Whether it returns 6 percent or 8 percent -- we can split hairs over that -- the question is, do you fundamentally believe the stock market will go up. If you believe that, then invest.

If you don't, where do you put your money?
If you only put it in a savings account, it's not going to give you the returns you need to live on. You have to take risks to get potentially high returns.
People like to complain about the economy, but the economy versus your finances are very different. My question is, 'Have you automated your accounts? Do you use a bank account with overdraft fees? Have you set up a conscious spending plan? How much is dedicated to a savings account versus going out and eating?'

I assume you follow your own advice and have money in the stock market, and it must have lost significant value lately. How do you not get down about that?
I built an infrastructure where I only focus on one thing -- earning more. It gets automatically disbursed -- 20 percent to investments, 5 percent to savings, etc. In terms of dealing with losses, first of all, I don't check into my investments every day, and I don't think anyone should. Second, there's a difference between losing when everyone is gaining and losing when everyone has lost.

I'm resolutely focused on the long-term. I do believe the long-term prospects are great, but I'm not a prognosticator. My focus is on living a rich life, which also means being able to visit a friend or buy what you want. Being rich is just partially about money.

Copyrighted, U.S.News & World Report, L.P. All rights reserved.


Soros: The Recession Will Last Forever

From The TimesMarch 28, 2009

George Soros, the man who broke the Bank, sees a global meltdown

Alice Thomson and Rachel Sylvester

George Soros was 13 when the Nazis invaded his homeland of Hungary. As a Jew, he was forced to adopt a false identity and live separately from his parents in Budapest. Instead of being traumatised by the experience, though, he found the danger exhilarating. “It was high adventure,” he says, “like living through Raiders of the Lost Ark.”

Sixty-five years later, he still thrives on danger. He famously made $1 billion on Black Wednesday by shorting the pound, earning him the label of “the man who broke the Bank of England”. Last year, as the world tipped into financial chaos, Mr Soros pocketed another $1.1 billion by correctly predicting the downturn. “I’m an expert in crises,” he says.

The man who has a phobia about maths has made his name as the philosopher king of economics – his book The Crash of 2008, out in paper-back next week, has been a bestseller on both sides of the Atlantic. Since 1944 he has believed in what he calls “reflexivity” – the idea that people base their decisions on their own perception of a situation rather than on the reality.

He has applied this both to investment and to politics: his skill has been to predict moments of seismic change by identifying a disjunction between perception and reality.

When everyone else was convinced that the markets would automatically correct themselves, the 78-year-old “old fogey”, as he calls himself, was one of the few warning of recession. He put all his chips on “the Barack guy” early on when all around him were still gunning for Hillary Clinton. It’s almost as if he has been waiting for the Great Recession for the past ten years. When we ask whether he prefers booms or busts, he replies: “I have to admit that actually I flourish, I’m more stimulated by the bust.”

This recession, he explains, is a “once-in-a-lifetime event”, particularly in Britain. “This is a crisis unlike any other. It’s a total collapse of the financial system with tremendous implications for everyday life. On previous occasions when you had a crisis that was threatening the system the authorities intervened and did whatever was necessary to protect the system. This time they failed.”

The financial oracle does not know how long it will last. “That depends on how it’s handled. Allowing Lehman Brothers to fail was the game-changing event. That’s when the financial crisis went over the brink.” We could end up with a depression. “Unless we handle it well then I think we would. The size of the problem is actually bigger than in the 1930s.”

The problem in Britain, he believes, is in many ways worse than in America or Germany. “American memory is seared by the Depression, the German memory is seared by hyperinfla-tion but Britain has a pretty serious problem in many ways worse than America because the financial sector looms bigger and the overvaluation of real estate is bigger than in America.”

He is not worried that an auction of government bonds failed this week – “that was a blip”, he says. He would still buy British bonds – “it depends on the price” – but he agrees with Mervyn King, the Governor of the Bank of England, that debt is a real problem. It will, he says, put people off investing in Britain. “I think it will have an effect, yes. It is a matter of worry because effectively the hole in the banking system is replaced by increasing the national debt.” There has been some talk that Britain might have to go cap in hand to the International Monetary Fund. “It’s conceivable,” Mr Soros says. “You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt . . . if the banking system continued to collapse, it’s a possibility but it’s not a likelihood.”

He refuses to say whether sterling has yet hit its lowest point. Has he shorted the pound recently? “I had shorted it last year, but I’m not shorting the pound now.” Is the euro under threat? “There is stress in the euro because of the differential in the interest rate that the different countries have to pay,” he replies.

Mr Soros is critical of the tripartite regulatory system set up when the Bank of England gained independence. “I have a different view on how the market operates than the prevailing view. I believe that the authorities have the responsibility to forestall, to counter the mood of the markets . . . I think that the problem was that the Bank of England didn’t have the supervisory authority.”

He does not, however, blame Gordon Brown. “He underestimated the severity of the problem, but then so did most people. Part of the perceived role of a leader is to cheerlead, so you can’t really blame him for that.”

From the day he was born, Mr Soros says, he was attracted to crisis. “It precedes me. I inherited it from my father.” His father had lived through the Russian Revolution and every day after school he would take his son swimming and talk about his experiences. “I sucked it in that way. And then when I was not yet 14, the Germans occupied Hungary, and I would have been deported to Auschwitz if my father hadn’t arranged for false papers. So that was a pretty profound crisis. I had to assume a false identity and live a different life.” He was separated from his parents. “We met occasionally in the swimming pool. But imagine you are 14 years old, you like adventure, and you have a father who seems to understand the situation better than others. It’s very exciting.”

He feels a similar thrill in an economic crisis. “On the one hand there’s tremendous human suffering, which is very distressing. On the other hand, to be able to handle the situation is exhilarating.”

He has always been something of an outsider. He thinks that this makes it easier for him to see through conventional wisdom. “I have always understood how normal rules may not apply at all times,” he says. In recent years he has been arguing against “market fundamentalism” – “the accepted theory was that markets tend to equilibrium”. He believes that the credit crunch has proved him right. “It reminds me of the collapse of the Sovi-et system, events are always exceeding people’s understanding. The situation is out of control. There’s a shortage of time to adjust to the change. Change is accelerating.”

Like Warren Buffett, he thinks that the complex financial instruments used by the banks were economic weapons of mass destruction. If anything he expected the tipping point to come earlier. “Everybody who realised that this was unsustainable expected it to collapse much sooner,” he says. “It is so devastating exactly because it took so long.”

The urgent task now, he says, is to realise that the system that collapsed was flawed. “Therefore you can’t restore it. You have to reform it.” He worries that politicians have not yet accepted the need for fundamental change and that “a lot of bankers have their head in the sand”.

H e was cast as the villain when Britain was forced out of the exchange-rate mechanism. “I didn’t speculate against sterling to benefit the public. I did it to make money,” he says.

He tells us that he has psycho-somatic illnesses – backaches and pains – that tip him off to changes in the market. “It’s as if you’re a jungle animal, and you see another animal facing you. You have to make a decision: fight or flight? Your hair stands up and you growl and you decide, ‘Am I going to attack because I’m stronger or am I going to run away because otherwise he’s going to eat me?’ You are very tense. And that’s the tension that gives you the backache.”

