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After such a rotten year, investors may not be eager to contemplate the next one. Thinking ahead is part of the job description for people who work in the financial markets, though, so when fund managers and strategists were asked to foretell surprising developments for 2009, they bravely accepted the challenge.
Most of their predictions are upbeat, as they almost have to be. With the past and present so bleak, what could be more surprising than a rosy outlook?
A recovery of the financial system, the black hole of the global economy and stock market, might seem especially improbable. No surprise, then, that banks figure in the prognostications.
“The first thing that you just wouldn't expect is for the U.S. financial sector to come back in a big way,” said Komal Sri-Kumar, chief global strategist at TCW Group, a subsidiary of the French bank Société Générale.
Sri-Kumar said he expected such an outcome in part because he thought that the U.S. economy, after a “pretty severe” recession in this quarter and the next, would rebound more swiftly than many of his peers were forecasting. One way for investors to benefit if he is right, he said, is to buy high-yield corporate bonds, which have been among the worst-performing assets this year.
Today in Your Money
“High-yield bonds are yielding upwards of 20 percent on the expectation that the default rate is going to increase exponentially in the next six months,” Sri-Kumar said. “If the recession is a short one, they will come back and yields will narrow.”
The life span of the downturn may hinge on Barack Obama's actions after he is sworn in as president. Tobias Levkovich, chief U.S. equity strategist at Citigroup, is looking for Obama to provide a much stronger jolt to the economy in the form of tax cuts and spending programs than is widely foreseen on Wall Street and in Washington.
“The Obama stimulus package could end up being much larger than anyone anticipates, given the needs generated by the credit crisis,” Levkovich said. “A lot of people are talking about a couple hundred billion dollars. What if it's two or three times that?”
In that case, anxiety over deflation should abate, Levkovich predicted, and “the markets can get out of their funk.”
Some economic and financial question marks are bound to linger whatever the people in charge do, but Max King, a strategist at Investec Asset Management, believes that the public is underestimating the potential for a rally in an investment that thrives on such uncertainty. “Gold will break well north of $1,000 an ounce,” he said. That would be a gain of more than 20 percent from recent levels, and he suggested capturing it by buying one of the exchange-traded funds around the world that hold physical gold.
And now the bad news: Robert Arnott, chairman of the asset-management firm Research Affiliates, says he expects a development so grim that even investors accustomed to a whole new benchmark of awfulness would be shocked: a recession in China.
He does not mean a slowing in the pace of growth from breakneck to exhausting, but a genuine decline in economic output, perhaps 2 percent for the year.
“The credit and real estate bubble is, relative to the size of the banking sector and GDP, larger in China than the United States,” Arnott said.
The investment strategy would be to resist bottom-fishing in emerging-market stocks, although he thinks that bonds there are a safe bet. “Bonds are cheap and priced to reflect a risk that's not in stocks yet,” he said. “I think emerging-market stocks could suffer another leg down.”
Kevin Landis, a portfolio manager for Firsthand, a firm specializing in technology industries, used his forecast to mock the pervasive gloom gripping the markets.
“Most companies will still be in business” at the end of 2009, he said. “That's my No.1 counter-trend argument.”
As investors begin once more to tolerate, and then seek out, risk, they will shift out of government bonds into blue-chip stocks, he said. In his universe, that means companies like Cisco Systems, Microsoft and Intel.
And what if he is wrong? What if 2009 is even more rotten than 2008 and the public turns out to have been miserable with good reason?
“Then it doesn't matter what you do with your money,” Landis said. “Then it's canned goods, bottled water and flashlight batteries.”
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: The financial panic has taken its toll on everything from fine art to used Aston Martins. Now private schools - once thought untouchable - appear to be feeling the pinch.
“Public,” or fee-paying, schools in Britain - where a year's tuition can easily cost £15,000, or about $23,000 at current exchange rates - are reporting shrinking waiting lists. International schools, which benefit from steady demand from embassies and nongovernmental organizations like Unesco, are cutting their enrollment projections because of uncertainty about foreign postings while the crisis lasts.
And although acceptance for the coveted spots in New York private schools will not be known until February, there are persistent rumors that more families are asking for financial aid, and some may even drop out.
As the gap between rich and poor has widened over the past two decades, parents have increasingly turned to fee-paying schools to ensure that their children have the opportunities they had - or wish they had had.
New York is the extreme example, with parents willing to undergo an elaborate admissions process for the right to pay up to $30,000 for their toddlers to go to a top preschool. Parents who win that battle and move on to the city's elite private schools can expect to spend about $400,000 by the time their children get to university level.
