Felix Salmon

Why invest retirement funds in stocks?

Felix Salmon
May 6, 2010 06:24 UTC

I love Eddy Elfenbein’s response to Scott Adams, who thinks that a good simple retirement portfolio can be wholly made up of just two ETFs, one domestic and one emerging-market.

Elfenbein responds with a great question: why not just invest the whole thing in Treasury bonds? After all, I’m pretty sure that Scott Adams doesn’t have a great degree of certainty about the magnitude of the equity premium over the next decade or three, and the first priority when it comes to retirement funds is that you don’t lose them. Right now, with a eurozone crisis looming, it’s entirely conceivable that we could see a rerun of the stock-market panic we had in 2008 and a return to Dow 7,000 — or even lower, if the U.S. and European authorities find themselves without the fiscal and monetary ammunition that they had last time around. In any case, the point is that we’ve been there before and we can be there again, and if that’s a possibility that’s unacceptable to you, then you shouldn’t invest in a 100%-stocks strategy.

Of course, there are risks to government bonds as well, especially long-dated ones, as Jim Chanos loves to explain. But if Treasuries take a tumble, you need to be a very nimble investor indeed to outperform in some other asset class.

My feeling is that if you’ve got a nest egg which you want to keep safe for retirement, then investing it in the highest-yielding TIPS you can find is probably as good a strategy as any. You won’t get rich that way, but at least you’ll be protected against stock-market losses and against inflation. On the other hand, if you don’t have enough money for retirement and you need serious positive returns on your investment, then you’re going to have to start speculating. Either that or going out and earning more money.

Most people, I think, overestimate their risk appetite, and only realize when it’s too late that they really couldn’t afford to lose that money after all. Which is why right now in many ways is a better time to sell stocks for retirement and put the proceeds in something safe like TIPS, than it is to buy stocks for retirement. If you were sickened when the stock market was at its lows and promised yourself that you would be much more cautious in future, then now’s probably as good a time as any to take advantage of the big run-up that we’ve seen in stocks and rotate into something which allows you to sleep well at night. Unless you enjoy investing — and few of us do — I see no great reason to jump with both feet, Scott Adams style, into this increasingly unpredictable and senseless market.


@Abulili, you are a freaking idiot. One, the US is not 16th-century France and will not default over the life of these bonds. Two, face value has nothing to do with real returns; if there is inflation, TIPS will adjust up and deliver. Three, not that it matters much, but TIPS are available at auction from the Treasury for free so you can always buy in at face value.

There is a lone gotcha with TIPS, which I think in your addlepated way you were trying to note. If there is deflation during the period you hold your TIPS, “[t]he principal is adjusted downward, and your interest payments are less than they would be if inflation occurred or if the Consumer Price Index remained the same.” [Treasury FAQ] This is, of course, still a positive real return.

“[A]lmost certain to have a negative real return” still has me laughing at you. It is quite literally impossible to have a negative real return on TIPS unless the US defaults. Not improbable — impossible.

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Reasons to buy Newsweek

Felix Salmon
May 5, 2010 20:29 UTC

Ken Layne has by far the funniest and most cutting reaction to the Newsweek news, but it’s Jeff Bercovici who nails the conventional wisdom:

If Allen & Co. can succeed in finding a buyer for Newsweek, it will likely be the sort of transaction in which the Post Co. accepts a nominal sum just to rid itself of the expense of publishing a money-hemorrhaging weekly magazine.

I’m a little bit more optimistic, because at heart the circulation numbers at Newsweek are still extremely impressive, even if they’re well down from their highs. The US rate base is 1.5 million, there’s another 460,000 English-language copies sold each week internationally, and 560,000 foreign-language copies as well. Then of course there’s the website on top, which attracts a respectable 5 million uniques.

Those numbers are more than high enough to sustain a seriously profitable business; the problem is that Newsweek had a much larger rate base — of 3.1 million — as recently as 2008, and it has necessarily suffered as its staff and circulation has shrunk.