The G20 summit in London next week is, he says, the last chance to avert disaster. “The odds would favour that it fails because there are such differences of opinion. It’s difficult enough to get it right in your own country let alone with 20 governments coming together, but if it’s a failure I think then the global financial and trading system falls apart.”

If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. “That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important.” The chances of a depression are, he says, “quite high” – even if that is averted, the recession will last a long time. “Look, we are not going back to where we came from. In that sense it’s going to last for ever.”

Life and times

Born Budapest, 1930. A Jew, he survived the Nazi occupation using a false identity. Fled communist Hungary for Britain in 1947

Education Worked as a railway porter and waiter to pay his way as a student at the London School of Economics, graduating in 1952

Career Took job with Singer and Friedlander in London before moving in 1956 to New York, where he worked as a trader and analyst. In 1970 he set up his own private investment company, the Quantum Fund. Made his fortune, on September 16, 1992, when he short-sold more than $10bn of sterling. Now chairman of Soros Fund Management and the Open Society Institute and said to be worth $11bn

Family Married and divorced twice and has five children

Quick fire

Budapest, London or New York?

Actually I'm very fond of London

English or Esperanto?

It used to be Esperanto, but now it's English. Bad English

Pound or dollar?

I really can't say

Chillies or chocolate?


Boom or bust?

I have to admit that actually I flourish, I'm more stimulated by the bust


China sees opportunity in failure

China Business
Mar 19, 2009

China sees opportunity in failure
By Antoaneta Bezlova

BEIJING - Differences between the United States and Europe over how to restore global economic growth have given rise to speculation here on whether a failure to agree on a grand strategy at the upcoming Group of 20 (G-20) summit might create room for China to assert its national agenda.

"It is well remembered that the collapse of international talks at the 1933 London summit laid the foundation for the US's consequent emergence as a dominant financial power," said an editorial in the China Business News at the weekend.

"With the US-based financial system facing unprecedented challenges, could a failure at the upcoming London meeting serve

to advance China's aspirations for the creation of a new financial order?" the editorial asked.

Officially at least, China has declared low expectations regarding the outcome of the April 2 summit of the leaders of the G-20 countries. Wu Xiaoling, former vice governor of the People's Bank of China, told a financial conference in Shanghai at the weekend that the summit was unlikely to bear much fruit.

"It is impossible for any concrete agreements to be reached at the G-20. We should not put much hope on it," Wu said. "That's why we should have our voice heard."

Low expectations aside, Beijing has invested substantial effort in preparing for the global summit. Officials from the ministries of Commerce and Finance, the Central Bank and the banking regulatory commission have been dispatched to London since early March to forge and present a united strategy at the meeting.
Divided into working groups, they have been laying the ground for China's participation in sweeping talks, including reform of the International Monetary Fund (IMF) and other multilateral bodies, the size and timing of coordinated stimulus measures and the inception of a global regulatory system.

Indications of China's stance came during the weekend's meeting of the G-20 finance ministers' preparatory to the April 2 summit. Finance Minister Xie Xueren called on the global community to accelerate the reforms of international financial institutions and to build a new financial system, which is "fair and square, compatible and orderly".

Speaking from Shanghai, Wu Xiaoling echoed Xie's statement, saying developed nations should shoulder greater responsibility in protecting the interests of developing countries and give emerging economies more power in international bodies like the IMF.

"The IMF should increase the share from emerging economies, and treat all members equally," Wu said. "A new set of rules should be set up to regulate the world economy, with a focus on global superpowers."

The meeting of the G-20 finance ministers revealed also the scope of existing disagreements between the US and Europe. US officials, backed by Britain and Japan, are seeking to line up global support for more government-backed stimulus measures.

European nations, though, are wary of such debt-fueled stimulus measures and have pushed for more regulation and oversight to prevent further deterioration of the global economy.

The split between the US and Europe and the deepening economic downturn have provided a distraction from the debate about China's role in creating global economic imbalances that had dominated economic circles in late 2008.

But to China's chagrin, the divergence of opinions has also pushed the summit agenda towards discussing an increase in financing to the IMF, instead of debating the much-anticipated reform of the financing body.

"What should have been the core issue of the summit - how to reform the IMF - has now been left by developed nations to fall by the wayside," Xu Mingqi, economist with the Shanghai Academy of Social Sciences, told the financial conference.

Xu argued that instead of debating how to redistribute voting rights inside the body, world leaders should decide on the creation of a monetary mechanism to be applied to countries issuing hard currencies that would work to protect the interests of global investors.

A similar concern was voiced by Chinese Premier Wen Jiabao during his once-a-year meeting with the press last week. Wen said he was "worried" about the safety of China's assets in the US, and asked Washington to provide guarantees that it would protect their value.

China is the largest holder of US Treasury bonds. As of December 31, the volume of the country's investments had reached US$696 billion.

While China also grapples with the implications of slumping global demand for its export-driven economy, Beijing sees the crisis as an opportunity to advance its own priorities of raising the country's global profile and acquiring more say in international financial institutions.

Over the past few months, Beijing has taken the first steps towards transforming its controlled, partially convertible currency into a regional currency by pushing loans and some trade settlements in yuan across Asia.

At the same time, China has said that it would use its huge foreign exchange reserves to contribute to the bailout fund of the IMF on the condition that its share of voting rights in the international body is increased.

Currently, the voting rights of the BRIC countries, namely Brazil, Russia, India and China, in the IMF are 9.62% of the total, together accounting for about half of the voting rights that the US holds.

Some Chinese economists have cautioned against committing any funds to the IMF before the removal of the US's right to veto in the IMF.

"Even if China decides to inject a large sum of money, it is pointless to increase its weight in the international financial organization," Yu Yongding, president of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told the China Daily. This is because the US holds veto rights in the decision-making process of the IMF.

But other experts see more room for advancing China's priorities by cooperating directly with the US. "In solving the crisis I would place more hope in the G-2, or the US and China, rather than in the G-20," said Liu Yuhui, economist at the Institute for Financial Studies of the Chinese Academy of Social Sciences.

"I expect few concrete results to emerge from this G-20 meeting," Liu said. "Currently, the IMF is an institution of rigidly allocated financial power and it would take a long time to change the status quo."

(Inter Press Service)


Russia backs return to Gold Standard to solve financial crisis

Russia backs return to Gold Standard to solve financial crisis

Russia has become the first major country to call for a partial restoration of the Gold Standard to uphold discipline in the world financial system.

By Ambrose Evans-Pritchard

Last Updated: 8:23AM BST 30 Mar 2009

Arkady Dvorkevich, the Kremlin's chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.

Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal.

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Mr Dvorkevich said it was "logical" that the new currency should include the rouble and the yuan, adding that "we could also think about more effective use of gold in this system".

The Gold Standard was the anchor of world finance in the 19th Century but began breaking down during the First World War as governments engaged in unprecedented spending. It collapsed in the 1930s when the British Empire, the US, and France all abandoned their parities.

It was revived as part of fixed dollar system until US inflation caused by the Vietnam War and "Great Society" social spending forced President Richard Nixon to close the gold window in 1971.
The world's fiat paper currencies have lacked any external anchor ever since. It is widely argued that the financial excesses and extreme debt leverage of the last quarter century would have been impossible - or less likely - under the discipline of gold.

