A credit crunch is a period when lenders are unwilling to provide loans to borrowers. Generally a lender will extend credit to a borrower under the assumption they will be paid back with interest. But when the economy is bad, lenders become hesitant to make loans for fear of losing their money.
Archive for the ‘Fixed Income’ Category
A Credit Crunch is…
Wednesday, July 27th, 2011What’s up with Greece?
Wednesday, June 22nd, 2011
(photo credit: David Spender)
You’ve heard that there’s a little trouble brewing in the glittering blue southeast corner of Europe, right? If you haven’t, Greece is in the middle of a nasty thing called a debt crisis. Basically, they can’t pay their bills, they’re gasping for air, and they’re pulling at ropes thrown by their European Union friends. So…
What’s the big deal? Why not let Greece’s failed economic policies fail? Who cares?
Fortunately for Greece, lots of people care. European nations (and investors throughout the world) see the Greek debt crisis as an infection that could spread throughout the EU and cause serious damage. Because nations in the eurozone all share the same currency (the euro), an economic disaster in one country will drag down the value of the currency for everyone.
So why hasn’t the problem been solved yet?
This (unbelievably) is the short answer, and definitely leaves out some of the finer points of the problem:
>>> Other EU nations have already stepped up and injected more than $100 billion into the Greek economy as a kind of bailout, but it’s just not enough. The Greek government has to cut spending and raise taxes in order to qualify for more aid, but citizens (and their powerful government reps) aren’t exactly excited about losing services and a bigger chunk of their paychecks.
>>> The government is also required to privatize some of its assets, which means selling valuable things like ports and banks and water utilities to private companies to raise cash. This also is not so popular – residents like their beautiful Greek coastline!
>>> Finally, private creditors (people who are owed money by Greece) have to agree to voluntarily hold onto and buy up more Greek debt (like government bonds). This is a hard sell in any case, but because publicly traded companies are legally obligated to act in the best interest of their shareholders, it may be especially hard to convince them that buying low-return debt in a failing economy is good for anybody.
What’s going to happen now?
Well, pretty much everyone involved agrees that they need to maintain a stable eurozone and a strong currency. So European nations are likely to keep trying to fix the problem any way they can. We’re not wizards over here at TILE, so we can’t say whether it will work, not work, or kind of work.
We will say that Greece is probably a pretty fun place to go right now if you’re looking for adventure civil-unrest-style!
Rut-Roh: Credit Rating Agency Just Not That Into U.S. Debt Right Now
Wednesday, April 20th, 2011
(photo credit: striatic)
Well, that pesky federal deficit has finally caught up with us. Standard & Poor’s, a credit rating agency that basically judges how risky (or safe) it is to invest in a country, has officially said that the United States’s economic shenanigans may end up costing it its pristine AAA credit rating. (That’s three A’s, so you know it’s extra awesome.) The main reason? Washington’s seeming inability to agree on a plan to reduce the deficit.
S&P didn’t actually downgrade America’s credit rating, but it did change its “outlook” from “stable” to “negative.” This is basically a shot across the bow, or a warning from your mother that if you keep hanging out with those corner boys all you’ll get is a reputation.
This is kind of a big deal. If the U.S. is downgraded (and according to S&P is could be within three years), we’ll be out-credited by France. And foreign investors might be less interested in buying Treasury bonds, which would cut off an important source of income for the government. Which might result in more cuts to services like health care, education, and, you know, repairing roads.
Let’s see where we are in two years. In the meantime, how do you think you would do in S&P’s eyes?
Can you weather the credit storm?
Even if Mom is still doing your laundry, you can always make graphs
Tuesday, February 22nd, 2011Even if the graphs are, oh, maybe just a little misleading. Take this one, for example. It appears to say that the reason certain European countries are in worse financial shape than others is because more of their men want to stay at home playing videogames.
See? Italy, Greece, Spain, and Portugal are over there on the right, with more of their menfolk living with the parents. And, conveniently, those same countries rank high on the riskiness (a.k.a. sovereign risk) of their government bonds (a.k.a. sovereign debt).
If he lives with his parents, you might want to think twice. About buying his government’s debt. (via The Economist)
But in case your statistics teacher hasn’t drilled this into your heads yet, correlation is not causation. This is a real-world example of that. Just because you can make a chart with a nice line on it doesn’t necessarily mean that one factor causes the other. Think about this:
- The % of men living with their parents may be another way of describing the % of men who are unemployed (or underemployed). That would certainly be a factor in a country’s financial health.
- Adult kids living with their folks might be due to a really expensive housing market, which is another factor in a country’s financial situation.
- The countries with the highest % of men living with their parents all have cultural traditions that encourage kids to stay with their parents until they marry, or sometimes even after.
- Ireland doesn’t have this culture of stay-at-home-til-you’re-40, but their bonds are still considered risky investments. If you just focus on the red line, you might miss this important point.