There are two big problems facing Newsweek, but neither is insurmountable. The first is that it can’t afford to have a huge newsgathering and editorial staff any more. The occasional fabulous feature about Oprah is wonderful to have, but those things can be bought from freelancers: they don’t need to be written by expensive staffers. Newsweek is not going to break much if any news, and it shouldn’t spend a fortune trying: instead it must aggregate, curate, and add value with a range of expert and reliable voices. Think of it as a more honest, less pretentious, and less anonymous version of the Economist.

The flipside of that problem is that Newsweek has to be able to rise above the rest of the bloggy commentariat. Ezra Klein, one of WPNI’s biggest stars, writes today about the plight of the Economist and other highbrow mags:

Those magazines write reported, analytical (and opinionated) articles for a sophisticated audience. But because their publishing cycles are slow, they’ve not traditionally been major players in the day-to-day conversation. But now you’ve got people who trained at those magazines and adopted their sensibilities writing at internet speed, which is to say, faster than the daily cycle. And that’s working, I think. At the very least, it’s working with elite audiences.

Newsweek is actually in a strong competitive position here: elite audiences are more comfortable making their own judgments about what’s worth reading and what isn’t, and coming to the conclusion that they get better analysis from say Rortybomb than they do from any of their print publications. But most of Newsweek’s readers don’t read blogs, or consider it to be in competition with blogs. They’re comfortable getting their news analysis weekly, in a trustworthy format, rather than multiple times per day in a format which requires active, critical reading.

As a long-term investment, the demographics of any print product look bad. Newsweek’s audience is old, it’s getting older, and it’s hard to imagine the social-media generation having so much awe and respect for its authority that they will buy it weekly to find out what’s going on in the world. And the economics of distributing a weekly news magazine are extremely painful: it costs a huge amount of money to print and distribute all that paper every week, when you don’t have the luxury that monthly magazines have of long lead times at the printers.

But printing technology is advancing fast, and it’s easier than ever for magazines to print relatively small runs in dozens if not hundreds of non-union locations around the world. A new and nimble network of local ad-sales teams can fashion custom versions of the product to targeted demographics, with a relatively small central publisher’s office handling the big buys across the global franchise. And the editorial product will be a bit like Google search results: universally authoritative, while still looking significantly different depending on where and who you are.

And internationally, where Newsweek has an enviable and demographically very high-end footprint, there’s more respect and hunger for authoritative news analysis. Besides, for the next couple of decades at least there will still be tens of millions of Americans who don’t like consuming such things by reading screens, and are much happier sitting back in the garden or on the couch with a high-res paper product.

Getting from today’s Newsweek to tomorrow’s will be painful, and will involve lay-offs; the buyer will naturally want WPNI to pay for those. So depending on how the deal is accounted for, Bercovici might be right about the headline price. But Newsweek is one of only a handful of highly-respected global news brands, and in a shrinking world that should be more valuable than ever.


I’ve been a subscriber for years, and I just let my subscription lapse. I consider myself left-wing, but do not consider the magazine’s recent changes to represent my perspective (the lapse into a male-dominated sexism was quite disappointing). But I do agree that Newsweek had stopped meeting my needs for a review of the week’s news. I live outside the US, and used to be able to rely on Newsweek to keep me in touch with events back home. But since its makeover about a year ago, it stopped doing that. It had become more essay, personalities, commentary, career-building – the Beltway Voice. The quality of the work was largely quite good, but I did not pay for that kind of magazine. I had just picked up a copy of Time and the Economist to see which would be my new subscription, so this news does not surprise me. But I do miss the old Newsweek. There is still a market for a print news weekly; alas, Newsweek forgot how to be that.

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Timing a Greek default

Felix Salmon
May 5, 2010 16:34 UTC

Willem Buiter has joined the group of people convinced that Greece will default. I think he’s too optimistic:

A mix of huge debt and no primary deficit – i.e. needs for external funds to pay for ongoing government spending – constitute “ the exact circumstances that makes a default individually rational for the debtor,” he notes…

The later it happens, the larger the haircut will be, says Buiter. He reckons a 30% cut today would have sufficed, but would have wrought havoc on the capital positions of Greek, French and German commercial banks, which would probably need to be recapitalized immediately, provoking major political embarrassment in Berlin and Paris.