Russia is a major gold producer with large untapped reserves of ore so it has a clear interest in promoting the idea. The Kremlin has already instructed the central bank of gradually raise the gold share of foreign reserves to 10pc.

China's government has floated a variant of this idea, suggesting a currency based on 30 commodities along the lines of the "Bancor" proposed by John Maynard Keynes in 1944.


Obama tells carmakers to shape up or face bankruptcy

March 31, 2009

Investors get the jitters as Obama tells carmakers to shape up or face bankruptcy

Christine Seib in New York

President Obama's warning yesterday that he would not hesitate to put General Motors (GM) and Chrysler into bankruptcy slashed the price of the American carmakers' debt and pushed insurance against its default higher.

GM bonds maturing in 2033 and paying 8.375 per cent dropped 2.75 cents to 16 cents in the dollar.

Phoenix Partners Group said that buyers of a five-year credit default swap on GM debt would pay 80 per cent of the sum insured up front, plus 500 basis points a year, up from 77 per cent on Friday.

Term loans to Chrysler's automotive business were trading lower. Even Ford, which has not asked the US Government for a bailout, saw its debt drop slightly.

The President has given GM 60 days and Chrysler only 30 days to slash debt and hit other targets or face the bankruptcy courts. Even after talks lasting months, GM and, to a lesser extent, Chrysler had previously failed to convince their lenders to accept a smaller repayment than they are due. However, despite Mr Obama's threats, experts do not expect bondholders to roll over. Some may prefer to take their chances in the bankruptcy courts rather than accept the existing offer from the car companies.

Doug Harvey, partner in the automotive division at AT Kearney, the consultancy, said: “Bondholders traditionally are gamblers and aren't afraid to call a bluff.”

Under the terms announced by the White House yesterday, GM has 60 days to negotiate with its bondholders to cut its $28 billion unsecured debt by two thirds. The company has a relatively small amount of secured debt. The carmaker wants its unsecured bondholders to accept as much as 90 per cent of the equity in the reorganised company, plus some cash and new unsecured notes. The bondholders want the Government to guarantee this new debt.

It is not clear how much of the value of bondholders' investments is wiped out under the terms suggested by GM, but Standard & Poor's, the ratings agency, describes the offer as a “distressed exchange”, indicating that the value of the debt was now substantially below par.

After the Government's announcement, a bond analyst said: “Bondholders as a group will now need to decide whether they accept a distressed exchange outside the bankruptcy court or pursue remedies in court.”

If GM was to be put into Chapter 11, bondholders could argue that they should be allowed control of the company, be repaid via the sale of some assets or even the sale of the whole company.

This may result in a payout not substantially less than is currently on offer, but takes the control from the bondholders and puts it into the hands of a judge - a risky strategy.

Mr Obama has made clear that any bankruptcy proceedings will be closely overseen by the Government. This does not bode well for bondholders, who have already been described by Steve Rattner, the President's adviser on the car industry, as less constructive than he would like.

Analysts at Credit Suisse said that the Government may use the bankruptcy proceedings to put itself above unsecured lenders in any future payout, in order to protect taxpayers' funding that it supplies to GM.

Fritz Henderson, GM's new chief executive, indicated that President Obama's support for GM made it more likely the company would file for bankruptcy. "Whether out of court or in court, either way, they'll be there to support us," he said.

A statement from a committee of GM's bondholders said that they would prefer that the carmaker did not go into Chapter 11.

"Bondholders did not cause GM’s problems ... but are more than willing to work towards a comprehensive, sustainable solution in which GM emerges a leaner, more competitive entity," the statement said.


In absolute terms, the G20 summit already looks unpromising

G20: a damp squib won't be the end of the world

Posted By: Edmund Conway at Mar 30, 2009 at 12:50:26 [General]
Posted in: Politics , Business , Economic Pulse
Tags:View More G20, global recession, Gordon Brown, london, Obama, summit

I've written enough times - before the finance ministers' summit for instance - that we can expect little in the way of tangible economic agreements out of the G20. This would be expecting too much (knowing what today's bunch of politicians are and aren't capable of). The world's financial system has collapsed; the very foundations of both it and the precepts that underpin global capitalism have come under question. These kind of disturbances cannot be undone or repaired overnight.

And so it is hardly a surprise that it is now dawning on politicians around the world that, in terms of actual output, the summit in London this week will be something of a damp squib. The draft communique has been leaked and looks dismally familiar: refutations of protectionism, calls for more free trade, rather blithe commitments to rescue packages for both their economies and their financial infrastructure. In fact, the phrases that have wafted out sound remarkably similar to the mantras Gordon Brown has been emanating around the world on his recent tour (for instance, a "global crisis requires a global solution"; or "we are determined to restore growth now, resist protectionism, and reform our markets and institutions for the future" or "we are determined to ensure that this crisis is not repeated.")

I can confidently predict that on the day the politicians and officials - keen to avoid the accusation of inaction or incapacity - will pepper the press with news of breakthroughs: a new $500bn plus donated to the International Monetary Fund, for instance, and further clampdowns on tax havens, to take two. But this will be done (perhaps successfully) in order to divert attention away from the lack of concrete results.

However, before one declares this a failure before it has even begun, it is worth bearing a couple of things in mind - however cynical one is. First, the real story of a big summit like this is rarely predictable. Most big financial or political meetings are preceded by plenty of debate and speculation over their likely outcome. The eventual story is often quite different. And by eventual story, I mean not the headlines that come out the day afterwards but the extent to which it shapes policy in the following weeks and months, the reaction in markets as time goes on, the impact on currencies and the effect on economic data - in short the historical significance of the summit.

Second is the fact that in the case of a major summit like this success or otherwise should be defined not in terms of concrete policies but in terms of the mood music surrounding the event. The 1933 London conference was a disaster because too many politicians either didn't turn up or showed a disappointing apathy about actually getting round the intractable problems of the day (which largely revolved around the gold standard). So as sceptical as I am (and as I am sure you are) about the bon mots from Brown, President Obama et al about unity being essential, I believe this is one of those rare moments when a show of unity is extremely important - in both economic and political terms.

Having resigned myself to the fact that it is too late to come up with a decent, comprehensive plan either to bail out struggling nations or to repair and reshape the financial system, I personally will judge the relative success of the summit on whether the leaders seem to be singing from the same hymnsheet. If they aren't, it is truly time to get worried, for it harks back to the 1930s when different blocs of nations took radically opposing economic strategies for escaping depression, with the result that for some countries the downturn was far nastier than it should have been.

However, in absolute terms, the summit already looks unpromising. The fact is that there are some important concrete agreements the G20 should be trying to achieve that seem simply to have been forgotten. For a more detailed guide of the kind of things they could or should be doing, and why, check out Willem Buiter's blog and Simon Johnson's here and here (as the former IMF chief economist his analysis over the next week or so will be particularly invaluable and important).

My plan over the next week, along with the Telegraph's other writers, is to try to look beyond the excitement surrounding both the visit of President Obama and the glitz surrounding the summit - not to mention the small news stories that flow out of it - and to try to determine precisely what this means for the world economy in the long-run.


