Posts Tagged ‘Economy’
Thursday, August 5th, 2010
Editor’s note: This is a first in a regular series on the economy and investing from Egan Ludwig, vice president of Waycross Investment Management in Bellingham.
In late 2008/early 2009, Treasury interest rates reached lows not seen since the 1940s. Once confidence began to inch its way back into investor’s minds, rates began to increase into the middle of 2009. Since then, rates have slowly moved back down to extremely low levels. What does this mean for investment portfolios going forward? To be more precise, what does this mean for bond returns? For this analysis, we’ll use the SBBI Intermediate Term Government Bond Index.
Interest rates fell from 13.96 percent at the end of 1981 to 2.42 percent at the end of 2009. Low risk, intermediate term government bonds returned a remarkable 8.5 percent per year during this period. Now interest rates have little downside left, but interest rates could stay very low for a long time. This is likely to result in bond returns that will be substantially lower than what we have experienced over the past 20 to 30 years. Investors need to adjust their expectations for future returns based on this new reality.
Learning from the past
Looking in the past at periods where interest rates were initially similar to where they are today may provide some guidance into future bond returns. For this analysis, we’ll look back at two similar interest rate environments, with varying economic backdrops.
The first period starts at the end of 1934 when yields on intermediate term government bonds stood at 2.49 percent. During the next 30 years interest rates fluctuated between 0.5 percent and 4 percent. The bonds returned 2.6 percent per year during this period. The economic backdrop began in the Great Depression and remained difficult until the latter part of the 1940s. Significant economic growth started in the ‘50s.
The second period started at the end of 1952 when yields on intermediate term government bonds stood at 2.35 percent. The next 30 years saw interest rates fluctuate between 1.72 percent and 13.96 percent. The bond market returned 5.2 percent per year during this period. This period began with robust economic growth that tailed off as inflation began to infect the economy in the 1970s. Note that the return on these bonds during 1982 (+29.1 percent), the last year of this period, had a significant positive impact on the average of 5.2 percent/year.
Looking to the future
What will be the return from bonds over the next five to 10 years? We simply cannot know the answer. However, investors should not expect returns equivalent to what we have experienced.
Investors also need to consider credit risks associated with owning bonds. In the past, Treasury bonds have been looked at as a risk-free asset. Over the last 30 years the intermediate term maturity of this risk free asset returned slightly more than 8 percent per year. Currently, investors are lucky to receive a 3 percent yield on Treasury bonds. The likelihood of the United States defaulting on its debt is incredibly low, even in an elevated debt environment.
However, corporate and municipal bonds, as well as international government bonds contain much higher credit risk compared to Treasuries. Given the current economic conditions it would not be surprising to see higher rates of default or restructuring in the near future within some of these sectors. Surprisingly, investors are not demanding significantly higher yields on these bonds. In fact, the yield to maturity on many intermediate term high quality corporate bonds is no more than the yield to maturity on equivalent maturity Treasuries. This happens very rarely.
Treasury bonds did an incredible job of counteracting stock market declines over the last 30 years. For instance, while stocks declined nearly 38 percent in 2009, Treasury bonds returned more than 10 percent. Looking forward, stocks will continue to move in their usual volatile fashion, but bonds will likely return much less as there is simply little room for yields to move to the downside. Whether it’s low interest rates or increased credit/default risk on various types of bonds, investors should be looking for other ways to diversify their portfolio if volatility is a major concern over the short run.
Egan Ludwig, CFA, is vice president of Waycross Investment Management in Bellingham. Reach him at Egan@waycross.com or 360.671.0148.
Tags: bonds, Economy, investing
Posted in Economy, Egan Ludwig, Finance | No Comments »
Monday, July 12th, 2010
Armed with a renewed vision and fortified mission, the Northwest Economic Council (NWEC) is on the offensive when it comes to economic development.
I sat down with NWEC board President Bruce MacCormack last month to talk about the organization’s new direction.
Formerly the Bellingham/Whatcom Economic Development Council, the organization changed its name and its leadership, and has emerged from a phase of reorganization re-energized to help grow business from within the county’s borders as well as attracting companies from further afield.
“We knew we had to rediscover ourselves and what our position was in this community,” MacCormack said. To that end, the organization commissioned a county-wide survey to understand the needs of business.
“People wanted someone to step up and create an economic strategic plan for the county,” he relates, which is now under way.