Instead, Buiter says, the plan must be to give some time to those banks to recapitalize, or sneak Greek exposure off private balance sheets and on to public ones.

The problem here is that a 30% cut today would not have sufficed, precisely because Greece is not running anything close to a zero primary deficit. Paul Krugman makes the point:

Here’s the thing: Greece is currently running a huge primary deficit — 8.5 percent of GDP in 2009. So even a complete debt default wouldn’t save Greece from the necessity of savage fiscal austerity.

It follows, then, that a debt restructuring wouldn’t help all that much.

In fact, it’s worse still: even if Greece were running a zero primary deficit (and I’d love to know if it’s ever managed that particular feat), a default without devaluation would still keep the country mired in its current uncompetitive state. If you’re going to go through the massive pain of a default, you might as well get the upside of devaluation at the same time, and exit the euro.

At that point, the only question is: do you default and devalue now, or do you wait a couple of years? Germany and France might well want to wait, in the hope that their banks will be better able to cope with such a thing in a couple of years’ time. But from a Greek perspective, if the pain is coming, best to go through it now and bring forward the growth rebound, rather than push off the devaluation stimulus to an indefinite point in the future.


Gee Butch from PA and Trewq,
I was really enjoying the comments on this aricle until you guys had to start the ideology wars.

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How the CDS market could help Greece

Felix Salmon
May 5, 2010 16:22 UTC

Amidst the sober analysis and the bloody riots, one expected artifact of the chaos in Greece has been notable by its absence: fevered finger-pointing at speculators in the credit default swap market.

And it’s now becoming clear why:

Barclays Capital analysts point out in their most recent European Credit Alpha report that Greek government bonds have been trading substantially wider than credit default swaps on the sovereign. This creates large potential returns on negative basis packages, especially if there is a credit event in the near term.

The negative basis between five-year bonds and five-year credit default swaps has recently been as great as 200 basis points. However, the basis can be even greater for a basis packaging combining short-dated credit default swaps and long dated bonds, says the report. The old-style restructuring used in Greek sovereign credit default swaps means that obligations of any maturity up to 30 years out can be delivered into any credit default swap.

In English, what this means is that the spread on Greek bonds is substantially larger than the spread on Greece CDS. As a result, you can theoretically lock in a risk-free profit by buying Greek bonds and at the same time buying credit protection on them: the cost of the protection is lower than the yield on the bonds, and the rest of your coupon payments is pure profit.

This also means that you can’t blame the CDS market for sending Greek bond spreads gapping outwards — if anything, the opposite is the case, and Greek bond spreads are probably responsible for upward pressure on Greek CDS spreads. Once again, if you own Greek debt, the CDS market is your friend: you’re better off buying protection on that debt than you are simply selling your bonds outright.

This trade could also help fund the Greek bailout while at the same time providing a solid bid for Greek bonds. I thought in 2009 and I still think now that governments might want to get involved in this trade: they can start buying up large amounts of Greek bonds, and hedging the credit risk in the CDS market. That would reduce Greek bond yields (an obviously positive outcome), while at the same time providing a high-visibility vote of confidence in the European banking system and the counterparty risk that might lie inside it.

Right now people are scared about the high yields on Greek debt, and that’s causing nervousness in financial markets worldwide. There’s not a lot of money going into the Greece basis trade, because it might be quite expensive if you need to fund it, and borrow the money you’re investing in Greek bonds. But that’s not an issue for someone like the German government.

While lending directly to Greece with one hand, Germany could start lending indirectly to Greece by buying its bonds in the secondary market with the other — and thanks to the existence of the CDS market, they don’t even need to take on any extra credit risk when they do so. It wouldn’t be enough to save the country from its fiscal crisis, a permanent solution to which is still remote. But it would surely help at the margin.

