Phila. Legal Community Holds School Supply Drives

Philadelphia's legal community recently hosted two school supply drives for needy students in the area.

Phila. Legal Community Holds School Supply Drives

Philadelphia's legal community recently hosted two school supply drives for needy students in the area.

Strategies: Forecast for a 20,000 Dow Still Holds

LAST July, when the Dow Jones industrial average was still stuck below 12,900 and investors were seeking safety in bonds, Seth J. Masters made a startling argument.

Mr. Masters, the chief investment officer of Bernstein Global Wealth Management, said that people were so traumatized by the financial crisis that they were seriously underestimating the stock market. In fact, the chances were quite good that by the end of the decade, the Dow would rise more than 7,000 points and reach 20,000, he said.

In some important ways, he said, stocks at that moment had become safer than bonds. “This argument may seem provocative,” he told me back then. “But that’s only because market conditions are so unusual, and so many people have become so pessimistic.”

Last week, Mr. Masters made essentially the same argument, but it sounded much less provocative. In fact, after months of soaring prices, new stock market records and minuscule bond yields, it may even be the Wall Street consensus.

“It seems we’re somewhat ahead of schedule but I think we’re still on track for Dow 20,000 by the end of the decade,” Mr. Masters said last week. “The odds have just gotten better.” And despite the stock market’s recent meteoric rise, he said, stocks still look relatively cheap, certainly compared with bonds.

“It’s not that the expected return on stock right now is really that high,” he said. “It’s that the return on government bonds is indubitably very low.”

That unfavorable verdict on bonds is no accident. In a sense, it’s the policy of the Federal Reserve. Ben S. Bernanke, the Fed chairman, says he is trying to make traditionally riskier assets like stocks relatively attractive, increasing investors’ wealth and in that way stimulating the economy.

As far as the bond market goes, the yield on a benchmark 10-year Treasury note was only 1.5 percent when I spoke to Mr. Masters in July, and it is about 1.9 percent now. To put those yields in perspective, the average for 10-year bonds since 1962 has been more than 6.5 percent, according to quarterly Bloomberg data. In other words, since last July, bond yields have risen by the tiniest bit, and they remain extraordinarily low, on a historical basis.

For bond investors, particularly retirees, these low yields pose a serious dilemma. “This situation creates great problems for people trying to live off the income they can get from bonds,” Mr. Masters said. (I’ll explore this issue further in a future column.)

For now, it’s worth noting that the problem for income-seekers will sort itself out eventually when bond yields rise and prices fall. But that shift is likely to inflict considerable harm on unwary investors.

That day of reckoning keeps receding, however, as global economic growth and inflation remain constrained. That alone tends to keep bond rates low. Furthermore, government spending cuts like the budget sequestration in the United States have reduced economic growth substantially, in the view of the International Monetary Fund and other forecasters.

And as long as unemployment is high and inflation is low, the Fed says it will continue to keep short-term interest rates near zero — and buy $85 billion a month in long-term bonds and other securities. Other central banks have made similar promises. At least for a while, then, historically low interest rates seem likely to persist, for short-term bills as well as for long-term bonds.

The likelihood of low bond yields helps explain the relatively high stock market returns expected by Mr. Masters. And a new study suggests that those yields are the main factor behind the bullish stock market consensus of financial analysts on Wall Street and in academia.

Fernando Duarte and Carlo Rosa, two economists at the Federal Reserve Bank of New York, described their study last week in “Are Stocks Cheap? A Review of the Evidence,” a posting on the New York Fed’s Liberty Street Economics blog. They analyzed 29 separate economic models and found that most predicted extremely high stock returns for the next five years. Why? There are many wonky reasons but in the end, they said, it is “mainly due to exceptionally low Treasury yields at all foreseeable horizons.”

Economic Scene: Mexico’s 1980s Austerity Experience Holds Lesson for Europe

His approach to economics was unorthodox but creative. He tried to raise oil prices by sheer force of will — firing the director of the state oil company Pemex for having the temerity to reduce the price of Mexican crude as oil plummeted on international markets. He froze dollar accounts in local banks to try to stem capital flight.