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But the phenomenon is also evident globally: from France, where more families are sending their children to Catholic schools regardless of their religion, to Germany, where independent schools now make up 7.9 percent of all schools, up from 4.5 percent in 1992, to Australia and even China.
Russ Prince, president of Prince & Associates, a consulting firm that studies the habits of the wealthy, said private school typically was the last expense parents were willing to cut back in a downturn. They will remortgage homes, take modest vacations, put off buying a new car or make do without household help, Prince said.
Some are willing to sacrifice far more. A study commissioned this year by BankWest, an Australian subsidiary of the British bank HBOS, found that among parents with annual incomes of 75,000 to 100,000 Australian dollars, or $50,000 to $65,000, who send their children to private school, more than 10 percent were spending as much as half their income on school fees. Fifty-three percent of Australian parents who sent their children to independent schools said they found it difficult to afford.
Parents typically see high fees as the price of funneling their children into the best universities and jobs. But many are also paying to reap other rewards.
“The education is believed to be excellent,” Prince said, “but at the same time, they have the connections and ability to move your kid to the next rung. It keeps them moving into an environment where you keep meeting people with more influence.”
In Europe, where social connections are forged more cautiously, other factors have influenced the increased interest in independent schools.
Among them are German and Swiss state schools' poor performance on the Program for International Studies Assessment, known as the PISA reports, which are published every three years by the Organization for Economic Cooperation and Development. The last PISA report showed that 15-year-olds who attend private schools perform better in mathematics, reading and science than students enrolled in public schools.
In France, government-supported Catholic schools cost about €200 per month, including the expense of lunches. The French have been turning to them as they perceive the state schools as increasingly chaotic, and because Catholic schools have a better record of their students' passing the baccalauréat exams, a requirement for college entrance.
For more ambitious French parents, there are also private preparatory schools that smooth entrance into the grandes écoles, the elite universities that have traditionally turned out France's leaders.
Milojka Joksimovic and her husband arrived in France from Yugoslavia a generation ago. She was trained as a literature teacher, he as an artist. Their credentials meant nothing in France, where they found work as a swimming pool attendant and a plumber, respectively. But they vowed that their children would get educations that would ensure their future.
When their youngest, a daughter, turned out to excel in math and science, they decided to send her to Sainte-Geneviève in Versailles, a prep school known to have broad success in getting students into the grandes écoles. Under a sliding scale, the couple pay €5,000 to €6,000 a year, or around a sixth of their net income. A banker who made $120,000 would pay close to $20,000 for his child.
While Joksimovic realizes that there is a financial crisis going on, there is no thought of abandoning the plan. “It is a financial investment,” she said.
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After such a rotten year, investors may not be eager to contemplate the next one. Thinking ahead is part of the job description for people who work in the financial markets, though, so when fund managers and strategists were asked to foretell surprising developments for 2009, they bravely accepted the challenge.
Most of their predictions are upbeat, as they almost have to be. With the past and present so bleak, what could be more surprising than a rosy outlook?
A recovery of the financial system, the black hole of the global economy and stock market, might seem especially improbable. No surprise, then, that banks figure in the prognostications.
“The first thing that you just wouldn't expect is for the U.S. financial sector to come back in a big way,” said Komal Sri-Kumar, chief global strategist at TCW Group, a subsidiary of the French bank Société Générale.
Sri-Kumar said he expected such an outcome in part because he thought that the U.S. economy, after a “pretty severe” recession in this quarter and the next, would rebound more swiftly than many of his peers were forecasting. One way for investors to benefit if he is right, he said, is to buy high-yield corporate bonds, which have been among the worst-performing assets this year.
Today in Your Money
“High-yield bonds are yielding upwards of 20 percent on the expectation that the default rate is going to increase exponentially in the next six months,” Sri-Kumar said. “If the recession is a short one, they will come back and yields will narrow.”
The life span of the downturn may hinge on Barack Obama's actions after he is sworn in as president. Tobias Levkovich, chief U.S. equity strategist at Citigroup, is looking for Obama to provide a much stronger jolt to the economy in the form of tax cuts and spending programs than is widely foreseen on Wall Street and in Washington.
“The Obama stimulus package could end up being much larger than anyone anticipates, given the needs generated by the credit crisis,” Levkovich said. “A lot of people are talking about a couple hundred billion dollars. What if it's two or three times that?”
In that case, anxiety over deflation should abate, Levkovich predicted, and “the markets can get out of their funk.”
Some economic and financial question marks are bound to linger whatever the people in charge do, but Max King, a strategist at Investec Asset Management, believes that the public is underestimating the potential for a rally in an investment that thrives on such uncertainty. “Gold will break well north of $1,000 an ounce,” he said. That would be a gain of more than 20 percent from recent levels, and he suggested capturing it by buying one of the exchange-traded funds around the world that hold physical gold.