As Whatcom County’s recognized ADO (associate development organization), developing a “regional economic strategy” plan is part of NWEC’s duties. The plan involves the cities, county, port and utilities as well as other stakeholders and is set to be unveiled at the first of next year, MacCormack said.
As an economic development entity, the top priorities of the council are maintaining jobs, creating new jobs, helping small business and startups prosper and survive, and helping companies get funding, MacCormack said. He sees a lot of the economic development being generated by small- and mid-sized companies, rather than the big guys.
“A huge percentage of the way the economy is going to re-grow is through small business,” he said.
In that vein, MacCormack is most excited about the NWEC’s business accelerator program, the Innovation Resource Center (IRC). The IRC just received a $99,000 grant from the U.S. Department of Agriculture to fund the endeavor, which aims to help grow and mentor startup businesses.
Businesses selected for the IRC will not only share bricks-and-mortar infrastructure, but will have access to educational, government and business resources such as training, funding and mentoring.
“The attraction will be to come together and grow themselves in a safe environment,” MacCormack said. While most startups will be local businesses, they may also hail from other counties, states or Canadian businesses hoping to get a foothold in the United States, he added.
MacCormack predicts government funding for startups will become less prevalent, and hopes the private sector will step in to help drive economic development. “You’re going to see less emphasis on government funding in the future and more emphasis on private sector intervention,” he said, pointing to both Skagit County and Spokane as areas where the private sector is greatly involved economic development.
“We’ve somehow got to encourage greater participation by private business,” MacCormack said. And he doesn’t mean only on a financial level, but business leaders using their experience to coach new and growing small businesses.
Business leaders can engage with NWEC in a number of ways, including joining the membership organization, volunteering for a committee or advisory team, or simply sharing experience and opinions with the group. To learn more, visit www.nwecon.org.
NWEC searches for new leader
The Northwest Economic Council’s executive director for the last four years, Nancy Jordan, stepped down from the position in early July. NWEC Board Chairman Bruce MacCormack said a search is under way for a senior executive who will oversee the IRC, NWEC Foundation, the strategic economic plan and other organizational initiatives.
Tags: Economy, Whatcom County
Posted in Hilary Parker | No Comments »
Thursday, May 27th, 2010
At first glance, it appears that our region’s labor market has finally turned a corner and begun to recover. According to the Washington State Employment Security Department Whatcom County’s unemployment rate fell from 9.5 percent in March to 8 percent in April. In Skagit County, the rate fell from 11.5 percent to 9.8 percent during the same period.
The state unemployment rate fell for the first time in more than three years from 9.5 percent in March to 9.2 percent in April. However, in Whatcom and Skagit counties, much of the job growth resulted from seasonal work in agriculture and, in Whatcom County, the lower rate in April can be explained in part because approximately 16 percent of the labor force seeking employment in March dropped out of the labor force in April. In addition, these numbers don’t account for the underemployed people who are working in jobs they are over qualified for. We have an extraordinary talented labor pool in our area that is operating substantially below it’s potential. Unfortunately, that’s the good news.
The challenge we now face is avoiding higher unemployment as the new norm. This won’t be easy if the political class at all levels of government can’t control the severe problem of too much government spending and debt. As I write this column the national debt has exceeded $13 trillion. That equals $117,975 per tax-payer and amounts to a 90 percent debt-to-gross-domestic-product ratio and doesn’t include the debt associated with unfunded entitlement programs and the losses from Fannie and Freddie that total $145 billion and rising.
The political class has dug an enormous economic hole for us and their current policy seems to be to keep digging. The private sector is heavily burdened and concerned about future tax increases and increased cost of doing business associated with a complex 2,700 page health-care reform bill, a financial reform bill expected to be more than 2,000 pages (which does not address Fannie or Freddie), and other initiatives like cap and trade and talks about a European-style value-added tax.
In addition, in mid-May USA Today reported that paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year. In the same time frame, government-provided benefits rose to a record high. This trend is unsustainable. The government depends on the taxes from the private sector to pay for these expanding programs. With private incomes shrinking and government spending increasing, the math just doesn’t work.
Why is this particularly important to those of us living in Whatcom and Skagit counties? In our region, government is our largest employer. In the past, this has been a great benefit and to a certain degree, it’s why we’ve never really experienced the economic high of the highs or low of the lows. However, the lack of fiscal discipline at the federal and state levels and the down trend in private incomes will have a clear negative impact on local governments and our regional economy. Western Washington University is in the process of managing approximately $13 million in budget cuts as are most other state institutions and virtually every local government agency is dealing with similar challenges.
