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100 Year Treasuries?

August, 2016

The average maturity of the $19 trillion U.S. Treasury debt is now about 5 years and costs taxpayers just over 1%. We continue to suggest to our clients that it makes good sense to refinance their personal mortgage debt at these historically low rates. If it makes sense on an individual family basis, it makes sense for our highly indebted country.

We believe rates will rise one day to the mid-single digit rates that have prevailed for most of the last century. If the Treasury could lock in these extremely low rates it would save taxpayers money in the future. Nearly as importantly, it would save the economy from a potentially enormous shock that could come with a fast increase in rates.

Currently the longest maturity bond issued by the Treasury is 30 years and costs taxpayers 2.3%. Some countries are issuing 50 year bonds and at least one has issued 100 year debt. We think it makes sense for the U.S. Treasury to do the same. Of course this would raise interest payments currently to save a much greater amount in the future. Does the Treasury have the fortitude to trade short-term pain for long-term gain? Let’s ask our legislators and find out!


Harbor Buys Europe

February, 2015

Harbor is buying or adding to positions in the Vanguard Europe Fund ETF which is our way of gaining exposure to shares on the continent.

In our opinion, the share valuations in Europe, which are now at a large discount to U.S. shares, make it highly likely that European equities will outperform those in the U.S. for an extended period of time.

The list of problems facing Europe is indeed long:  sluggish growth, deflation, inflexible labor markets, rigid regulation, concern that the Euro currency will break down.  We believe these issues have created a large enough discount on European shares to make the opportunity compelling.

Dividend yields in Europe are twice those in the U.S.  Valuation metrics such as price/book value, price/earnings, and price/sales all reflect discounts of 20-40% versus U.S. peers.  Depending on which measures you select, U.S. shares have outperformed a similar European index by five-fold over the last five years.

We think the recent ECB (European Central Bank) decision to implement QE (quantitative easing) provides the catalyst necessary for change in investor sentiment regarding European shares.


No, Michael, the Market is not ‘Rigged’

April, 2014

Michael Lewis created quite a buzz when he appeared on 60 Minutes on Sunday, March 30th and declared that the U.S. equity markets are ‘rigged’.  That comment, from such a high profile author, set a series of things in motion, one of which must be brisk sales of his newest book Flash Boys which was released for sale the next day.

Other repercussions include FBI investigation into the possibility of criminal activity, SEC investigation into the possibility of ‘front running’ and the CFTC investigation of high frequency trading (HFT) in gold and silver.  The financial markets have been discussing the book and HFT on a daily basis since that program aired.

I was asked the following morning on CNBC’s Squawk Box program for my opinion of
Mr. Lewis’ statement that the “stock market is rigged”.  It is important for all of our clients to understand Harbor’s position on the issue.

My response was that, as much as I respect Michael Lewis as an author and observer of the financial markets, I thought the use of the term “rigged” was inflammatory.  I have read all of Mr. Lewis’ books that relate to financial markets, have enjoyed each, and been impressed with his grasp of all things financial.  I do not consider our stock markets to be rigged in the common sense way the word is used.  I went on to say that anything that reduces the investing public’s confidence in the integrity of the financial markets reduces their efficiency and therefore is a cause for concern.

I do believe that HFT traders add little, if any, liquidity to the equity market.  Probably they beat Harbor and other traditional investment firms to the best bid and offer prices by a fraction of a penny on both sides of the trade.  We believe a share of stock bought and held for 5-10 years on which we give up a fraction of a cent is not worth worrying about.

Do HFT trades have a trading advantage?  Sure they do.  They employ tens, if not hundreds of millions of dollars in high speed lines, networking gear and computer servers to get, and act on, price information a fraction of a second faster than traditional market participants and they trade millions of shares a day to earn a living.

I was in the audience in March of 2000 when famed investor Warren Buffet said “It doesn’t bother me that other people are making money in a different way than I am.”  I couldn’t have said it better.

Our stock market exists for the purpose of efficiently allocating capital to businesses and they do a great job of it.  They are not ‘rigged’ in the common use of that term and remain the best easily accessible way for ordinary investors to build wealth over time.


"The Grand Bargain"

October 2013

It is time to negotiate, folks. On December 1, 2010 former Senator Alan Simpson and Bill Clinton Chief of Staff Erskine Bowles delivered the National Commission on Fiscal Responsibility and Reform report to President Obama.  The President had empanelled the bipartisan commission in February of that year.

Since the report was delivered the U.S. has operated without a budget for another three years and added $3.0 trillion to our national debt which now stands at $17 trillion.  We suggest the report be used as a baseline for new bi-partisan budget negotiations which would be binding and would be required to be adopted by both houses of Congress and signed by the President.