Only a united front at the London G20 can save the world from ruin

Only a united front at the London G20 can save the world from ruin
Industrial production is collapsing faster than during the Great Depression. Social and political devastation will not be far behind, unless the G20 can heal global divisions, writes Ambrose Evans-Pritchard.

Ambrose Evans-PritchardLast Updated: 7:02PM GMT 28 Mar 2009
Comments 89 Comment on this article

By the time world leaders gathered to vent their spleens at the London Economic Conference in June 1933, the Slump had already done its worst. Catastrophic policy errors – tight money – had caused the 1930-31 recession to metastasize into debt deflation. Hitler had been let into government with three cabinet seats, enough to give him the Prussian police and Reich interior ministry. It was all he needed.

Any country that tried to reflate alone was punished by creditors. Most stuck grimly to liquidation. Europe and America undercut each other with beggar-thy-neighbour moves on trade and gold. The surplus countries refused to play their part in restoring demand – just as they refuse today, either because they will not (Germany and the Netherlands, who between them have a surplus of $294 billion) or because they cannot for structural reasons (China, $401 billion).

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It was impossible for deficit states to fill the breach, so the system folded on itself. Today, the biggest deficits are: the US ($673 billion), Spain ($155 billion), Italy ($73 billion), France ($57 billion), Greece ($50 billion), Britain ($46 billion). When the Banque de France withdrew gold deposits from New York in October 1931, the US Federal Reserve was forced to raise rates from 1.5 per cent to 3.5 per cent at a terrible moment. It knocked the stuffing out of the US banking system. Needless to say, France was the bigger loser from this petulant act, though that took time to become evident.

The London Conference was a fiasco. President Roosevelt refused to attend. He took a sailing holiday to flag his contempt for Old World posturing. FDR feared a trap to draw America back onto the Gold Standard – the source of the misery – and to lock the White House into Europe's deflation orthodoxies. As delegates waited, he cabled a message mocking the "old fetishes of so-called international bankers". Keynes defended him as "magnificently right".

The London G20 comes earlier in the depression cycle. A good thing too. The fundamental circumstances are worse today than in the early 1930s. The debt burden is higher. The global economy is more tightly intertwined. The virus spreads more swiftly.

Do not be misled by apparent normality. Unemployment lags, and social devastation lags further – although it has already hit the Baltics and Ukraine. Do not compress the historical time sequence either. Life seemed normal in early 1931 when the press reported "green shoots" everywhere. Part Two of the Depression was the killer. Part Two is what we risk now if we botch it.

Yes, we have done better this time. We saved the credit system. Central banks have slashed rates to near zero in half the world economy. The heroic Bank of England has pioneered monetary stimulus a l'outrance, even if the ungrateful wretches of this island mock their own salvation. But we must move faster because world manufacturing is collapsing at three times the speed. The damage that occurred from late 1929 to early 1931 has been packed into six months. Japan's exports fell 49 per cent in January. Holland's CPB Institute says global trade shrank 41 per cent (annualised) from November to January. Industrial output has fallen heavily over the last year: by 31 per cent in Japan, 24 per cent in Spain, 19 per cent in Germany, 17 per cent in Brazil, 13 per cent in Russia and by 11 per cent in the UK and US. Almost all has occurred since September.

In any case, the European Central Bank (ECB) is still standing pat. It is partial to medieval leech-cures – and hamstrung by the lack of EU debt union. Now, if the G20 were to convey the world's wrath at Europe's monetary paralysis, we might get somewhere. But Gordon Brown has been sidetracked by fiscal flammery. We are past that stage. Only the printing presses can rescue us, and the ECB refuses to print. Tactically, Mr Brown erred gravely by promising "the biggest fiscal stimulus the world has ever seen". It is not his gift, and comes ill from a deadbeat state that cannot sell its own bonds.

There again, was it wise for the Czech premier and titular EU president to rubbish Barack Obama's fiscal blitz as the "road to hell"? That too comes ill from a leader who has just lost a no-confidence vote over his handling of the Czech economy. But the hapless Bohemian speaks for Europe, where Hooverism is written into EU Treaty law. Indeed, last week Brussels fired anathemae at Greece, Spain, France, Britain and Ireland, for breach of the 3 per cent deficit rule. We must retrench under Regulation 1466/97. Laugh not.

Germany's finance minister, Peer Steinbruck, is still digging in his heels against "crass Keynesianism". No matter that his economy will shrink 6-7 per cent this year. Germans must sweat it out: some more than others. Unemployment may reach five million in 2010. No doubt spending is a poor instrument, and we are all sick of bail-outs. But Mr Steinbruck might brush up on history. It was the deflation of 1930-1932 – not the hyperinflation of 1923 – that killed Weimar democracy. (Communists and Nazis won half the Reichstag seats in July 1932). The neo-Marxist Linke Party is already angling for 30 per cent in June's Thuringia poll.

You may agree with Mr Steinbruck. Fine. Capitol Hill does not. The most protectionist Congress since Bretton Woods is not going to acquiesce as precious US stimulus leaks abroad to the benefit of "free-riders". Patience will snap. "Buy American" is already US law.

The risk is that this G20 becomes the defining moment when a disgusted American political class – sorely provoked – turns its back on the open trading system. The US alone has the strategic depth to clear its own path, and might find eager partners in a "pro-growth bloc" – much as Britain led a reflation bloc behind Imperial Preference in the early 1930s. As the world's top exporters, Germany and China should take great care to restrain their body language this week.

Well done, Mr Brown, for trying to hold the world together. But if the summit degenerates into a shouting match between mercantilist creditors and prostrate debtors, it may serve only to frighten markets and tip us into the next – more violent – downward leg of this slump.


How a Modern Depression Might Look -- if the U.S. Gets There

How a Modern Depression Might Look -- if the U.S. Gets There
by Justin Lahart
Monday, March 30, 2009

In the wake of the biggest financial shock since 1929, economists say the odds of a depression are less than 50-50 -- though still uncomfortably high. But even if a depression comes to pass, a 21st-century version would look very different from the one 80 years ago.

There is no consensus definition for "depression." Harvard University economist Robert Barro defines it as a decline in per-person economic output or consumption of more than 10%, and puts the odds of a depression at about 20%. Many economic historians say the line between recession and depression is crossed when unemployment rises above 10% and stays there for several years.

The current recession, though severe, is not at depression levels now. Unemployment in February was at 8.1%, not as bad as in the early 1980s -- the last time the idea of a depression was being kicked around seriously, when it remained over 10% for 10 months. In the Great Depression it reached 25%

"When you get an unemployment rate of 25%, it's everywhere," recalls economist Anna Schwartz, who is 94 years old and best known for her analysis of the causes of the Great Depression with the late Milton Friedman. "Everyone is conscious of that and fearful. We're not talking in that league at all."

Using the Barro definition, economists in a Journal poll conducted in early March put the odds of a depression at 15%, on average. But there was wide disagreement. John Lonski, chief economist at Moody's Investors Service, put the depression odds at 30% in early March, but better-than-expected news recently has led him to put it closer to 20%. In contrast, Paul Kasriel of Northern Trust put the odds of a depression at just 1% because of the aggressive lending by the Federal Reserve and the fiscal stimulus just beginning to hit the economy. "There are just too many powerful countercyclical policies in place that will prevent the worst-case scenario," he says.

