Some investment tips for the prime minister
Just don't listen to the experts, Guy Rolnik tells Netanyahu in the wake of TheMarker's report that he sought to make changes to his investment portfolio.
There are still question marks hovering over TheMarker's report last week that Prime Minister sought to make changes to his investment portfolio, then changed his mind. What's the deal? Was he just worried, like any other investor, about the imminent implosion of Europe? Did he seek to exploit the insider information to which a prime minister is privy? Or was this just another clever gambit to bring public attention back to security issues?
The ruckus over Netanyahu's portfolio provides an opportunity to recall that the prime minister is just another man with an investment portfolio, who like everyone else has to sleep in the bed that the markets have made for them, in Israel and around the world. Here's what we would have told Netanyahu had he asked for our investment advice.
1. Don't listen to the experts
Especially the ones who claim to know where the market is headed and who say with a smile that everything (both stocks and bonds ) will do well in the long run. Judging by the past five years in the world financial markets, most "expert" advice on investments is worthless. The global financial system is bankrupt and its condition is terminal. It is being kept alive by injections of capital from the central banks, but the medical staff is not coordinating its efforts and no one knows the long-term effects of their treatments.
All the hapless investor can do is to obey the basic rules: Diversify risk - in various countries, currencies and types of asset - and above all, stick to the simplest financial assets.
The more complex the security, the wider berth you should give it. The deeper you delve into investment opportunities around the world, and their risks, the more you will realize how far the drift has been from the principles of the free market. The financial and economic worlds have changed dramatically since your business school days at MIT, despite Wall Street's protestations.
2. That wasn't Godzilla
A few days after the financial crisis erupted in late 2008, you, like many people brought up on the American financial system, were in shock. You colorfully described the crisis as a Godzilla, that Japanese movie monster that explodes from the sewers onto the streets, trampling everything in its reptilian path.
Maybe that's how things seemed back then, but by now it's clear that the U.S. subprime crisis was no mere overgrown gecko that a few heroes could kill. It was the symptom of a deeper disease, a rot in the mechanism of the world financial system. The last three years have proved beyond a doubt that if the financial markets are allowed to operate freely it will be the biggest entities that will make the rules, and they will only continue to grow.
3. Low interest rates are a time bomb
Last week your lawyer told the press your portfolio was "conservative." First, you should know there is no longer such a thing as a "conservative" portfolio, for two reasons. One: Government bonds, once considered a conservative investment, now seem about as safe as a house on fire, given that nations are standing in line to default. Today it's Europe but tomorrow the conflagration could spread to the emerging markets.
Two: The financial system’s life-support machines lowered interest rates worldwide to rock bottom. That confers a double danger: Current income is lower than interest, and there is the risk of gigantic capital losses if interest rates suddenly start to climb, which could cause heavy losses on long-term government bonds.
Now, Bibi, consider Yossi the plumber, who is far less wealthy, clever and connected than you. He must contend with a market that offers few “safe” investments, ones that generate low but steady returns. Now you can understand that times have changed, and that the next 20 years will be unlike anything we have seen before.
4. Mr. Prime Minister, you are responsible
You are responsible for the pension system of all Israelis. You know full well that despite the spin of the banks, the business barons and their pet journalists − spin that financially clueless social activists ate up − this decade’s reform forcing banks to sell their holdings in provident and mutual funds wasn’t about “putting the public’s savings into the capital market.”
That money has been gradually seeping into the market since an earlier reform, 25 years ago when you were deputy foreign minister or Israeli ambassador to the United Nations.
The money flow into the capital market is accelerating at warp speed. Israel’s economy and its pension system are far more dependent now on the quality of regulation, enforcement, corporate governance and capital market mechanisms.
You must continue to reform the Israeli capital market, not only adapting it to the flood of money coming but also putting into practice the lessons learned throughout the world. If we do not reform the market, radical political elements will try to retreat from the model of the free markets and return to the days of government managing all retirement savings.
Are your people, Prime Minister, discussing the long-term ramifications of rock-bottom interest rates for Israeli pensions? What will happen to the hundreds of thousands of Israeli families whose pensions depend on an assumption of net annual gains, adjusted for inflation, and whose income will drop by as much as two-thirds after paying management fees of 3%-4%?
Over time, these differences could wipe out savings, delegitimizing the whole idea of investment funds that operate solely in the free market.
5. Give teeth to regulations
As we have warned time and again in the last year, the people owning the monopolies, the leveraged tycoons and their cronies in the press will try to tie the recession to the only significant economic move you led in your current term as prime minister − tackling the problem of economic concentration and lack of competition.
As expected, some of your people have bought the spin that foreign investors aren’t coming to Israel because the government is doing something about economic concentration.
But the truth is otherwise: Israel doesn’t need foreign investors who come in order to pursue leveraged buyouts of monopolies and oligopolies, squeeze them dry and move on. We aren’t some backward Eastern European or South American economy that needs that sort of investor. We need foreign investors who bring know-how, expertise, recognized brands and access to world markets.
The results would astonish you. You would discover that the Tel Aviv Stock Exchange is choked with companies of exactly that type, so it’s not a reliable barometer of the state of the economy. The mobile operators lost billions of dollars in market value this past year, but the public will gain enormously from the reorganization of the telecommunication market.
7. Don’t invest in the tycoons’ bonds
Bonds issued by Israel’s biggest businessmen have in recent years lost as much as 90% of their adjusted value (their value if redeemed immediately). Bond prices really are low these days, beyond what their inherent risk should dictate.
But that doesn’t necessarily make them a good investment, nor does it reflect panic in the marketplace. It demonstrates that investors suspect the business barons will join the trend of simply not repaying their debt to the public, even when they can in part. It’s become legitimate because of the structure of the market, in which the few people who control the public’s money are cronies of the people who borrowed from the public in the first place.
If the market mechanism worked and the owners faced the loss of their companies, liquidation, or exposure of sweetheart insider transactions, the corporate bonds market would look very different.
8. Don’t buy an apartment
Interest adjusted for inflation is at rock-bottom. For all the reasons listed above Israelis have been snapping up apartments in Tel Aviv at prices that wouldn’t shame Manhattan. Don’t do it, Netanyahu, not because the capital market assures better returns over time, but because your job as prime minister is to dramatically lower housing prices in Israel.
You mustn’t get caught in a conflict of interest, as many politicians, journalists and government officials did who borrowed heavily to buy homes at top dollar in recent years. Each year in which households netting NIS 8,000 to NIS 15,000 a month are buying homes for NIS 1 million to NIS 2 million increases the number of people who are enslaved for decades to their mortgages and struggling to stay afloat.
9. Don’t touch gas and oil exploration stocks.
The true value of that industry to investors will ultimately be a function of the government’s decisions on royalties, taxation and exports. Israel is developing a huge exploration industry that will bring a lot of money into the economy, and under the right regulation could create great opportunity for local industry.
But it also confers tremendous potential for Big Business and Big Government to cozy up. Israel needs to be a high-tech superpower and develop as many small and medium businesses as possible, which aren’t dependent on regulation. It doesn’t need giant companies whose profits are determined by a government official.
10. Let Sara decide,
That’s because the knowledge and confidence that men possess leads them to make every possible mistake when it comes to their personal finances.
Also, it’s the only way to completely hedge yourself against risk. If it works, you both win. If it doesn’t, she won’t be able to say, “Bibi, I told you so.”