In conclusion:
- Correlation is not causation
- Think before you reblog
- If you can’t do either of those things, at least read the comments
China Sells Off Part Of Its Piece Of The American Pie
Wednesday, February 16th, 2011“WASHINGTON — China, the biggest buyer of U.S. Treasury securities, reduced its holdings in December for the second straight month.
Overseas demand for Treasurys helps lower the interest rate the U.S. government pays on its debt. If the United States had to finance its debt through U.S. investors alone, the government would have to pay higher rates. American companies and consumers would also pay higher rates.”
What do you think?
Remember when we asked about the U.S. back-up plan on the off chance our biggest foreign debt holder decided to sell off our Treasury bonds? Well.
Maybe they’re just rebalancing their national portfolio. Or following the age-old rule of “don’t put all your eggs in one basket?”
A diverse investment portfolio. With butter and sprinkles.
Thursday, December 23rd, 2010
from Let It Dough! by Christoph Niemann (NYTimes)
You can invest in lots of different things – stocks, bonds, mutual funds, currencies, cows. (For real! They’re called commodities and they’re really weird.) And you can invest in this stuff in the U.S. or in almost any country in the world.
But here’s the trick: you want to have a diverse mix of all these things, so you don’t lose all your money if, say, the U.S. economy crashes or all the cows go on strike.
Diversification is a way to reduce that risk by creating a portfolio with a wide mixture of different investments. In basic terms, it means “don’t put all your eggs in one basket.”
Mmm. Sprinkles.
Investment Advice From A Banker’s Deathbed
Wednesday, December 1st, 2010Some people would shatter under the weight of Gordon Murray’s diagnosis. But he channeled his remaining energy into creating a legacy.
- In 2008, former Wall Street bond salesman Gordon Murray was diagnosed with brain cancer. Five months ago he decided to end his treatment and write “The Investment Answer.”
- After 25-years of high-level jobs on Wall Street, Mr. Murray says he suddenly realized that everything he knew about investing was wrong. Actively managing (tinkering with) investment portfolios, he says, is useless at best, and harmful at worst.
- Even as an experienced financial player, Murray found he didn’t actually know much about asset allocation. He learned the ropes in firms like Goldman Sachs and Lehman Brothers, which valued risk and bravado over safety and simplicity. His book, full of simple investment advice, is aimed at investors who are in the same position he was.
Facts & Figures
The five choices Murray says every investor needs to make:
- Only work with financial advisors who earn commission from you – not mutual funds or insurance companies
- Diversify! Keep your money allocated between stocks and bonds, big and small, and value and growth
- Make sure to include foreign investments to guard against economic disasters in the U.S.
- Be skeptical of actively-managed funds… even experienced fund managers can’t predict the future of the market
- Rebalance – sell your winners, buy more losers. It’s painful, but improves your returns in the long run
Best Quote
“It’s American to think that if you’re smart or work hard, then you can beat the markets.” – Gordon Murray
U.S. Taxpayers Actually Profit From TARP
Friday, October 22nd, 2010The mere mention of TARP sends many people into grumble-mode, but the emergency measure to bail out large financial institutions has actually turned the government a profit.
- The Troubled Asset Relief Program traded banks much-needed capital in exchange for partial government ownership.
- Now that two-thirds of TARP recipients have paid the money back, the government has seen a profit of about 8.2%. That’s more than the return on any U.S. Treasury bond, high-yield savings account, money-market fund, or CD.
- Despite the return on investment, the public is not happy about TARP. Several politicians have lost primary elections this year because they voted in favor of the program, and authorities say the return rate is misleading because it doesn’t take into account the other costs of the bailouts.
Facts & Figures
- The government has earned about $25.2 billion so far on $309 billion in TARP investments.
- The return rate on 30-year Treasury bonds averaged 4.1% during the last two years.
- Over the same period of time, high-yield savings rates averaged 0.36% – 0.92%.
Best Quote
“From the perspective of the taxpayers getting their money back, TARP has been a great success. But there are other costs as the government made it possible for the banks to pay back TARP. Those costs can turn out to be larger, and their legacy could last longer.” – Todd Petzel, Chief Investment Officer at Offit Capital Advisors LLC
China Is The Biggest Buyer Of U.S. Treasury Bonds
Monday, October 18th, 2010When you hear about the U.S. budget deficit, do you think about bond holders in China? Maybe you should…
- For the second month in a row, the Chinese government is the biggest foreign holder of U.S. Treasury bonds – bonds issued and backed by the U.S. government.
- A report called TIC (“Treasury International Capital”) tracks sales of American securities to foreign buyers. It’s one way of seeing how easily the U.S. government can attract foreign investors when it needs to raise cash.
- In the rank of foreign holders of U.S. Treasury bonds, Japan comes in right behind China.
Facts & Figures
- China’s Treasury bond holdings total $868.4 billion.
- Japan’s holdings total $836.6 billion.
- In August, private foreign investors bought $85.5 billion in Treasurys. In July they purchased $21.4 billion.