But the canine defense didn’t work. In 1982, interest on the country’s foreign debt swallowed almost two-thirds of its export revenue. In February, the Mexican currency started plummeting. In August, Jesús Silva Herzog, Mexico’s finance minister, flew to Washington to tell Paul Volcker at the Federal Reserve and Donald Regan at the Treasury Department that Mexico could not make its coming payments to American and other foreign banks.

Tweak a few of the details and Mexico in the 1980s looks a lot like most Southern European countries today. In Mexico’s case, runaway government spending in the 1970s, fueled by high oil prices and greased by foreign debt, threatened to bankrupt the country after the Fed sharply raised interest rates to curb rampant inflation in the United States, increasing Mexico’s interest payments even as oil prices crashed to earth.

Similarly, money poured into Spain and Greece when investors persuaded themselves that the bonds of all members of the euro zone should be as safe as Germany’s, the region’s most creditworthy country. In Greece, this allowed a government spending binge. In Spain it ignited a housing bubble. Both countries were left with an unbearable burden when the world economy hit a wall, creditors took flight and the money stopped.

European decision-making during the crisis of the last few years also shares some of the erratic nature of Mexican policy under President López Portillo. Cyprus was somehow allowed to threaten the euro area’s banking system. European leaders then “solved” the problem by imposing capital controls that — like those tried by Mexico — are unlikely to work and will undoubtedly provide new headaches down the road.

But the most relevant parallel is one that European leaders refuse to see. If there is one overwhelming lesson from the debt crisis that struck Mexico and other Latin American countries so hard three decades ago, it is that countries that cannot grow will not pay. It is up to creditors, too, to allow them to grow. It took Mexico and its lenders seven years to figure that out. The European crisis is in its fifth year. You would think they might have learned something by now, but no.

Mexicans remember what happened after Mr. Silva Herzog’s flight to Washington as the “lost decade.” Miguel de la Madrid, who took over as president the following December, promised deep budget cuts in exchange for bridge loans and debt rescheduling. That didn’t work, so Mexico cut a new deal, getting new loans from commercial banks, the United States and the International Monetary Fund, in exchange for cutting government payrolls and subsidies, selling state-run companies and opening the country to foreign trade.

I started college a little before Mr. Silva Herzog’s trip. In the five-plus years it took me to get a degree (Mexican degrees take longer) the Mexican economy contracted about 2 percent. By the time I got my graduate degree two years later, gross domestic product per person was 8 percent less than it had been in 1982.

Yet despite the enforced austerity, Mexico’s foreign debt in 1988 still amounted to 56.5 percent of Mexico’s economic output, more than it had six years before.

This must sound familiar to Europe’s unemployed. If anything it’s far worse there. The Greek economy has shrunk more than a fifth over the last five years. Government debt amounts to about 170 percent of the economy; it was 100 percent when the crisis started. The economies of Ireland, Portugal, Spain and Italy are smaller, too, than they were five years ago. Their debt burden is heavier. And still, European leaders insist that more of the same must be the solution.

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

Germany Holds Talks on National Energy Strategy

Until now, each state has drawn up and worked from its own plan for the expansion of renewable resources in its territory, often in conflict with one another. On the federal side, there is no single leader for the project to increase reliance on renewable energy to at least 35 percent by 2020. Instead, responsibilities are divided between the ministries of the environment and the economy, with the education minister responsible for financing research on renewable energy and storage technology.

The opposition Social Democratic Party has pounced on the weakness in the Merkel government’s signature project ahead of national elections next year, while widespread public support for the plan faces strains from a nearly 50 percent jump in a consumer tax for the transformation next year.

“Germany’s energy transformation is threatened with collapse due to the inability of the government” to draw up a master plan, Hubertus Heil, a leading Social Democrat, said before Friday’s meeting.

Germans’ relationship to nuclear energy is deeply emotional, rooted in the antinuclear protest culture of the 1970s and memories of radioactive mushrooms and wild game in Bavarian forests that resulted from the 1986 meltdown in Chernobyl.