(HT: Alea)

Update: A tipster explains the reasons for the negative basis here: there’s forced selling in the bond market, especially from accounts which aren’t allowed to hold debt which has even one junk rating. Greece is also being tossed out of a few bond indices. So that explains the downward pressure on Greek bonds, which doesn’t exist in the CDS market.


This is like telling a junkie to inject his way out of drug dependency. But funny at the same time.

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Art market datapoint of the day, Picasso edition

Felix Salmon
May 5, 2010 15:17 UTC

Holland Cotter today does a great job of disproving Sotheby’s auctioneer Tobias Meyer’s infamous maxim that “the best art is the most expensive, because the market is so smart”.

His subject, of course, is the $106.5 million 1932 Picasso, which now holds the record for the most expensive work of art ever sold at auction. But that doesn’t mean it’s especially good:

It’s an entertaining picture. Picasso was a born entertainer, a comic ham. I think that’s the reason for his immense popularity, though it’s not what’s great, meaning original, in his art. The seed of that is found in early Cubist painting and collage, with their shaking-apart structures, razor-sharp slices into space, and disorienting confusions of art, language, time and accident. Everything about that work was new and not easy, and still is.

“Nude, Green Leaves and Bust” and other paintings from its period are old and easy, art as usual. They keep to the known, the pleasure zone; they keep old orders firm, artist over subject, man over woman, woman as thing, a pink blob with closed eyes.

Carol Vogel speculates, unsurprisingly, that the buyer was one of a select group of alpha males:

Dealers said several prominent collectors were thought to be bidding on it, including Kenneth C. Griffin, chief executive of the Citadel Investment Group in Chicago; Leslie H. Wexner, the Columbus, Ohio, collector; Steven A. Cohen, the Connecticut hedge-fund billionaire; Joseph Lau, a Hong Kong collector; and Roman Abramovich, the Russian financier.

At these levels, buying art becomes trophy-hunting, a silly competition to see who can spend the most money. The main reason for the price is not quality but size: the painting is a good 20 square feet, much larger than any of Picasso’s cubist masterworks. The painting is instantly recognizable as a big Picasso, and it will surely make its buyer feel very rich and powerful every time he sees it. But the price has nothing to do with quality.

Who could be chairman of Goldman Sachs?

Felix Salmon
May 5, 2010 13:40 UTC

Splitting the roles of chairman and CEO at a public company is nearly always a good idea. It makes sense at Goldman Sachs, which is reportedly considering it, but if it were to happen, the decision would be a fraught one.

For one thing, it would look panicked and defensive, rather than a long-term strategic move. But the main reason not to do this, from Goldman’s view, is simpler: it’s incredibly difficult to find a suitable candidate. Just think of all the qualifications which are needed:

  • The ability to set the strategic direction for what is still the world’s foremost investment bank and broker-dealer. How big should Goldman be? What kind of balance between banking and trading should it have? How much should it pay?
  • The ability to be the risk manager of last resort, keeping an eye on the balance sheet and making sure that nothing is getting out of hand. With David Viniar as CFO, this part of the job is maybe less important right now. But it’s still hugely important.
  • The ability to communicate effectively with shareholders, regulators, and politicians — in a way that Lloyd Blankfein is not so great at.
  • The ability to represent Goldman’s shareholders, who are to a large degree its partners.
  • The ability to restore the credibility of the rest of the board, which has been something of an embarrassment of late.

Is there anybody who can do all this? The WSJ article barely even brings up the names of Hank Paulson and Arthur Levitt before throwing cold water on them. My feeling is that if the job is going to be real, and not a figurehead, it really needs to be a Goldman person of some description doing it: maybe Bob Hormats or Byron Trott? Or bring back Jon Corzine? I wonder whether he’d take the job, since it comes with so much downside and so little obvious upside.


The NYTimes article suggests that they were of the same type. But its true, we don’t know the details.

One thing is certain is that Goldman is getting a disproportionate share of the beatings of late. J.P. Morgan and other banks did many of the same things…

I think it is because they are the leader. Because they are tops, they need to be much cleaner than second tier, fly-by-night firms. It is not enough to have average standards. You may give up a lot of sketchy business but you will get better business.