And now the bad news: Robert Arnott, chairman of the asset-management firm Research Affiliates, says he expects a development so grim that even investors accustomed to a whole new benchmark of awfulness would be shocked: a recession in China.
He does not mean a slowing in the pace of growth from breakneck to exhausting, but a genuine decline in economic output, perhaps 2 percent for the year.
“The credit and real estate bubble is, relative to the size of the banking sector and GDP, larger in China than the United States,” Arnott said.
The investment strategy would be to resist bottom-fishing in emerging-market stocks, although he thinks that bonds there are a safe bet. “Bonds are cheap and priced to reflect a risk that's not in stocks yet,” he said. “I think emerging-market stocks could suffer another leg down.”
Kevin Landis, a portfolio manager for Firsthand, a firm specializing in technology industries, used his forecast to mock the pervasive gloom gripping the markets.
“Most companies will still be in business” at the end of 2009, he said. “That's my No.1 counter-trend argument.”
As investors begin once more to tolerate, and then seek out, risk, they will shift out of government bonds into blue-chip stocks, he said. In his universe, that means companies like Cisco Systems, Microsoft and Intel.
And what if he is wrong? What if 2009 is even more rotten than 2008 and the public turns out to have been miserable with good reason?
“Then it doesn't matter what you do with your money,” Landis said. “Then it's canned goods, bottled water and flashlight batteries.”
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Things are getting rough for the recreational boating industry. New sales of smaller vessels, typically financed by borrowing, have contracted sharply, and sales of preowned yachts are plummeting.
The picture at the top end of the market is markedly different. Demand for new superyachts, costing upward of $20 million, remains robust - but for how long?
Boat builders and dealers are understandably nervous, but they are determined to weather the turbulence, just like they weathered the downturn after the terrorist attacks of Sept. 11, 2001. John Mitchell, an analyst with the Yacht Report, the boating industry bible, reckons there are similarities between industry developments after the attacks and the current state of play.
“There was a significant dip in yacht builds immediately after the terrorist attacks, but this was followed by a substantial hike,” Mitchell said. “The general consensus on this being that not only were fortunes severely depleted at the time, but many owners did not want to build yachts at a time of crisis and suffering - even if they could afford to.”
Expectations were high at the International Boat Show, which ran Oct. 30 through Nov. 4 in Fort Lauderdale, Florida. At the show, an industry barometer for next season's trends, around 1,200 exhibitors occupied three million square feet or 279,000 square meters, of exhibition space, and an estimated 130,000 tickets were sold for the five-day extravaganza, which was - surprising to some - on a par with last year.
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“After witnessing a slowdown at the Monaco Yacht Show in September, we were concerned that dealers would struggle to close sales at Fort Lauderdale, but the majority of exhibitors reported keen interest from qualified buyers and a healthy number of repeat viewings,” said Skip Zimbalist, the show's organizer. “There was a strong international presence, with potential buyers flying in from Europe, Russia, Mexico and the Middle East.” Although Zimbalist did not have exact figures, he reckoned international ticket sales were up by 15 percent from 2007.
Bargain hunters were out in force at Fort Lauderdale, and dealers did not disappoint. “There were terrific discounts if you were prepared to buy secondhand,” Zimbalist said. “Preowned boats less than two years old were on sale for 50 percent less than the cost of a new model.”
Whether this flurry of interest translates into concrete sales remains to be seen. Zimbalist is cautiously optimistic. “It will take a few weeks to gauge the overall success of the show, as deals are taking longer to close and the financing market remains tight,” he said. “But all the indicators suggest that people still have money to spend on boats - especially at the top end.”
Vendors say they expect sales to continue to contract at the lower end of the market as many small and midtier boat owners bought craft with borrowed money, often secured on residential property. In many cases the value of these loans now exceeds the value of the assets. But the superyacht industry, which is not dependent on financing, is stronger than it has ever been before, Mitchell said.
“Many of the yachts being built around the world are in fact orders from repeat clients,” he said, “and there are several thousand families joining this upper rank of wealth every year, capable of building these vessels.”
Figures released by Camper & Nicholson, an international yacht brokerage firm, showed that new orders for superyachts had grown 18 percent in 2008. The size of the average superyacht is also ramping up. In the late 1990s a typical superyacht measured 70 feet to 80 feet long, or 21 meters to 24 meters. Today, the average superyacht is pushing 190 feet, with some as long as 450 feet.