Today's government response is a far cry from the early 1930s, when the Fed raised interest rates, the infamous Smoot-Hawley Tariff Act crushed trade and Treasury Secretary Andrew Mellon's prescription for the economy was "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate."

"The Great Depression was a mass of policy errors that made it worse," says historian and investment consultant Peter Bernstein, 90. "This time we have our fill of policy errors, but at least they're not making it worse."

Mr. Bernstein lived on Manhattan's Upper West Side during the Depression. "You were conscious of it all the time when you were out in the street," he says. "People looked so threadbare."

The different structure of today's economy means that a modern depression would differ from the Great Depression of the 1930s. Fewer than 2% of Americans working today have agricultural jobs, compared with one in five in 1930. Three-quarters of today's workers are in service-related jobs, which tend to be more stable than manufacturing, compared with fewer than half in 1930.

And then there are the social-safety-net programs that emerged after the Great Depression to blunt the blows. "There were no unemployment insurance, no food stamps, none of the automatic things that maintain some income for people who are out of work," says former Massachusetts Institute of Technology economist Robert Solow, a Nobel laureate. Mr. Solow, 84, grew up in Brooklyn, N.Y., and remembers his parents' constant worry about the next month's money.

With spending on food accounting for a little less than a tenth of a typical family's disposable income today, compared with a little less than a quarter in 1930, a modern depression wouldn't hit people in the stomach as the Great Depression did. Growing up on a Wisconsin farm, Catherine Jotka, 89, remembers taking dried corn meant for animal feed out of the granary and sifting dirt out of it to make corn bread.

Today's cutbacks would be for more discretionary purchases -- cable television, iTunes songs and restaurant meals. And there's plenty of room for trimming, says Victor Goetz, 81, a retired engineer who lives outside Seattle. "This has a whole different feel than anything we had in the 1930s," he says.

Even if the downturn isn't deep enough to be called a depression, the restructuring that it needs to go through means that even after the economy bottoms out, there could be a "lost" four or five years of sluggish growth, says Nobel laureate Paul Samuelson, 93.

As a University of Chicago student during the Depression, Mr. Samuelson remembers attending economic lectures that seemed completely out of step with the times, based on laissez-faire principles that stopped making sense after the 1929 crash. "I was perplexed because I could not reconcile the assignments I got from these great economists with what I heard out the windows and I heard from the street," he says.

Starting in the 1980s, the U.S. saw an extraordinary period of economic quiescence, where growth was steady and policy makers dealt with financial crises handily. Economists began to doubt the possibility of a financial crisis so severe it would upend the economy. And that left them as blindsided as their counterparts when the crisis came 80 years ago.


Monday, 30 March 2009

Bull market looks premature

Discounting mechanism
By Edward Hadas

Context News

The Dow Jones Industrial Index has risen 21% since March 9.

The index previously rose 19.2% from November 20 until January 2, before falling 28% until March 9.

The International Monetary Fund predicted global activity to decline by 0.5% to 1% in 2009 and growth to return in 2010, in its economic forecast on March 19.


Stock markets: All of a sudden, it’s a bull market. The Dow Jones Industrial Index has risen by 21% since March 9, just crossing the traditional 20% threshold that some chart-watchers use to separate a mere rally from the real thing, But this three-week old may not live to a ripe age.

The previous Dow rally started after the November 2008 rescue of Citigroup, lasted until the New Year and came a mere 0.8 percentage points short of qualifying as a bull market – before yielding to a 28% rout. The current recovery has largely been a vote of confidence in a subsequent US banking system rescue, along with massive government help.

Will this upward market movement prove more durable than the last? Mathematically, it has the advantage of starting from a much lower base. From Thursday’s close, the Dow will have to rise a further 14% just to match the 2009 high, hit on January 2.

The economic case is less clear. True, after the nationalisation of financial risk through guarantees and money-printing, panic over a possible imminent financial sector collapse looks overdone. And while GDP in the first quarter of 2009 looks to have been substantially lower than in the fourth quarter of 2008, the pace of decline seems to have slowed.

But the global downward economic momentum remains strong. The International Monetary Fund doesn’t expect growth to return until “the course of 2010”. While waiting, profits are going to be slaughtered.

Profits at non-financial US corporations fell by 9% in 2008. In severe recessions, the average drop is more like 25%, according to BNP Paribas. Globally, the rate at which analysts are cutting their earnings forecasts – a fairly accurate indicator of current profit, according to Société Générale – suggests a 40% decline for quoted companies this year. That suggests investors are paying 20 times current earnings for stocks.

The bull market will only last if it can trample over a thicket of terrible earnings announcements. That is a lot to ask from investors who have not yet fully recovered from a too long series of financial shocks.



G20 summit stops short of committing the leaders to a new fiscal boost.

A draft communiqué for the G20 summit stops short of committing the leaders to a new fiscal boost. The US and UK had earlier called for other nations to engage in more Keynesian-style stimulus to restore economic growth. Continental European nations, led by Germany, had resisted this.

The communiqué, published by the Financial Times, merely reiterates that the G20 countries have already engaged in “unprecedented and coordinated” fiscal stimulation and says they are “committed to deliver the scale of sustained effort necessary to restore growth while ensuring long-run fiscal sustainability.”

The 24-point communiqué also promises to “resist protectionism and reform our markets and our institutions for the future.”

Meanwhile, President Barack Obama admitted to the FT in an interview that it would be difficult for him to ask for more money to recapitalise the banking system until Wall Street convinces voters it is not misusing the money. “If voters perceive that it’s a one-way street that we are just pouring more and more money into institutions and seeing no return other than avoiding catastrophe, then it is harder to make an argument for further intervention.”

G20 communiqué


Avoiding Armageddon
By Hugo Dixon

G20: Be thankful for small mercies. The US and the UK aren’t likely to fall out with continental Europe at this week’s G20 summit in London over the fiscal boosts. The draft communiqué promises to do what’s needed to restore growth and ensure long-run fiscal sustainability. But it falls short of calling for any new Keynesian stimulus.

This fudged language is an acceptance of the facts of life. The fiscal stimulation so far, led by the US and China, was probably needed to stop the global economy tumbling into the abyss. But even President Barack Obama doesn’t think he can get Congress to approve another, even more ambitious deficit spending plan, at least not right away.

Gordon Brown, the other neo-Keynesian cheerleader, had a timely reminder last week that states can’t borrow endlessly. The UK prime minister’s aides claimed that the failure of a government bond auction was just a technical glitch. But Brown has learned that investors’ trust in the government’s creditworthiness can no longer be taken for granted.

Obama, Brown and some other leaders might want to try to pump up their economies with another big round of borrow-and-spend. But if the market won’t cooperate, governments would have to have to slam on the brakes, hiking taxes and interest rates in order to stay in business. Such a sudden reversal would create what some people are calling the Armageddon scenario.

One way of avoiding Armageddon is to ensure long-run fiscal sustainability, as the G20 draft puts it. That’s probably the most one can expect from any communiqué. But such platitudes won’t cut much ice with investors. They will want to see credible plans for getting budgets back into balance in the medium term.