The original report concentrated on three areas:  spending cuts, tax reform and entitlement reform.  This proposal was approved by 11 of the 18 members of the committee and presumably, since the problem is far worse now, an even greater majority would endorse the plan if reintroduced now.

We have a moral obligation to get spending and debt under control for future generations or they will suffer much higher tax rates, much lower benefit payments and a permanently lower standard of living.

The “Volcker Rule"

March 2012

“The “Volcker Rule” is getting a lot of attention in the financial press. It is good that it is being thoroughly debated because it is important to the world’s financial health. To avoid another financial meltdown this rule should be implemented. The rule, named for Paul A. Volcker, former Chairman of the U.S. Federal Reserve and widely recognized for breaking the back of late 1970’s hyperinflation, is designed to lessen “systemic risk” that certain banks pose to our economy. Systemic risk is the likelihood that a single bank’s failure, would spread to cause all other banks to fail. A recent prime example of the enormity of systemic risk was our government’s creation of the emergency “TARP” fund, lending $750 billion of U.S. taxpayer money, thereby preventing our banks from collapsing in the fall of 2008. We got our money back from the banks in question… but that was too close to call and we should never allow a similar event. We need to lead the world by example at this historically critical moment.

The Volcker Rule proposes that large banks, that are considered too important to fail, be constrained from activities that create too much risk. Activities such as “proprietary trading” (trading securities for their own accounts) would be eliminated. We did not have rules adequate to ensure this basic financial safeguard in 2008. Partly as a result of the 1999 rescission of Glass-Steagall Act banking rules that have been in place since the great depression era, we have relived aspects of the pain suffered in that terrible time. As originally conceived the Volker Rule would have returned us to a Glass-Steagall-like separation of commercial and investment banking. It would have removed many of the higher risk activities pursued by banks as currently configured, from potential taxpayer bailouts. The original bill was watered down by lobbyists who seek to keep the banks as they are. Commercial and investment banking cannot and should not coexist under one roof. Regulation of such a joined entity is doomed to failure. In essence, a commercial bank which by its size and position in our financial system, requires that we as a country rescue it from potentially fatal problems, must have its activities restricted to protect our country and citizenry.

The banks in question, Wall Street allies and advocates, and some who claim that “free markets” can never be encumbered, have unparalleled financial and political strength. Many are fighting fiercely against Volcker Rule implementation with all resources available to them. They claim that foreigners will steal America’s lead in finance as has happened in manufacturing. They claim financial damage from rules will cost them so gravely that business and jobs will be lost. It is for the good of all that we not create inefficient capital markets due to unnecessary regulation, according to opponents.

We know the costs of allowing these banks to operate with as much risk as they want, while knowing that if the leverage turns out too high, or the gamble too great, that taxpayers will rescue them. We are seeing the European’s frantically grappling with the results of these policies. The Euro land megabanks were the banks cited by Glass-Steagall repealers of the 1990’s as “taking business from the U.S. because we had too many rules”. We live with the ongoing repercussions of Fannie Mae and Freddie Mac whose risks are now known to be borne by taxpayers when once their shareholders reaped the profit. Foresight about a bigger picture that realizes that American supremacy in capital markets is in large part due to confidence in the stability and transparency of the system, and not short term profitability, is required by all of us … including members of the financial industry.”

European Contagion

December 2011

As we watch governments here and in Europe struggle with politically explosive decisions regarding cutting budget deficits and dealing with enormous debt loads, one thing is clear: if we enter another credit crisis the transmission mechanism to the U.S. and the rest of the world economies will be the banking system.

We have heard much discussion about sovereign debt and lending to the weaker countries, but not so much about recapitalizing the banking system. The weak link in Europe is their seriously undercapitalized banks. Unlike the U.S., Europe never added capital in 2009, and only recently began shedding the riskier assets from their banks’ balance sheets. The reason the deterioration in the prices of sovereign bonds in Southern Europe is so important to the financial markets is that the European banks do not have adequate bank capital to deal with the writedowns that would result from a default or a mark-to-market.

European authorities should put more immediate effort into getting more capital into their banks. In addition to Eurobonds they need a EURO TARP. The Troubled Asset Relief Program (TARP) that we used here to add capital to our banking system worked to calm financial markets and ultimately the banking part of TARP returned a profit to taxpayers.

Time for a Eurobond

August 24, 2011

The sovereign debt crisis in Europe needs a big and bold solution. It is time for the 17 countries to unite behind the idea of issuing Eurobonds. The full faith and credit of each of the 17 members would be pledged to back the payments and a pool of between 1 - 2 trillion Euros of bonds; the proceeds would be used to purchase much of the outstanding debt of the weaker nations in the group. This would ease financing conditions of the weaker nations, strengthen their economies, lower interest rates and shore up the balance sheets of the beleaguered European banks. Financial markets would become calmer, allowing for greater economic confidence and perhaps averting a double dip recession in Europe and the U.S.