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Felix Salmon
May 5, 2010 06:47 UTC

Euro now below $1.30, Greece 2yr debt still at 14%. Crisis not remotely averted yet — Reuters

Where are the criminal prosecutions of bankers? Are regulators and the FBI asleep? Or was there no crime there? — HuffPo Investigative Fund

Lazard Confirms It Is Advising GreeceDealbook

Is Gary Gensler to the left of the White House when it comes to derivatives reform? — TNR

Teitelman scores some good points against Buffett — Deal


Bob, it’s fixed now, sorry about that.

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Reinhart explains that Greenspan quote

Felix Salmon
May 4, 2010 15:18 UTC

It’s official: Greenspan wasn’t talking about the housing bubble, or economic policy at all, in the now-famous quote from the March 2004 minutes where he talks about the risks “of inducing people to join in on the debate”. We’ve got it straight from the horse’s mouth: Vincent Reinhart is the man that Greenspan was talking to, and he explains exactly what the context was:

Alan Greenspan’s comment was in response to a briefing I had just given on an inside-baseball topic. The FOMC had been considering moving up when to release its minutes, which are a ten- to fifteen-page summary of the discussion at the meeting. Up to then, the minutes were released after the next regularly scheduled FOMC meeting. Staff had run an experiment to see if the minutes could be prepared quickly to be released sooner—before the next meeting. (The issue was not in the drafting, but rather in incorporating comments and a final approval from policy makers with hectic schedules.) In a short briefing, I asked a narrow question whether the FOMC’s discussion of such transparency issues at the prior meeting should be included in that meeting’s minutes. (In the event, the FOMC was transparent about transparency and also did expedite the release of the minutes.)

My remarks sparked a general observation from Chairman Greenspan on limits to transparency. Specifically, he said, “We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.”

For those not familiar in parsing his prose, Greenspan was noting that letting the world know that top Fed officials were considering an issue would draw attention to that issue, which might sometimes be uncomfortable. This is a debatable proposition, to be sure, but not one that sounds conspiratorial.

That is, unless you have the imagination of Ryan Grim, who linked this obviously general discussion of the timing of the release of the minutes to the specific mention of housing prices 45 pages (and four hours in real time) earlier. To do so, Grim also had to elevate a mention about real-estate speculation by the president of the Federal Reserve Bank of Atlanta, Jack Guynn, into Cassandra’s warning. That comment, by the way, came in the same set of remarks in which Guynn noted a little later on that the price of steel fence posts had doubled.

We do at least now know what Grim means by “moments earlier”: he means “four hours earlier”.

Still, the fact is that Grim’s story about Greenspan is, in Reinhart’s phrase, “too good to check”. And it’s already found its way into the Greenspan lore, along with a lot of more accurate stories about him.


All Grim has going for him is a convincing capability of creating situations which did not occur, enhanced by his 20/20 hindsight. My guess is that in real time he would not be capable of finding his way out of a two man tent before he peed his pants.

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The Goldman defenders

Felix Salmon
May 4, 2010 14:10 UTC

Is it just me, or are the defenders of Goldman Sachs becoming more vocal and more numerous these days? Andrew Ross Sorkin today seems to come down squarely on the side of Warren Buffett and Bill Ackman, defending Buffett from accusations that his stance on Goldman is self-serving (“his stake in Goldman is more a loan than an investment, so he’ll no doubt be paid no matter what happens with the Abacus suit”) and agreeing with Buffett that there seems to be something of a witch-hunt going on:

With so many easy targets of the financial crisis — Fannie Mae, Freddie Mac, A.I.G., Bear Stearns, Lehman Brothers — it does seem odd that the government, and the public, has chosen to vilify one of only a couple of firms that made fewer mistakes than the rest.

The problem is that this makes no sense. Does Sorkin really believe for one moment that the other firms on his list haven’t been vilified? After all, he himself wrote a column last year explaining that that the vilification at AIG was so bad that you wouldn’t want to work there for less than $3 million a year.