Without that, they will fear that governments will go for print-and-spend, a policy that is likely to lead to high inflation. If inflation fears take hold, governments will find it even harder to borrow the mountains of money they need now to finance their deficits.



Health Insurance: What You Need to Know

Health Insurance: What You Need to Know

Published: February 2, 2009

With Americans spending an ever increasing amount on medical costs, it’s more important than ever to have insurance that fits your health care needs. So when you start shopping for a plan, don’t just look for one with the lowest premiums. Consider the services that are most important to you.

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The best place to get health insurance, of course, is from your employer. Group plans are typically cheaper, and your employer will probably cover much of the cost.

There are three main types of coverage you can choose from: H.M.O.s (health maintenance organizations), P.P.O.s (preferred provider organizations) and the newer option called an H.D.H.P. (high deductible health plan) paired with a savings account. A small number of companies still offer old-fashioned, fee-for-service plans, but their ranks are dwindling.

Here’s what you need to know about the most common plans:

H.M.O.S provide comprehensive coverage at a low cost to the consumer. In general, you don’t pay any deductibles or co-payments for basic care (and if you do, they will be relatively low). But your choices will be limited. You can generally use only the doctors and hospitals within the H.M.O.’s network, though more plans are easing up on this restriction, and your designated primary-care physician will determine the level of care you require and when you need to see a specialist.
Pros: Low cost. Coordinated care.
Cons: A limited choice of providers. If you go out of network, for example to a specialist, you will probably not be reimbursed.

PREFERRED PROVIDER ORGANIZATION AND POINT OF SERVICE plans were created in response to consumer frustrations with the limitations of H.M.O.s. You can choose to go to network providers and pay a small co-payment, or go out of network and have only a portion — typically around 60 to 70 percent — of your costs reimbursed. The main difference between the two is that a point of service plan requires a referral from your primary care physician to see a specialist, while the preferred provider plan does not.
Pros: More flexibility than an H.M.O.; lower overall out-of-pocket costs than a fee for service plan.
Cons: It’s tricky to predict your costs unless you’re willing to stay within the network. Getting reimbursed for out-of-network claims can be a hassle.

HIGH-DEDUCTIBLE HEALTH PLAN Over the past few years, more employers have begun to offer the option to sign up for a high deductible health plan that is linked to a health savings account or health reimbursement account. Some employers may offer the high-deductible health plan on its own and allow the employees to set up a savings account with the bank of their choice.
The plans work like the preferred provider option, but the deductible is much higher — at least $1,150 for coverage of a single person and $2,300 for families. To compensate for the larger deductible, employers typically offer different two savings options:
  • A health savings account allows you to put away pretax dollars and then withdraw the money to pay your out-of-pocket costs. (Your employer may kick in some money, too.) In 2009, you and your employer can put up to a combined limit of $5,950 in a health savings account if you opt for family coverage ($3,000 for singles). The money rolls over from year to year, so you can basically store up a medical emergency fund. When you’re 65, you can take the remaining money out without paying a penalty, though you’ll pay taxes on the withdrawal if you’re not using it to pay for medical costs.
  • A health reimbursement account is financed solely by your employer. Typically, an employer will contribute an amount equal to about half the employee’s deductible The money rolls over from year to year, but you cannot take the money with you when you leave the company.

Pros: Low premiums. Tax-free savings (in the case of the health savings account).
Cons: Potentially high costs, especially if you or a family member becomes chronically ill. Don’t choose this option unless you have the money to pay the deductible.

INDEMNITY, OR FEE-FOR-SERVICE, PLANS are offered by fewer and fewer employers because of their expense. They allow you to go to any doctor, hospital or medical provider you choose. The plan typically reimburses 80 percent of your out-of-pocket costs after you fulfill an annual deductible.
Pros: Flexibility. You can go to any medical provider, anywhere, without seeking plan approval first.
Cons: Your total out-of-pocket costs will probably be higher than in a preferred provider plan or H.M.O. Most fee-for-service plans don’t cover preventive care like flu shots or mental health services.

To help narrow your choice, here are the steps you should take:
1. Ask your favorite doctors which insurance plans they accept. If you find that one or more of your doctors do not accept any insurance plans, then you’ll want to select a plan that reimburses you for your costs when you go out of the network.
2. Make a list of all the services you and your family use. Include on the list things like vision care, dental, physical therapy, acupuncture and mental health care. Find out how the plans you like best will cover these services and at what cost.
3. Compare costs. Write down the costs associated with each plan, including premiums, out-of-network costs, and extras like vision or mental health care.

The Joint Commission on the Accreditation of Healthcare Organizations has put together a comprehensive list of helpful questions.

In addition to offering low-cost health insurance, your employer may also offer a health care flexible spending account, which lets you set aside pretax dollars to pay for your out-of-pocket medical costs. (If you have already signed up for a health savings account, you can only use the flexible spending account for dental, vision or post-deductible medical expenses.) You can deposit up to $5,000 a year in a flexible spending account, depending on the limit set by your employer. The money will be deducted from your paycheck and you can’t change the amount midyear. If you have high medical costs, using a flexible spending account can save you hundreds of dollars a year in taxes. But calculate your costs carefully. The money does not roll over to the next year. Any money you don’t use will be lost.

If you need to buy insurance on your own — there are a number of options to consider, including these:

First, if you are about to lose your job and work for a company with more than 20 employees, you can remain on your employer’s plan for up to 18 months, under a federal law called Cobra, the Consolidated Omnibus Budget Reconciliation Act. But you will have to pay the full premium plus 2 percent for administrative costs, and the expense is often quite high. This may be a good temporary measure, though, until you can find a more affordable option.

If you’re out on your own, try to find a group plan to join since group plans typically cost less and offer more benefits than individual plans. Can you join your spouse’s plan? Do you belong to (or can you join) a union, professional organization or alumni group that offers insurance? You may also be able to find a group plan for freelance workers. If you are over age 50, look at the plans offered by the AARP.

If a group plan is not an option for you, you’ll have to buy an independent policy. Fortunately, there are numerous plans to consider. The simplest way to compare policies and prices is by going to an online insurance broker like eHealthInsurance.com. At EHealthInsurance, for instance, you simply fill in your gender, ZIP code and date of birth -- and, if you want, the names of your doctors — and the site comes up with a list of policies for you to consider. You can apply online.

If the prospect of sorting and sifting through dozens of policies seems daunting, consider using an independent insurance agent, who sells many different kinds of health insurance. You can find agents in your area at the Web site for the Independent Insurance Agents & Brokers of America.
Individuals with modest incomes may be eligible for Medicaid. You may be able to get coverage for your children through the State Children’s Health Insurance Program, a federal-state partnership.

If you have a serious health problem and are unable to find coverage through a private insurer, find out whether your state has a high-risk pool that you can join. While these plans are not low in cost, they are often the only option for people with pre-existing conditions.


Helping Out With Cash: A Delicate Art

Your Money
Helping Out With Cash: A Delicate Art

comments (39)
Published: March 27, 2009

It was the idea of her friend’s children riding around in the back seat of an uninsured vehicle that finally convinced Mishiko Flores that she had to do something to help.

Q. & A.
Financial Planning Amid a Layoff
Greg Merlino, a certified financial planner with Ameriway Financial, will answer questions on financial planning for people who have lost their jobs or are worried that they might.

