James Saft

Time ripe for a new nifty fifty

Oct 20, 2011 21:31 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

Tough times make dependable excellence even more valuable, which is why we just might see the rise of a new “Nifty Fifty” of elite shares.

During their heydey in the 1960s and early 1970s the Nifty Fifty were a group of U.S. large cap companies which managed a spectacular period of outperformance during a generally downbeat and low growth period.

Featuring such household names as IBM , Coca-Cola , Procter & Gamble and Disney , the Nifty Fifty delivered strong and dependable earnings and dividend growth during a period where those were in short supply.

They were rewarded by a fantastic run of outperformance and a dizzying re-rating, or expansion of price/earnings multiples, which eventually drove valuations well into bubble territory.

Similar to the 60s and 70s, the world is staring at structural problems that will make a recovery from the long secular bear market unlikely for quite a while.

Europe’s coming credit austerity

Oct 18, 2011 20:48 UTC

By Jim Saft
James Saft is a Reuters columnist. The opinions expressed are his own.

Having demonstrated how poorly austerity worked in Greece, Europe may be on the verge of giving it a try in credit markets.

Plans to rescue the euro zone and its banks might land Europe in an extended credit crunch, a very poor outcome given the continent’s continued heavy reliance on bank financing.

China’s great divergence

Oct 13, 2011 18:15 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

China may be about to teach the world another lesson about what happens when speculative money learns that its favored markets aren’t panning out.

In the U.S. in 2007 the subprime bubble collapsed into a still-smoldering heap when borrowers and speculators realized that real estate was topping out.

In China speculative investments including so-called “private lending” don’t promise an exact repeat but have enough elements in common to make the two situations rhyme.

Europe opens drug front in war on reality

Oct 11, 2011 13:53 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

It was perhaps inevitable — at some point Europe’s war on reality would flower, if that is the right word, into a war on drugs.

Funny too, because usually people who want to escape reality take drugs, rather than blaming drug-taking in others for reality’s nettlesome shortcomings.

Carlo Giovanardi, who is undersecretary in Silvio Berlusconi’s government in charge of family policy and drug prevention, is now blaming stock market “volatility” (by which I am guessing he means falls) on cocaine-taking among share traders on the Milan stock exchange. Giovanardi said that the government would look into the possibility of drug testing for traders, perhaps with the help of the Milan Bourse and the country’s market regulator.

Europe up a creek with no central bank

Oct 7, 2011 21:32 UTC

James Saft is a Reuters columnist. The opinions expressed are his own

HUNTSVILLE, Ala. – Europe is demonstrating that a sovereign nation without a true central bank is just an uninsured bank, liable to be tipped over by the markets.

While the ECB is a central bank in almost all respects, what it isn’t is a lender of last resort for individual euro zone nations, a role that is expressly ruled out by the European Treaty.
A lender of last resort is what stops a bank run on a solvent institution from bringing it down due to a lack of liquidity. In the case of a nation, a lender of last resort, usually the central bank, can simply print money to satisfy debts in its own currency. And though we’ve all become terribly cynical about the concept of liquidity crises in the past couple of years, not least because so many people in authority have used it as a place to hide when the real issue was solvency (Greece, Lehman Brothers), the fact is that markets take on their own momentum.
Just as no-one viewed euro zone debt as anything other than a safe haven for the currency area’s first decade, now investors are busy driving up the price of even German default insurance.
This is the terrible logic of markets when they view sovereign borrowers as credit risks; it is almost inevitable that they push, and in pushing weaken the un-backstopped borrower and ultimately bring it down. This is a process which needs a circuit breaker, and Europe has no adequate circuit breaker, unlike Britain or the U.S.
“Rather than viewing government bonds as risk-free, safe-haven assets, financial markets now view and trade euro area sovereigns mainly as credit risks. This has very profound consequences for the stability of financial markets,” economist Elga Bartsch of Morgan Stanley wrote in a note to clients.
“For it seems to me that some markets have lost their ability to find a new, stable equilibrium. This is because, instead of moving in sync with the business cycle, government bond yields now move against the cycle, ie, rising in a downturn. This seriously undermines the ability of the government sector to stabilise the economy and the financial sector.”
Bartsch looked at all sovereign borrowers since the mid-1990′s whose spreads above Treasuries rose to at least 10 percentage points, an indicator of distress. In only 20 percent of the cases did a debt restructuring, or default, ensure. Some were rescued by the IMF but many righted themselves.
Thus Europe is at the mercy of markets, left without a central bank or outside force which can break the cycle and impose order. The ECB has purchased government bonds as a back door means of providing support, but this is awkward, will ultimately test the limits of the bank’s capital and, as being against the spirit of EU law, is deeply divisive. The EFSF fund is not well suited for playing this role either.


