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Think Different
Here's a scary thought: What if after one of the worst market meltdowns in history, spurred by overleveraging in the housing market, debt-fueled bank expansions and bad bets on risky investments, no one really learned anything? What if the seeds of last year's market crisis are actually growing taller than before?
Robert Arnott, chairman and founder of Research Affiliates in Newport Beach, Calif., believes that investors are in fact getting ahead of themselves. "I think the collective amnesia is pretty alarming. I think the crisis has not passed," he says. "I think the risk of a major European bank going down is greater than ever. The risk of commercial real estate imploding the same way residential imploded is a real risk. And the aggregate debt levels are too high and unsustainable."
Got all that? Wait, there's more.
"There is a lot of complacency," Arnott continues. "There are a lot of investors thinking we're back to a 'buy-the-dips' market. A lot of investors I think have taken the last year-and-a-half experience and kind of cleansed their minds of it."
Arnott and his team at Research Affiliates calls this collective amnesia the "Rip Van Winkle Effect," pointing out that an investor who slept through the last two years would think there had just been a minor market drop. The investor would not be aware that what actually happened was a major crash, followed by "the mother of all recoveries," as Arnott calls it.
Analyst Research
Retirement tools often underestimate risk - MarketWatch
When it comes to retirement planning, it's important to measure risk. But it's just as important not to mismeasure it. Unfortunately, that's what most Americans and financial-services firms do today. They tend to focus on the probability of risk and less, if at all, on the magnitude of the risk. The net result is that many retirees and retirement savers now have investment portfolios that are far too aggressive.
Advisor Perspectives
Roubini: Fed Policies are Destabilizing the Financial System
Roubini said, investors should prepare for an anemic U-shaped recovery and avoid risky assets “across the board.”
The carry trade has caused all asset classes to be highly correlated. Even trades that appear to be different are really the same, Roubini said.
What matters more than correlation, however, is artificially low volatility in the markets.
“This carry trade cannot go on forever. Eventually it will unravel, and when it unravels it will get ugly,” Roubini said.
[He] cited a number of reasons that the carry trade must end. The dollar cannot fall forever, he said, and it will eventually stabilize. Similarly, the Fed cannot reduce volatility forever, and the current plan to purchase assets is scheduled to end in March. That will result in large budget deficits and a lack of buyers for mortgage-backed securities, causing spreads and volatility to rise. If there is a V-shaped recovery, the Fed will abandon monetary easing, and interest rates will rise, triggering a reversal of the dollar. Lastly, if there is a U-shaped recovery with a risk of double-dip recession, investors will become risk-averse and seek the safety of the dollar, as they did last year. This, too, will cause the dollar to rise.
The end of the carry trade will trigger a market crash, Roubini said, and “the global economic consequences will be more severe than the bursting of the housing bubble.”
Equities now overvalued
“The increase in equity prices is too much, too soon, and too fast and cannot be justified by the improvement in fundamentals,” Roubini said. The economy has bottomed out and started a gradual recovery, he added, but asset prices have “gone through the roof.”
Roubini is more bullish on the emerging markets than he is on the US and developed economies, because they do not have high leverage in their household and financial sectors. Their flexibility to use monetary and fiscal policies could accelerate their recoveries.
China, however, will not be the
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Roubini cited a number of reasons that the carry trade must end. The dollar cannot fall forever, he said, and it will eventually stabilize. Similarly, the Fed cannot reduce volatility forever, and the current plan to purchase assets is scheduled to end in March. That will result in large budget deficits and a lack of buyers for mortgage-backed securities, causing spreads and volatility to rise. If there is a V-shaped recovery, the Fed will abandon monetary easing, and interest rates will rise, triggering a reversal of the dollar. Lastly, if there is a U-shaped recovery with a risk of double-dip recession, investors will become risk-averse and seek the safety of the dollar, as they did last year. This, too, will cause the dollar to rise.
The end of the carry trade will trigger a market crash, Roubini said, and “the global economic consequences will be more severe than the bursting of the housing bubble.”
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“The increase in equity prices is too much, too soon, and too fast and cannot be justified by the improvement in fundamentals,” Roubini said. The economy has bottomed out and started a gradual recovery, he added, but asset prices have “gone through the roof.”
Those fundamentals justify only some of the market rally that began in March, he said. Back then, the market was not just pricing in a recession; it was pricing in an L-shaped depression, with major economies being taken over by their respective governments, he said. Government action has averted depression by minimizing the “tail risk,” Roubini said. “Given that risk is lower, asset prices should be higher,” he said.
Regardless of shape of recovery, Roubini said there is light at the end of the tunnel, and asset prices are anticipating a recovery. Risk-aversion is on the decline, he added. “We have avoided Armageddon, and investors have moved to riskier assets.”
The Private Venture Investment Process
Joseph offers a four-part standard for would-be angel investors: invest in a company that has a large (and growing) market for its products and services, ideally with little competition; it should have some kind of sustainable competitive advantage that will allow it to hold its market share; the management team should have compelling expertise in the contemplated market--a track record of proven experience with the specific business model or business plan; and finally, the deal terms must be at least fair and ideally favorable. There should be transparency, anti-dilution protection, and other protective provisions.
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When it comes to separating the wheat from the chaff, my primary screen is simple. For a private venture investment (PVI) to be worthy of the costly, time-consuming, bandwidth-bogarting process of evaluation, consideration, due diligence, and deal term negotiation, it must initially meet these four criteria:
Everything Matters: Corporate Governance Alert
The SEC’s amendments to Rules 144 and 145 will be effective on February 15, 2008 and the new exemption for certain compensatory stock options became effective on December 7, 2007.
Talking Business - Benjamin Roth’s View From Inside the Great Depression - NYTimes.com
In January 1931, a lawyer named Benjamin Roth, 38 years old, solidly Republican, a solo practitioner in Youngstown, Ohio, decided to start a diary. Realizing that he was “living through an historic thing that will long be remembered” — as he put it in one early entry — he wanted to keep a record for posterity.
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