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First, she asked her husband: Could they afford to give the family money? Then, she practiced her offer with her mother. In the end, Ms. Flores made a delicate approach and, after bursting into tears, her friend accepted the $3,000 gift.

In last week’s Your Money column, I asked readers to tell me how they were wrestling with the question of whether to give — or take — money from those closest to them. The responses poured in from people like Ms. Flores who have offered help and those who have been recipients of financial aid, or who wish they were.

Because so much attention has been on the shortcomings of government assistance, I had not realized how many people were grappling privately with how best to reach out. Still, the volume of replies shouldn’t have been surprising, given that so many people have lost jobs, lost money in investments and watched the value of their houses drop in the past year or so.

And for all the people who are struggling to pay the bills, there are many in their inner circle who have been agonizing for months over how or whether to write them a check.

You can read some of the scores of inspiring (and dispiriting) reader comments on the Web version of last week’s column. We’ve also sorted some of the most thoughtful e-mail replies by topic in an interactive viewer linked from the version of this column at nytimes.com/yourmoney.

Meanwhile, I’ve tackled five of the toughest parts of this money quandary below.

GRANT OR LOAN? Whether you give money outright to those closest to you or lend it, the dangers are similar. Putting money between you can fundamentally and permanently alter the nature of the bond.

Loans are particularly problematic. Debt, especially when it is piled on top of existing loans, adds to uncertainty, especially if the recipients have no idea when they are going to be able to pay it back.

Giving money to someone you know, meanwhile, requires a specific mind-set. Can you truly do it without any expectations or preconditions? And can you do it without resenting what the recipient chooses to do with it?

“The person who is unemployed wants to be sure there are no strings attached,” said Fred Bracken, a New York City resident who recently lost his job with American Express. “There’s a difference between lending a hand and being coddled.”

If there are conditions, make them simple rules that inspire everyone involved. Almost 50 years ago, Rich Wilbanks was moving from Oregon to California with his family so he could start a teaching job. His brother and his wife handed them $300 and told them it was in the nature of a loan but that they would need to repay it by helping someone else.

He and his wife have paid it forward many times over the years since. “You get to pay what you want to whom you want,” said Mr. Wilbanks, who is now retired and living in Berkeley. “You never get a statement about it. It’s your obligation to deal with yourself, somehow down the road somewhere.”

Ms. Flores, the Clifton, N.J., resident who helped her friend, added two other items to the script. First, Ms. Flores reminded her friend that she would certainly do the same thing for Ms. Flores’s family if the need arose. And then, she told her friend that she never wanted to talk about it again.

One year later, the relationship is still intact.

ASK FIRST, OR JUST ACT? It is tempting to offer financial aid only when someone close to you asks. After all, you don’t want to embarrass anyone. But it may be best to risk discomfort, or being turned down, in the event that the person you’re worried about is simply too proud to make the request.

Ms. Flores, who counsels New Jersey state prisoners for a living, said, “A lot of the time, I’ll deal with clients who get into trouble because they’re afraid to ask for help.”

Even when someone does not accept an offer, the act of asking can itself be helpful.

“Just the thought that there is help in the margins means you don’t necessarily have to take it, and that has sustained me,” said Naomi L. Maloney, a copywriter and brand consulting strategist in Oakland, Calif., whose friends have offered her loans. “It makes me work a little bit harder and feel more confident in my self-worth as a worker and as an earner, to know that the help is there if I need it.”

ACT ALONE OR WITH OTHERS? In late January, Steven Roy lost his job, which provided health insurance for his family. A few weeks later, his infant son Isaac, who is known as Ike, was found to have a life-threatening illness. Within hours, friends of the family from the AustinMama Web community in Texas had erected ikeasaurus.com to coordinate help for the family. A few hours later, there was $4,000 in a PayPal account with the Roys’ name on it.

Kari Anne Roy, Ike’s mother, said it was easier to accept the money from a group than it might have been to say “yes” to many individuals. “There is no one we could give the money back to,” she said, given that the money in the PayPal account, now up to about $8,000, is a single sum. “We couldn’t give it back if we tried.”

That said, accepting the money, which the family has barely begun to spend and still hopes not to, has not been easy. “I don’t want to be that family on the tip jar at the sandwich store,” she said. “I feel an overwhelming sense of responsibility. Is it O.K. to buy bottles with the money, or do I need to buy medicine instead?”

GIVE ANONYMOUSLY? If you want to give money but handling it face to face is not palatable for whatever reason, anonymous grants are another option. If you are part of a religious congregation, its leader may be willing to help with the gift.

Sue Barnet of Wetumpka, Ala., arrived home one day in November to find a $200 check in the mail. The bookstore where she worked had closed, and someone from her church had given the money anonymously to her minister and asked that he forward it.

Ms. Barnet said she was so amazed that she had to sit down at her kitchen table.

“I couldn’t believe that someone in our congregation thought enough of me and had enough faith in me that they decided to do something really practical to help,” she said. “I come from a family of extraordinarily independent women, very determined. Sometimes that’s not such a good thing. I think I would have just been too embarrassed to accept a direct gift.”

Thanks to a new part-time job at a public library, Ms. Barnet is beginning to recover financially. She said she planned to donate to her church’s discretionary fund, which her minister could use to help others in need.

Another way to hide your identity while giving is through the Giving Anonymously Web site, givinganon.org. The nonprofit group will send an anonymous check on your behalf and record thank-you messages from the recipient.

CASH OR DIRECT PAYMENT? As a general rule, plain money is the most flexible gift there is. There are no limits on its use, as there is with a gift card.

If you can’t spare money right now, giving frequent-flier miles to people who might not otherwise be able to afford a vacation or a trip to attend a funeral is a nice gesture.

Several people wrote in to suggest one final idea: giving to the children of adults facing financial distress. Paying the provider directly for a music lesson or a week of camp feels less like an act of charity and has the added benefit of allowing those who disapprove of the parents’ spending or other choices to keep their children from doing without.


Lowered Expectations for the Bulls’ Return

Lowered Expectations for the Bulls’ Return

Published: March 21, 2009

THROUGHOUT the 1980s and ’90s, investors took comfort in knowing that short-term setbacks were just that: short. Back then, it took only about a year and a half, on average, for stocks in a bear market to slide from peak to trough and then climb all the way back.

Jeremy Grantham of the investment firm GMO says a roaring bull market is possible, “but it may still take us 10 years” to return to the previous peak.

But this is a different era. The downturn, which cut the Dow Jones industrial average in half, is already nearly a year and a half old, and despite recent gains there’s no clear sense that the worst is over.

So it’s time for investors to reset their expectations, many market strategists say. At the very least, don’t count on the market normalizing, or “reverting to the mean,” with much speed. And don’t count on the market recouping all its losses for several more years.

Setting aside specific problems now facing the economy — like the credit crisis and the continuing troubles in the housing and financial sectors — the math of recovering from downturns of this magnitude is hard to overcome quickly. James B. Stack, editor of the InvesTech Market Analyst, a newsletter in Whitefish, Mont., studied bear market recoveries since 1929; he found that after the most significant downturns — like this one — it has taken more than seven years for stocks to fully recoup losses.