Budget Battle

May 3, 2011

It is time to stop kicking the budgetary can down the road and tackle the deficit. Entitlement programs represent two of every three dollars the Federal Government spends and need to be restructured to get spending under control. On the social security front, retirement age needs to be lifted and indexed to longevity and the COLA needs to be indexed to price inflation, not wage growth. Medicare costs can be reduced significantly with co-payments on the part of recipients which would lower the cost to the taxpayer and add some spending control by the consumer. End of life spending needs to be addressed as we all use 80% of our healthcare converted dollars in our last two years of life. Medicaid should be connected to a block grant program as envisioned by Congressman Ryan’s plan. Tax policy needs to be simplified and the rate structure flattened to provide incentive. Higher brackets should be applied to ultra-high earners to raise additional revenue. And lastly we must cut defense spending and expect our allies to assume more of the cost of their defense.

We could be on course for a deficit of 4% of GDP by 2015 and a balanced budget by 2020 if our leaders would develop the political nerve to ask for some sacrifice from all of us. They should agree to scrap the congressional benefit programs and join the newly restructured ones all of their constituents are expected to live with. Of course they could also agree to cut their pay 20% and allow campaign finance reform to pass just to make us all feel a little better about our sacrifices!


Nationalize Them Now

September 9, 2010

We believe the government could help stabilize both the housing market and the economy as well as increase household cash flow for families holding conventional mortgages owned by Fannie Mae and Freddie Mac. The two agencies hold $5.7 trillion in fixed rate mortgages which could be re-finananced to current market rates of 4.5% on 30 year amortization. Many of these families cannot re-finance on their own because they are underwater on the homes price or they no longer meet other FNM/FRE standards such as income ratios. The government should fully nationalize both agencies and immediately re-finance all their holdings to market rates. The initial reduction in revenues to the agencies from lower interest payments could conceivably be fully offset by a reduction in foreclosures and short sale losses over time. Families could stay in their homes and have greater cash flow to meet other family needs.


June 4, 2010

The Euro currency has weakened recently as a result of the sovereign debt crisis sweeping southern Europe.  An emergency loan guarantee program of almost one trillion dollars offered jointly by the EIB, IMF and EU members temporarily calmed market fears.  We believe, however, this will turn out to be a band-aid and that the weaker members of the EU will need to exit the Euro currency and devalue their currencies and renegotiate their sovereign debt.  World markets have not yet absorbed the full impact of this major change to the largest "common market."  We remain cautious and focused on capital preservation.

Christmas Eve Mugging

December 31, 2009

Taxpayers were accosted by the Treasury on Christmas Eve when the $400 billion cap on assistance to Fannie Mae and Freddie Mac was lifted providing unlimited taxpayer funding for the mortgage giants. It is time to admit the Government Sponsored Enterprises were a disastrous way for congress to try to expand home ownership.

The common and preferred shares should be cancelled providing taxpayers a break and investors a reminder that with potential gain comes risk of total loss. The right thing to do would be to fully nationalize the firms thereby lowering their funding costs and allow for an orderly wind down over a predetermined period after which the portfolio of mortgages would be sold to investors.

Reappoint Ben Bernanke!

July 27, 2009

Our Federal Reserve Chairman's term expires in January and the administration is sending mixed signals regarding his reappointment. The Chairman has done a great job stabilizing the credit markets and thereby the economy over the last twelve months. Issuing more positive comments or directly stating Bernanke will receive a second term as Chairman would further strengthen our financial markets and boost economic prospects.

Recession Update

May 15, 2009

The recession may have just completed its worst two quarters of GDP contraction with the economy declining at over a six percent rate.  Many prominent economists expect GDP to contract at a lesser rate this quarter and turn positive later this year.  We are not so sure.  This recession could feature a double-dip much like the severe contractions in the 1930's and 1980's.  We believe as stimulus wears off and unemployment grows the economy could relapse next year which is why we remain in capital preservation mode for our clients.

Mortgage Crisis

February 23, 2009
We believe much of the government crisis funding to date (stimulus, TARP, Fed programs) has been misdirected. The epicenter of the banking crisis is the residential real estate market and the mortgages and derivates based on that market. We believe the majority of the initiative should be directed at stabilizing the value of the homes Americans own.

The Home Owners Loan Corporation (HOLC) worked well in the 1930's at no net cost to the taxpayer. The Treasury should issue low rate, long amortization schedule mortgages to all who could qualify. The resulting refinancing proceeds would flow both through the banks and mortgage securities markets. This would lower the cost of buying or owning a home, stabilize the price of homes and help increase the value of mortgage securities. Importantly the equity and solvency of banking institutions that hold these mortgages would improve dramatically.