So, what is the solution? First, we must send a clear message to Washington D.C. and Washington state that we’ve had enough. We must demand fiscal discipline. We’ll have that opportunity in November.
Second, we must refocus local efforts on economic development and job creation in the private sector. A number of groups including the Economic Development Association of Skagit County and the Northwest Economic Council of Whatcom County have been at the heart of these efforts. In the past, the focus has been on touting the quality of life and strong labor force in an effort to attract companies to relocate to our region. In order to make these efforts successful, it requires strong cooperation from local governments in making us a business-friendly region. Skagit County has been successful in that regard. Whatcom County has not. In the current economic environment, if we’re going to create jobs, it’s going to require our government officials backing up their rhetoric with action and it will require focusing on existing small and early-stage companies, which is where most of the jobs are likely to come from.
And third, local governments are going to be required to discipline themselves financially and understand they will be facing challenges that will be trickling down from the federal and state levels. Raising taxes and imposing costly regulations on businesses and productive individuals in this environment is typically the first reaction. Instead, officials should re-examine their priorities and be prepared to make some tough choices.
Tags: Economy, government, Skagit County, Whatcom County
Posted in Economy, Tony Larson | 1 Comment »
Tuesday, May 11th, 2010
How can we take those in Washington D.C. in charge of financial reform seriously when they don’t include Fannie Mae and Freddie Mac in their discussions? When the dust settles, we will have dumped $145 billion in taxpayer money into these two government-sponsored enterprises with no end in sight.
Fannie Mae just asked the government for another $8.4 billion in aid after posting an $11.5 billion first quarter loss. This comes just a week after Freddie announced its own request for another $10.6 billion. Both companies warned of additional future losses requiring more government bailout dollars, which will be unlimited after the Obama administration raised the $400 billion debt limit late last year. With the promise of apparently endless bailout dollars, what incentive do Fannie and Freddie have to reform themselves? None!
Government subsidies for failing business practices will only promote additional failing practices. It provides incentive for companies to take their focus off improving their products and fixing problems and places it on to lobbying Congress for more money. The original justification for bailing out these giants was the American dream of home ownership for every American. We should keep in mind that the American dream is not about home ownership alone. It’s about the values associated with reaping what you sow in a just world.
Fannie and Freddie have created a positive perception of themselves as a homeowner’s friend and they have generated substantial political clout with strong contributions to political campaigns, but they are potentially the most dangerous type of enterprise. They allow private banks and mortgage companies to take substantial risks, pocket any profits for themselves, then dump the investments to Fannie and Freddie and count on taxpayers to take care of the losses.
Fannie and Freddie need to be broken into smaller private mortgage entities in order to eliminate the market distortions they create. There are many other reasonable ideas to consider, but one thing is for sure… it is disingenuous and irresponsible to leave them out of financial reform discussions.
Tony Larson, Publisher
Tags: Economy, government
Posted in Banking, Economy, Finance, Small Business, Tony Larson, business | No Comments »
Thursday, January 28th, 2010
Look out Washington State, you might be next. The Kool-Aid drinkers in Oregon have proven that some of the people can be fooled all of the time.
I was very surprised, particularly in the current economic environment, to see that 54% of Oregonians recently voted for $700 million in higher taxes on businesses and what they called the state’s wealthy.
Their highest state income tax rate will rise to 11%, toward the highest in the country, which is New York at 12.6%.
Why is it that Oregonians would duplicate the self-destructive behavior of states like California, New York and New Jersey, who are seeing productive people and businesses leave their state in droves to find more friendly tax and regulatory environments? Phil Knight of Nike called the tax initiative Oregon’s “assisted suicide for business.”
As it turns out, even though the initiative lost in most of the state, it won 71% of the vote in liberal precincts in Portland, bankrolled by a deluge of money from national and local public employees unions. They ran class-warfare ads that suggested that the taxes would be paid by Wall Street bankers, out-of state credit card companies and CEOs. In reality, job creators will be hit most. Or correct that, more affluent people have the resources to move themselves and their businesses out of state if they want to. It’s private employees, left without job opportunities, who will be hit hardest.