More invidiously, Sorkin twice plays the cunning game of stating the SEC case against Goldman in ways that makes it easy to criticize. “The S.E.C. has accused Goldman of not disclosing that the Abacus instrument was devised in part by a short-seller, John Paulson, who stood to gain by betting against it,” he writes, accurately enough, and then lays out the opposite case:

“For the life of me, I don’t see whether it makes any difference whether it was John Paulson on the other side of the deal, or whether it was Goldman Sachs on the other side of the deal, or whether it was Berkshire Hathaway on the other side of the deal,” Mr. Buffett said…

One Berkshire shareholder who has been a regular in Omaha is Bill Ackman…

In recent days, he has gone even further than Mr. Buffett in his defense of Goldman, suggesting it would have been unethical for the firm to disclose Mr. Paulson’s position in the Abacus deal. He says that Goldman, as the market maker, had a duty to protect the identity of both sides of the transaction.

He agrees with Mr. Buffett that as an investor, he would not have considered it necessary to know that Mr. Paulson had helped select the securities.

But this is a bit of a straw man, as Sorkin well knows. The heart of the SEC case is not that Goldman failed to disclose Paulson’s name. It’s that Goldman failed to disclose the fact that the sponsor of the deal, the fund which was paying Goldman $15 million to put it together, was going short the entire thing. The Magnetar disclosure, for instance, which the SEC presented to Goldman as an example of what the bank should have done, never actually reveals Magnetar’s name or identity. But it does make it clear that the Initial Preferred Securityholder might be shorting the deal and that its interests are not necessarily aligned with those of the investors.

What’s more, Buffett and Ackman have made their careers, and become extremely wealthy, by analyzing and picking individual securities. That’s what they’re especially good at. Neither of them in a million years would invest in a CDO managed by someone else, like ACA: they compete with the likes of ACA. IKB, by contrast, specifically asked for an independent CDO manager, and said that it would not be happy with Goldman itself selecting the contents of the CDO. That’s not the kind of action that you’d expect from someone who thinks that a simple list of reference securities comprises “all the relevant facts that any investor would need”, in Sorkin’s words.

ACA, here, is a bit like a mutual fund manager, and IKB was an investor in that fund. The argument from Buffett and Ackman is essentially that so long as fund investors know what their fund manager is investing in, they shouldn’t really care who that manager is. It’s silly, especially coming as it does from two men who have made a fortune by setting themselves up as great stewards of other people’s money.

John Gapper is much more sensible on the whole affair, throwing prior Buffett statements back at him, especially the one from 2002 where he complains that derivatives are nearly always mispriced until it’s far too late. He says that “the shareholders of Berkshire Hathaway were disappointed by Warren Buffett’s defence of Goldman Sachs”, while Sorkin prefers to say that “by the end of Berkshire’s annual meeting, at least some of the 40,000 shareholders in attendance who had been skeptical of Goldman” had come around to Buffett’s way of thinking. I suspect that Gapper’s characterization is the more accurate.

But it seems that Goldman is drumming up a certain amount of what it likes to think of as “third-party validators” these days, including this astonishing statement from law professor Richard Epstein:

At the time of the ill-fated Goldman transaction, no one in the CDO market thought they were governed by any full disclosure regime. It was everyone for himself, and for good reason.

Hm. I wonder, in that case, why there was a 196-page prospectus for the deal, full of dense, disclosure-filled legalese.


If it were only the big investment companies swindling each other of their own money, this would all be moot, but in the end it was the public who took more risk then they would be willing to take.

In the end, these deals caused huge shudders throughout the world because it is paper snd debt, smoke and mirrors and the transactions more then a little suspect throughout.

@AEinCH, Personally I would like to know how Synthetic CDOs can be crafted at all, as though it were some big win in a high stakes lottery and you hold the ticket on paper. Being the money collected was the prize and there was no actual entity as a prize, I think initial investors have the right to ask that question.

Is “are you willing to take ridiculously high risk to buy into high risk/high yield winner takes all schemes?” now one of the questions the investment companies ask their clients? You would find, if asked, most would not wish to have their investment funds used in a lottery scheme.

Money maker= book maker

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