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Posts tagged trade policy
8 Investing Lessons From John Paulson
Nov 23rd
Even as the financial system collapsed last year, and millions of investors lost billions of dollars, one unlikely investor was racking up historic profits: John Paulson, a hedge-fund manager in New York.
His firm made $20 billion between 2007 and early 2009 by betting against the housing market and big financial companies. Mr. Paulson’s personal cut would amount to nearly $4 billion, or more than $10 million a day. That was more than the 2007 earnings of J.K. Rowling, Oprah Winfrey and Tiger Woods combined.
How did he do it? Believing that a housing-market collapse was coming, Mr. Paulson spent over $1 billion in 2006 to buy insurance on what he then saw as risky mortgage investments. When the housing market cracked and the mortgages tumbled, the value of Mr. Paulson’s insurance soared. One of his funds rose more than 500% that year. Then in 2008, he shorted financial shares, or wagered that they would fall in price, profiting again when these companies collapsed.
And are there any investing skills that average investors can learn from his success? Yes. There are no guarantees, of course, but the success of Mr. Paulson and a few other underdog investors lends encouragement to individuals trying to compete with Wall Street’s pros.
Here are eight investing lessons of Mr. Paulson’s $20 billion gamble, the greatest trade in financial history:
1. Don’t Rely on the Experts
Many investors lost big in 2007 and 2008 as housing crumbled and the stock market tumbled. But no one lost more than commercial and investment banks caught with toxic mortgage-related securities. These bankers were the very same ones who created these investments, and Wall Street’s top analysts had vouched for their safety, even as Mr. Paulson and others bet against the investments.
Lesson: When Wall Street is wheeling out its latest can’t-miss product, be skeptical.
2. Bubble Trouble
Some academics argue that financial markets have become more efficient. But a rash of financial bubbles in recent years — including housing, energy, technology and Asian currencies — suggests that markets are becoming harder to navigate, and are more prone to overshooting. Today, investors of all sizes read the same articles, watch the same business-television programs and chase the same hot tips. They invariably head for the exits at the same time.
Lesson: Have an exit strategy — and cash to cushion any tumble.
3. Focus on Debt Markets
Most investors track the ups and downs of the stock market but have only a vague sense of moves in debt markets. That’s a mistake. Early signs of trouble were seen in sophisticated markets that don’t get much limelight, like the subprime-mortgage bond market. These problems eventually felled the housing and stock markets, and the overall economy, a set of falling dominos that Mr. Paulson and his team correctly anticipated.
Lesson: Debt markets can do a better job predicting problems than stock markets.
4. Master New Investments
Mr. Paulson scored huge profits by buying credit-default swaps, a derivative investment that serves as insurance on debt. When risky mortgage bonds tumbled in value, Mr. Paulson’s insurance soared. But many experts were flummoxed by CDS contracts or shied away from educating themselves about these relatively new investments.
Mr. Paulson and his team had no experience with CDS contracts. But they put the time into learning about them.
Lesson: Educate yourself about the range of exchange-traded funds being introduced, some of which can play a valuable role in a portfolio.
5. Insurance Pays
A number of investors worried about a bursting of the housing market, but few did much about it, even though insurance, such as CDS contracts, at the time were selling at dirt-cheap prices. Out-of-the-money put contracts — options that pay off only if the market tumbles — also were trading at reasonable levels. As cheap as this insurance was, many pros ignored it.
Lesson: Don’t underestimate the value of a safety net, such as put options.
6. Experience Counts
Some of the biggest winners in the meltdown were middle-aged investors dismissed by some as past their prime. But they had experienced past market downturns, while some of the bankers and analysts caught flat-footed knew only good times.
Lesson: A historical perspective can be a valuable tool.
7. Don’t Fall in Love
With an Investment. In early 2009, Mr. Paulson became more bullish about the banks and financial companies that he had wagered against in 2008, after determining that these companies had improved their balance sheets. The moves resulted in profits this year.