Who are the winners of this tax increase? The average pay and benefits package in Oregon for unionized state employees in 2009 was more than $83,000. That’s more than 30% higher than private employees. While private unions have decreased in membership over the past 10 years, public employee unions have grown. Now they are promoting class warfare in order to convince people they are the modern day Robin Hood. Apparently many feel comfortable voting for tax increases they think only apply to others.
In 1787, a Scottish history professor named Alexander Tyler commented on the fall of the Athenian Republic, saying, “A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until
the time that voters discover they can vote themselves generous gifts from
the public treasury. From that moment on, the majority always votes for
the candidates who promise the most benefits from the public treasury,
with the result that every democracy will finally collapse due to loose
fiscal policy.”
Now, in addition to politicians, we need to be concerned about the influence of public employee unions. They are generating more and more political influence. Most don’t understand we are not a democracy. We are a Republic and are supposed to be directed by our Constitution, which limits the role of government and protects individuals against intrusive government power. As long as we don’t forget that, our Republic is safe. When we expect and ask our government to solve our problems, we are in trouble. So, be careful what you wish for.
Tony Larson, Publisher
Tags: business, Economy, government, Oregon, Skagit, Taxes, Tony Larson, Washington State taxes, Whatcom
Posted in Tony Larson | 3 Comments »
Saturday, January 23rd, 2010
How refreshing is it when what you’re thinking manifests itself into the national spotlight? That’s what happened when Scott Brown of Massachusetts was elected as the 41st Republican in the United States Senate, potentially slowing down what was looking like a steamroller Congress, rolling over the American people.
Politics are often local, but people I know of all political stripes have been extraordinarily concerned about the philosophy that is driving policy in Washington, D.C. and the impact this philosophy and policy is having on their lives. The best we can hope for is that President Obama got the message last Tuesday. Wasn’t the message from Massachusetts that Republicans, Independents and even many Democrats think the federal government is getting too involved in their lives? And isn’t the public’s highest priority economic revival and job creation? One thing is clear. We won’t know if Obama received this message by his words. He’s expected to pivot to the economy in his upcoming State of the Union address, but if we’ve learned anything over the past year it’s that we have to focus on his deeds.
So far it doesn’t look promising. The polls must be telling the White House that demonizing Wall Street and bankers still plays well politically, even if the nationalization of health care does not. Obama immediately went on offense, promising strong financial regulation against banks and Wall Street. This initiative is purely political. That’s why it came from the White House and not from the Treasury. How will this improve business and consumer confidence, improve the economy and put people back to work? It won’t. A recent poll showed that 77% of investors believe the Obama administration is anti-business and 80% are not confident in his ability to handle a financial emergency.
Going after Wall Street and banks might have short-term political benefit, but it makes me feel like either they just don’t get what’s most important or they’re back on there quest to take control of as much of the private economy as they can. Just for the record, Wall Street didn’t cause the financial collapse we experienced — government did. What undermined the financial system more than anything else was a fanatical application of rules aimed at getting banks to lend as much money as possible to facilitate homeownership among minorities. An admirable thought, but disastrous policy. Remember the Community Reinvestment Act? The government created the subprime market by compelling banks to make bad loans and urging Fannie Mae and Freddie Mac to cash out the banks by putting more and more of the toxic mortgages on their balance sheets. Despite the huge executive bonuses given out at Fannie and Freddie, I’ve heard nothing about limiting or blocking the proposed expansion of these programs. No mention of reform or regulation.
How is taxing and bullying business supposed to promote jobs in the private sector? Who in his right mind would be hiring in an environment like this, with the government taking control or clamping down on one industry after another and submitting proposal after proposal that will certainly require higher taxes in the future?
People with common sense understand the concept of rewarding what you want more of and penalizing that which you want less of. Either the President and Democrats in congress don’t understand this fundamental truth, which is scary, or they do, which is scarier.
We all need to stay engaged and demand that our elected officials get back to the fundamental common sense approaches that create a strong economy. We must encourage and promote those who believe in the dreams and aspirations of the American People. It is individuals, pursuing their passions and personal interests who will spark economic revival and be responsible for innovative solutions to problems we face. We need less, not more government intrusion. Let’s continue to send that message at the ballot box.
Tags: business news, Economy, Healthcare reform, Politics, Skagit County, Whatcom County
Posted in Tony Larson | No Comments »
Friday, January 15th, 2010
Rick Larsen was in Bellingham last Friday, and writer Josh Stilts had an opportunity to sit down with the 2nd District Congressman to learn a little bit about his thoughts on the economy and his basketball prowess.