Tom Chant, a spokesman for Superyacht UK, which represents the interests of British yacht vendors and brokers, said that a recession was unlikely to halt the growth in size of super yachts. “The majority of repeat orders are from owners who are wanting to trade up to bigger and more exotic models,” he said. “Owning a superyacht is all about making a statement. If money is no object, then size becomes important.”
There is also a practical reason boats are getting bigger. “Many superyacht owners want privacy - a yacht that can house a full complement of staff, and provide all the amenities that the ultrarich would expect to have access to on a daily basis,” Chant said. Exotic add-ons, like helipads and submarines, are also increasingly popular, which is pushing up the size of the yachts being built today.
But as money continues to be lost on world stock markets, even the ultrarich may be required to make economies. The rising costs associated with manning a vessel, especially fuel, crew and maintenance costs, means that owners have to spend around 10 percent of a yacht's value on annual running costs. For an 80 foot yacht that translates into $8 million a year, and many wealthy people have several yachts.
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: Normally when I return from my annual summer sojourn to see family in America, I temporarily hate my London townhouse. It looks small and dark, unlike my folks' bright, rambling colonial. I notice every flaw, from the wind rattling through the kitchen windows to the leaky shower in our family bathroom.
But this past September, I leaned lovingly into my paint-chipped front door as I inserted the key. A small miracle had occurred while we were away: Our application for a new mortgage had been approved. The house we had owned for nearly a decade would remain ours, at least for a few more years.
This was an especially lucky break considering that if we had applied eight weeks later, we would probably not have qualified - an outcome that has become commonplace in the through-the-looking-glass world of London real estate.
My husband and I were lucky first-time buyers back in 1999, (see earlier article at iht.com/articles/2002/06/01/mcents01_ed3_.php) benefiting from the early days of overly generous bank loans that we now know helped build the glacier leading to the world's current financial meltdown. We were given a 95 percent mortgage, with absolutely no worries on the part of our lender that the loan was four times our annual income and that our profile - two journalists, one of them freelance, living in London with three small children - was hardly that of the Rockefellers.
Three years into owning our house, it was worth 50 percent more than what we paid. Feeling rich, we refinanced in 2004, borrowing another 10 percent so we could put in new floors, a new bathroom and some built-in cabinets. Thanks to a friend's personal financial adviser, we didn't even shop around for a good deal: The adviser did it, showing up ten days after we called him with a new mortgage at a lower rate.
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In 2006, our fixed-rate time limit ended and we once again had incentive to shop around. This time, my husband secured a new, interest-only mortgage after just a few simple phone calls. Our monthly payments would be even lower than before, though with this type of loan we would not be reducing the principal. Yet seeing that most mortgages are interest-only for the first few years anyway, it seemed a good option. And when we learned that the two-year fixed rate was just 4.59 percent, it seemed too good to be true.
Turns out it was.
This past February, Northern Rock - a bank that at the time accounted for one in five British mortgages, including ours - had to be bailed out by the government because it over-leveraged. The bank's demise left us staring at a whopping 6.8 percent interest rate if we didn't refinance by June. That meant our monthly mortgage payment would increase by more than a third.
Still, in spite of the difficult economic climate, we felt pretty smug about finding a new lender. My husband had just started a new and well-paid job; my freelance writing business was going strong; we had some savings in the U.S. stock market; and we only needed to cover half the value of our house. Other people might have trouble getting a mortgage, but we wouldn't: we were the paradigm of prudence, with good credit (we never miss a payment) and frugal spending habits.
By the end of April, we still had not found a new mortgage even with the help of our adviser. There was nothing competitive in the marketplace, he said - code for “affordable” - and he urged my husband to look for himself.
One week later, we found ourselves in a meeting with a mortgage broker at one of the world's largest banks. As he thumbed through three months of our bank statements, our U.S. and British tax returns, my husband's employment contract and various other documents attesting to our financial health, we joked around, feeling both wealthy and worthy of his time.
Two hours later, we left his office feeling poor and pessimistic.
“This is tough,” the banker had told us, “but I am not sure you will be approved.” My husband had only been in his new job for a short while, therefore it might not work out; our monthly costs were too high, with three children in private school; our stock holdings in America could go down (but they could also go up, we said) and I was still self-employed.
But the banker's last question was the most disturbing: “How will you pay back this loan if you had to?”
“How does anyone pay back a house loan?” I said. “We would sell it and downsize.” The banker looked at us, said nothing, and jotted something down. Later, we learned from a friend in real estate the true thrust of the question: “He wants to know how you would repay in a negative equity situation” - in other words, if the value of the house fell below the value of the mortgage loan.
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