Lesson: Even the greatest trade doesn’t last forever.
8. Luck Helps
In early 2006, Mr. Paulson determined that housing was in trouble and set out to profit from the impending fall. But some housing experts already had determined that real estate was overpriced; others had wagered against housing but could no longer stomach their losses. Just months after Mr. Paulson placed his historic trade, U.S. housing prices began to fall.
Lesson: Don’t risk too much in any one trade, even one that seems like a sure thing.
Are Chinese exports good for U.S. economy?
Nov 18th
By Chris Isidore, CNNMoney.com senior writer
On 5:04 pm EST, Tuesday November 17, 2009
As President Obama completes his trip to China, it’s a natural time to ask if trade with the greatest source of U.S. imports is a good thing or bad thing for the still battered U.S. economy
Obama said he spoke to Chinese President Hu Jintao about the need for more balanced trade between the two major trading partners. He also urged China to allow the Chinese yuan to gain value against the dollar.
But he also told an audience of students in Shanghai this week that increased trade between the two nations is good for both countries, despite some friction between the two governments. And Obama said he hoped that trade will continue to grow.
"This trade could create even more jobs on both sides of the Pacific, while allowing our people to enjoy a better quality of life," Obama said.
But there are plenty of critics who believe that nothing good comes out of the U.S. trade gap with China, which so far this year has dwarfed the combined gap with the rest of the world by more than a third.
"I think the U.S.-China relationship was the worst economic policy mistake of the last generation," said Scott Paul, executive director of Alliance for American Manufacturing, a coalition of small-to-mid-size manufacturers and some unions which has been a long-time critic of U.S. trade policy.
Paul and other critics argue currency manipulation by the Chinese to undervalue their currency, government subsidies to Chinese manufacturers and low wages paid to Chinese workers have put U.S. workers at an unfair disadvantage.
The Economic Policy Institute, a liberal think tank, estimates that 2.3 million U.S. jobs were lost between 2001 and 2007 due to the Chinese trade gap.
University of Maryland professor Peter Morici has written that this trade gap "threatens to torpedo the economic recovery and keep unemployment above 10 percent for the foreseeable future."
But others argue that even if there needs to be some changes in U.S.-China trade policy, the U.S. economy benefits more than it is damaged by the relationship.
Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, said that there is little evidence to support that trade gaps lead to big increases in job losses.
"If it was a cause of unemployment, why wasn’t unemployment rising from the late 90’s all the way through to today as Chinese imports rose," he said.
Jay Bryson, global economist with Wells Fargo Securities, added that even though the growing trade gap has caused some harm to the U.S. economy, there are plusses that should not be overlooked.
"It doesn’t mean that every person in the United States benefits, but from a national perspective it’s a positive," said Bryson.
Bryson and Hufbauer both said that lower priced Chinese goods reduces the cost of living for American consumers, giving them more money to spend on other goods and services.
Bryson said limiting Chinese imports through tariffs or other barriers would raise the price of those goods.
"While it would protect the jobs of some people making toys or shirts here, it would cost other jobs because we wouldn’t have the money to spend on other goods and services," Bryson said. "If I’m spending more on toys for my kids or my shirts, I have less money to go to the movies or go out to a restaurant."
Hufbauer conceded that the Chinese yuan is grossly undervalued. But he said there is reason to hope for some change on that front.
China has pegged its yuan to the dollar, rather than letting it trade freely like other currencies. So it has been declining as the dollar has lost value in recent months.
The decline in the yuan means that other countries in Asia and Europe are starting to pressure Chinese leaders to allow their currency to trade more freely. And strong economic growth in China, coupled with the declining dollar, is creating inflation risks for China.
So the Chinese may start to relent on the yuan due to their own self interest, rather than American pressure.
"Once there is some evidence the global recovery is more sustainable, the Chinese worries about inflation are likely to mean they’ll allow [the yuan] to appreciate versus the dollar," said Bryson.
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