Yesterday (Jan. 14), John Koster of Arlington announced he will run against Larsen for the 2nd District seat.
Q: In a county like Skagit that economically depends on health care, how will the proposed reform legislation affect residents and workers?
A: Health care reform will allow access and affordability. High premiums for small businesses and accessibility for seniors needs to be resolved. We need to establish a national market; insurance companies will see an increase in upwards of 30 million people seeking health insurance. Instead of long lines at the emergency rooms people will be able to see their physician. It’s all about quality versus quantity.
Q: What is your plan to establish renewable industry in Washington’s second district?
A: Economic recovery isn’t going to come as a quick turnaround but it is working. No one believed profits would come from the $700 billion bank bailout but already 15-17 percent is coming back in tax deficits. Banks need to be evaluated and take into consideration what’s behind the loans. We need to create incentives for small-to-medium sized banks so they can make commercial and business loans. Tools like 504 loans, (a program designed to provide financing for the purchase of fixed assets, usually real estate buildings and machinery, at below market rates). For somewhere like Bellingham the Port is essential to future growth and how we transport people and goods will dictate the expansion of downtown Bellingham and help shape the economic recovery.
Q: What needs to be done to better transportation?
A: It’s about reducing congestion. Transportation means jobs. Recent Whatcom Transit Authority bus purchases and open communication has lead to success.
Q: What’s something most people don’t know about you?
A: I play basketball with President Obama and members of Congress and the Senate.
Q: Whose one of the best players?
A: Reggie Love (special assistant and personal aide to the President, who played at Duke University) dunked on us.
Q: What do you get out of being a representative?
A: The opportunity to get up every morning and do something for an area my family and I been a part of for over a hundred years keeps me going.
Tags: Economy
Posted in Uncategorized | 1 Comment »
Thursday, December 17th, 2009
Welcome to Northwest Business Monthly magazine Online (nwbmonline.com). One of the many upgrades on our New website is our ability to share ideas more frequently than in our monthly magazine.
I’m excited about this blogging feature because I know how challenging it is to put the necessary time and focus on your family, health, relationships, business, finances and other priorities in your life. After that, you don’t have much time to keep up on economic and political issues that impact your life.
I intend to blog regularly regarding issues that I’m passionate about and that I feel are important for all of us to be informed about.
My hope is that nwbmonline.com will become a place for you to visit, not only to gather insights and a fresh perspective, but to provide your own, whether you agree or disagree with mine. So please log in and join the conversation.
That being said, I’m writing this note with much urgency. Congress is in the middle of creating an enormous debacle before Christmas. I wrote a column in the December issue of Northwest Business Monthly regarding what I see as the healthcare reform disaster. Please pick up a copy of Northwest Business Monthly and read it if you are so inclined. In the future, if you log in for no fee, you’ll have access to everything in the magazine and online.
I couldn’t be any more concerned about how bad I believe the proposed healthcare reform bill will be for our economy and country. And as it turns out, most Americans feel the same way. According to a recent Rasmussen poll, 56% of voters oppose the plan while only 40% approve. 46% strongly oppose it while only 19% strongly favor it. And it appears that as more people pay attention to the details, the more they oppose it. Perhaps that’s why the only people who’ve actually seen the senate bill are those who have been personally invited into Harry Reid’s meeting room. Zero of them were Republicans. So much for the transparency and bipartisanship we were promised. Remember when we were told that the debates would be bipartisan and televised on C-SPAN? Perhaps this is also why the democratic leadership is trying to pass this bill at record speed. They want a vote before Christmas, that is, before democrats in moderate districts go home on holiday to hear from their constituents.
While the massive taxes from this new bill will start in 2010, the so-called benefits won’t kick in until 2013. Anyone who pays attention and is not completely blinded by partisan politics understands this bill will have a devastating long-term impact on our economy and particularly on the small businesses that used to make our country the envy of the world. This bill is particularly bad for seniors, bad for young people, bad for small businesses and absolutely a nightmare for our national economy and country. PLEASE call or write your legislator (www.sos.wa.gov/elections/elected_officials.aspx) and let them know how you feel. Also, please log in and post your comments. Your opinions are very important.
Positively,
Tony Larson, Publisher
Northwest Business Monthly Magazine
Tags: Bellingham, Economy, healthcare, Healthcare reform
Posted in Tony Larson | 7 Comments »
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