You could object that, of course, all sovereign borrowers are ultimately credit risks. Even if one is repaid in the sovereign’s currency, that currency can be debased by inflation or the money printing press. True, but markets do not seem to impose the same penalty on inflation risk that they do on default risk.
There are two main take-aways from this. The first, of course, is that if you don’t have a proper central bank you ought to keep your debt profile slim so as not to attract too much attention to your vulnerability. This worked for Germany, whose Bundesbank was similarly forbidden by charter from printing money to buy government debt. Not borrowing too much is good advice but not terribly helpful in the current circumstances.
The second is that Europe needs a democratic way in which to agree to monetize or otherwise write down its debts. Failing that, the risk is that the domino-style run on government credit becomes self-fulfilling, as we’ve seen is the risk with ever larger sovereign borrowers like Italy being weighed by the markets and found wanting. This ultimately will break the euro, probably at about the point when Germany realizes it is picking up France’s dinner check.
This is not an argument in favour of suppressing markets by banning short selling or other measures, as is so often the impulse in Europe. Those arguments are raised by people, be they politicians or investment bank CEOs, who want to be insulated from the consequences of their own decisions. It is instead about clarity about who pays.
Europe suffers from unclear lines of accountability. There are easy fixes for that, but imposing them quickly will be difficult. That is certainly how markets are trading, and the result may be a self-fulfilling fracturing of the euro.

Waiting for labor’s gains

Oct 4, 2011 21:51 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala. – Right about now, even the most committed capitalist investor ought to be hoping for one thing: that labor soon has the upper hand.

That’s because the whole edifice: the global economy, the consumption-based developed economies and the share prices they power are crumbling because average workers simply haven’t got enough earning and buying power to play their central role.

Wages in the U.S., for example, have been stagnant for the best part of 40 years, during which time the consumption merry-go-round has only been kept spinning through a combination of artificially high asset prices and spending borrowed money.

The drugs don’t work any more

Sep 29, 2011 22:22 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

On one point departing Kansas City Fed President Thomas Hoenig and the high-yield bond market agree: current monetary policy is not helping.

Bonds issued to highly indebted and riskier companies have suffered since the Federal Reserve last Wednesday introduced “Operation Twist,” its attempt to suppress longer-term rates and goose investment and speculation.

This should come as little surprise to Hoenig, who retires from the KC Fed on Oct. 1 after a long career as a central banker and banking supervisor, and who has decried the way monetary policy has encouraged the running up of debts.

Solving Europe doesn’t avoid recession

Sep 27, 2011 14:13 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

The question isn’t “will Europe tip the world into recession?” but rather how much worse the euro crisis will make the recession that is already chugging down the tracks.

Markets have been transfixed by the European debt crisis, with its dozens of moving pieces, and its potential to reshape the monetary and political map, to topple banks and to deal a massive shock to the global economy, trade and confidence. High-level meetings in Washington over the weekend were, once again, inconclusive. Some hope for a euro super bazooka bailout vehicle, though such a fund faces obstacles and its chances for lasting success are far from clear.

Investors are right to worry about the unraveling of Europe, but wrong to conflate averting disaster there with a return to rude economic health.

Don’t expect coordinated easing

Sep 22, 2011 21:31 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala. – That much-anticipated global coordinated easing won’t be global, won’t be coordinated and won’t even be much of an easing.

In 2008 the world got global coordinated monetary easing, with contributions from central banks from Tokyo to Washington.

In 2009 virtually every member of the Group of 20 nations contributed to global coordinated fiscal easing, committing to a total of almost $700 billion in additional spending, or more than 1 percent of global GDP.

One-note Geithner’s leverage song

Sep 21, 2011 21:12 UTC

James Saft is a Reuters columnist. The opinions expressed are his own

HUNTSVILLE, Ala. – Tim Geithner went a very long way on Friday to accomplish very little, flying to Poland to pitch to the assembled euro zone finance ministers the same tactics that have worked so poorly in the U.S.

Faced with another debt problem, Geithner once again proposed more debt as the solution, suggesting that Europe should leverage its EFSF bailout fund so it can have enough firepower to buy up the debts of weak euro zone nations. This mislabels a debt problem as a price problem, and is an almost exact analogue to the U.S.’s own tactics in addressing its own financial system problem — creating leveraged funds to buy up toxic debt and thereby massage the balance sheets of banks.

This is the deflationary equivalent of reacting to runaway inflation by deciding to lop a zero off the end of prices; things will appear better but the underlying issue is not resolved. This is borne out in the U.S., where private fortunes continue to be made in banking, but where the system is unable to play its role in capital intermediation. Many lenders are still wary, rightly, of funding U.S. banks and are unconvinced that the toxic debt problem is gone for good.