Happy Friday! There are more good news articles, commentaries, and analyst reports on the Web every week than anyone could read in a month. Here are the eight most fascinating ones I read this week.
1. Stocks and bonds: The cost of fear
U.C. Berkeley economist Brad DeLong points out that the difference between the yields of stocks and inflation-protected Treasury bonds, or TIPS, is getting preposterous: "So, if you invest $10,000 in the S&P for the next five years, you can reasonably expect (with enormous upside and downside risks) to make about 7% per year, leaving you with a compounded profit in inflation-adjusted dollars of $4,191. If you invest $10,000 in the five-year TIPS, you can confidently expect a five-year loss of $510."
Why the gap? DeLong writes:
First, many people are uncertain that current conditions will continue. Most economists forecast the world a year from now to look a lot like the world today, with unemployment and profit margins about the same, wages and prices on average about 1.5% higher, total production up roughly 2%, and risks on both the upside and the downside. But many investors see a substantial chance of 2008 and 2009 redux, whether triggered by a full-fledged euro crisis or by some black swan that we do not yet see, and fear that, unlike in 2008 and 2009, governments would lack the power and will to cushion the economic impact.
These investors do not view the 7% annual return on stocks as an average expectation, with downside risks counterbalanced by upside opportunities. Rather, they see a good-scenario outcome that only the foolhardy would trust.
Second, many people do see the 7% return on stocks as a reasonable expectation, and would jump at the chance to grab it -- plus the opportunity of surprises on the upside -- but they do not think that they can afford to run the downside risks. Indeed, the world seems a much more risky place than it seemed five or ten years ago. The burden of existing debts is high, and investors' key goal is loss-avoidance, not profit-seeking.
"Retirement ages will have to move to 70, 80 years old," Benmosche, who turned 68 last week, said during a weekend interview at his seaside villa in Dubrovnik, Croatia. "That would make pensions, medical services more affordable. They will keep people working longer and will take that burden off of the youth."
This isn't just true for Europe, most of which is buckling under unsustainable pension plans. It's also the new reality for America, which currently navigates with a combination of underfunded pensions and woefully inadequate private retirement savings.
I canceled my cable TV two years ago and never looked back. Henry Blodget of Business Insider says I'm not alone; it's happening across the country. What does that mean for the industry? Blodget writes:
- The traditional "network" model is likely to break down and be replaced with far larger "libraries" of content and far more efficient content production, acquisition, and distribution.
- The cost of traditional pay TV will have to drop. Users will have to get more for less, or they'll stop paying for much at all.
- Ultimately, the distinction between "TV" and other forms of video content will disappear.
4. Deja vu:
Martin Wolf writes in the Financial Times one of the clearest and scariest summaries of what's happening today:
Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it.
5. Listen to Grandma, kids
Forbes writes about a survey from Bankers Life and Casualty Company Center for a Secure Retirement highlighting 10 pieces of advice current retirees have for the younger generation. In order:
- Start saving early.
- Contribute to a retirement account at work.
- Do more planning.
- Invest conservatively.
- Get professional advice.
- Live frugally.
- Work as long as you can.
- Spend your money while you're healthy.
- Don't worry so much; it will all work out.
- Spend your time wisely.
6. What tomorrow looks like
The New York Times put together a long piece detailing 32 "innovations that will change your tomorrow." They include:
- Smart teeth. "Scientists at Princeton and Tufts are working on a superthin tooth sensor (a kind of temporary tattoo) that sends an alert when it detects bacteria associated with plaque buildup, cavities or infection."
- Smarter(er) phones. "A team of Dutch and Italian researchers has found that the way you move your phone to your ear while answering a call is as distinct as a fingerprint. You take it up at a speed and angle that's almost impossible for others to replicate."
7. Way too big to fail
Heidi Moore writes about Nobel-winning economist Robert Engle's finding that America's largest banks don't have enough capital to withstand a big financial crisis. How much more capital do they need? It's scary:
So what would American banks need to survive another crisis? Using Engle's calculations, it would take $513.65 billion in fresh capital for the top firms including JPMorgan (NYSE: JPM ) , Goldman Sachs (NYSE: GS ) and Citigroup (NYSE: C ) .
Here's the chilling part: How does that compare to 2008? It's about the same amount. Back then, those top banks would have needed to raise $539.4 billion.
8. You know you can't get enough of him
Berkshire Hathaway (NYSE: BRK-B ) chairman Warren Buffett sat down for a 45-minute talk at the Economic Club of Washington DC. He covers the basics: his life, career, philanthropy, and outlook for the U.S. economy. The blog My Investing Notebook has the whole interview (on video) here.
Enjoy your weekend.