It would be a severe blow to Ms. Merkel and her Christian Democrats if the project, passed last year by her center-right government in the wake of the Fukushima nuclear disaster in Japan, were to fail. On Friday, she pledged to work with the states through a national dialogue on how best to move forward.

“Germans can be assured that we feel committed to the goal of energy transformation,” Ms. Merkel said after the meeting. “I felt a spirit that we all want, and perhaps can, achieve this.”

Torsten Albig, a Social Democrat who is governor of Schleswig-Holstein, also praised the discussions as “a considerable step forward” toward reaching a master plan by March.

His northern coastal state, along with Lower Saxony, has been criticized for expanding offshore wind energy at such a rapid pace that turbines have had to be switched off on exceptionally windy days, because they produce more energy than the grid can handle.

Ultimately, Ms. Merkel would like to see the energy generated by wind farms in the north transmitted to the power-hungry industrial south. A plan to expand Germany’s grid with that aim, which would require about 500 miles of new power lines and other major upgrades, is to go before Parliament next month.

Family of Wen Jiabao Holds a Hidden Fortune in China

But now 90, the prime minister’s mother, Yang Zhiyun, not only left poverty behind, she became outright rich, at least on paper, according to corporate and regulatory records. Just one investment in her name, in a large Chinese financial services company, had a value of $120 million five years ago, the records show.

The details of how Ms. Yang, a widow, accumulated such wealth are not known, or even if she was aware of the holdings in her name. But it happened after her son was elevated to China’s ruling elite, first in 1998 as vice prime minister and then five years later as prime minister.

Many relatives of Wen Jiabao, including his son, daughter, younger brother and brother-in-law, have become extraordinarily wealthy during his leadership, an investigation by The New York Times shows. A review of corporate and regulatory records indicates that the prime minister’s relatives — some of whom, including his wife, have a knack for aggressive deal making — have controlled assets worth at least $2.7 billion.

In many cases, the names of the relatives have been hidden behind layers of partnerships and investment vehicles involving friends, work colleagues and business partners. Untangling their financial holdings provides an unusually detailed look at how politically connected people have profited from being at the intersection of government and business as state influence and private wealth converge in China’s fast-growing economy.

Unlike most new businesses in China, the family’s ventures sometimes received financial backing from state-owned companies, including China Mobile, one of the country’s biggest phone operators, the documents show. At other times, the ventures won support from some of Asia’s richest tycoons. The Times found that Mr. Wen’s relatives accumulated shares in banks, jewelers, tourist resorts, telecommunications companies and infrastructure projects, sometimes by using offshore entities.

The holdings include a villa development project in Beijing; a tire factory in northern China; a company that helped build some of Beijing’s Olympic stadiums, including the well-known “Bird’s Nest”; and Ping An Insurance, one of the world’s biggest financial services companies.

As prime minister in an economy that remains heavily state-driven, Mr. Wen, who is best known for his simple ways and common touch, more importantly has broad authority over the major industries where his relatives have made their fortunes. Chinese companies cannot list their shares on a stock exchange without approval from agencies overseen by Mr. Wen, for example. He also has the power to influence investments in strategic sectors like energy and telecommunications.

Because the Chinese government rarely makes its deliberations public, it is not known what role — if any — Mr. Wen, who is 70, has played in most policy or regulatory decisions. But in some cases, his relatives have sought to profit from opportunities made possible by those decisions.

The prime minister’s younger brother, for example, has a company that was awarded more than $30 million in government contracts and subsidies to handle wastewater treatment and medical waste disposal for some of China’s biggest cities, according to estimates based on government records. The contracts were announced after Mr. Wen ordered tougher regulations on medical waste disposal in 2003 after the SARS outbreak.

In 2004, after the State Council, a government body Mr. Wen presides over, exempted Ping An Insurance and other companies from rules that limited their scope, Ping An went on to raise $1.8 billion in an initial public offering of stock. Partnerships controlled by Mr. Wen’s relatives — along with their friends and colleagues — made a fortune by investing in the company before the public offering.