For example, it took 7.2 years after the start of the bear market in 2000 for stocks to reach a bottom and then to climb back to the 2000 peak. After the bear started growling in 1973, it took 7.5 years to return to the high. And after the 1929 crash, equities didn’t return to their previous peak for another quarter of a century.

The current bear market started on Oct. 9, 2007. Based on the average recoveries of the past, the Dow may not make it all the way back to its peak of 14,164 until late 2014. And some market observers say it could take significantly longer.

But don’t stocks usually bounce aggressively off their lows? And aren’t stocks supposed to perform much better than average after years when they perform much worse than average?

Maybe not. A recent report by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School found that the payoff for investing in stocks following bad years was only slightly better than after good ones.

The report looked at global stock market performance going back to 1910. In five-year periods after the worst years in the market, stocks returned 7.1 percentage points above the prevailing yield on a three-month Treasury bill. Following the best years, stocks gained 6.8 points above cash. The study was part of the 2009 Credit Suisse Global Investment Returns Yearbook.

“Betting on quick mean reversion is a dangerous thing,” Professor Dimson said.

But assume for a moment that the market is due for a big snap-back. Even if that were to occur, stocks would still have a steep mountain to climb.

“We could have a legendary run off the lows, but it may still take us 10 years to get back to our old highs,” said Jeremy Grantham, chairman of the investment management firm GMO.

Historically, bull markets have gained around 38 percent in their first 12 months. That amounts to more than a third of the total gains throughout a typical bull market’s life. Let’s assume that such an initial surge happens this time.

The Dow is trading 7,278. A 38 percent rise would lift the Dow to 10,043. Even assuming a 10 percent annual climb thereafter — a big assumption in tough times — it would take nearly four more years to get back to even. That would bring us to 2013.

Investors who bank on 10-percent-plus returns may be fooling themselves, says Robert D. Arnott, chairman of the investment management firm Research Affiliates. “The folks who are thinking that we could go back to a sustained period of double-digit annual returns for stocks haven’t really studied their history,” he said.

Based on long-term returns of the Standard & Poor’s 500-stock index, including dividends, Mr. Arnott said it was reasonable to expect that stocks might generate annual returns of around 8.5 percent.

IN the 1990s, he noted, earnings growth was higher than average. That, as well as investors’ willingness to pay higher prices for each dollar of earnings, accounted for the outsize market gains in that decade, he said.

But that kind of euphoria about stocks will probably not be repeated anytime soon, as price-to-earnings ratios for stocks have fallen back in line with their historical norms and are well below their recent highs. “We have to move people away from the mind-set that anything less than double-digit returns is disappointing,” Mr. Arnott said.

Here’s another way to think about it: Even if it takes 10 years for the Dow to claw back to its old highs, at an annual rate of nearly 7 percent, “you would have still done very well — certainly better than in T-bills,” Mr. Dimson said.

Single-digit stock returns may not seem all that thrilling, compared with the huge numbers posted during the bull market of the ’90s. But for many investors, a stretch of modest returns might be a great relief after the losses of the last few years.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.


Now the Long Run Looks Riskier, Too

Now the Long Run Looks Riskier, Too

Published: March 28, 2009

CAN investors count on the stock market to produce handsome long-term returns?

The conventional answer has been, emphatically, yes. After all, despite downturns like the one we’ve endured recently, stocks over periods of 30 or more years have almost always outperformed other asset classes. And numerous studies have found that the stock market’s long-term returns have tended to fall within a surprisingly narrow range.

But those studies were based on the stock market’s past performance, which, famously, provides no guarantee of future performance. New research, using different statistical techniques aimed at capturing the uncertainty of future returns, suggests that the market may be much riskier than many investors have understood.

The new study, which began circulating last month as a working paper, is titled “Are Stocks Really Less Volatile in the Long Run?” Its authors are Lubos Pastor, a finance professor at the University of Chicago Booth School of Business, and Robert F. Stambaugh, a finance professor at the Wharton School of the University of Pennsylvania. A copy is at http://ssrn.com/abstract=1136847.

The professors don’t disagree that, historically, the stock market’s returns over various 30-year periods have been surprisingly consistent. Periods of particularly good returns have been followed by subpar ones, and vice versa — a process that statisticians call reversion to the mean. Prof. Jeremy Siegel, also of Wharton, and the author of “Stocks for the Long Run,” is often credited with demonstrating that mean reversion has been at work in the American stock market since 1802.

In an interview, Professor Stambaugh said that while Professor Siegel’s research shows that mean reversion is powerful, it is hardly the only force affecting the stock market’s long-term returns. Because estimates of those other forces are imprecise, Professor Stambaugh said, uncertainty about market fluctuations increases with the holding period — the opposite of what happens because of mean reversion.

One example of such a force, Professor Stambaugh said, is global warming. Its impact on the economy over the next 12 months is likely to be quite small, he said. But expand the horizon to the next several decades, and the possible effects of global warming range from negligible to catastrophic.

It is one thing to acknowledge the existence of uncertainty, but quite another to measure its influence on long-term market volatility. To do that, Professors Pastor and Stambaugh rely on a statistical approach pioneered by the Rev. Thomas Bayes, an 18th-century English mathematician. Bayesian analysis is often used to assess the uncertainty of future outcomes, based on a formula for updating the probabilities of given events in light of new evidence. This approach is quite different from traditional statistical measurements of probabilities based on historical data.

Applying Bayesian techniques, the professors found that reversion to the mean isn’t powerful enough to overcome the growing uncertainty caused by other factors as the holding period grows. Specifically, they estimated that the volatility of stock market returns at the 30-year horizon is nearly one and a half times the volatility at the one-year horizon.

Why don’t traditional measures of volatility, such as standard deviation, pick up this phenomenon? Those measures focus only on how much the stock market’s shorter-term returns fluctuate around the long-term average, Professor Stambaugh says.

As a result, they ignore uncertainty about what the average return might itself turn out to be. For example, he said, it is possible that the standard deviation of the market’s returns over the next 30 years could end up the same whether its average annual return over that period is 20 percent or zero.

What about Professor Siegel’s finding that the stock market has produced an annual average inflation-adjusted return of close to 7 percent since 1802? In an interview, Professor Pastor emphasized that the last two centuries could easily have been less hospitable to the United States, most likely lowering the stock market’s returns. An investor couldn’t have known in advance that the United States would win two world wars, for example, or emerge victorious from the cold war. In any case, he said, there is no guarantee that the next two centuries will be as kind to the domestic equity market as the last two.

IN an e-mail message, Professor Siegel acknowledged the theoretical uncertainty of forecasting stock market returns, but said it was hard to quantify it. He said the methods that Professors Pastor and Stambaugh used to measure the uncertainty were “very much outside of the standard statistical techniques.”

But Professor Pastor says that these methods are better suited than the standard techniques for quantifying the uncertainty faced by real-world investors. Even if Bayesian approaches have yet to become mainstream in financial research, he adds, they have become much more widely used in recent years.

What is the investment implication of the new study? Other things being equal, Professor Stambaugh says, you would probably lower your portfolio allocation to stocks. But by how much? It’s impossible to generalize, since the answer depends on your time horizon and what else is in your portfolio.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: strategy@nytimes.com.