“American fiscal woes provide investment opportunities, investment managers told”

 CFA Institute’s annual conference weighs up impacts of ongoing economic slump

While the economic crisis in the is likely to get worse this year before it gets better, it will also generate some potentially profitable investment opportunities.

That’s according to experts and economic insiders presenting at the CFA Institute’s annual conference that recently brought more than 1,800 international investment advisers and strategists to .

“We had mortgages inflating the credit bubble, and right after that, they pricked the bubble. And you can see losses have been realized, and there are a lot more on the way,” said Michael Lustig, managing director and portfolio manager of global investment management firm BlackRock Inc.

While $146 billion worth of write downs and loan losses have been reported by the world’s largest financial institutions, more losses are expected as $313 billion worth of sub-prime mortgages are scheduled to be renewed in 2008.

Lustig said that’s roughly 71% of the total value of mortgages up for renewal in the this year.

Lower underwriting standards and higher loan-to-value ratios are among the key contributors to the rise in loan delinquencies and foreclosures.

According to Janet Yellen, president and CEO of the Federal Reserve Bank of , about 20% of sub-prime mortgages are now either delinquent on their payments or in foreclosure.

She noted that the sub-prime mortgage crisis, coupled with a downturn in the housing market and rising oil and food prices, has drastically reduced consumer confidence and spending. That, in turn, has stalled economic growth at 0.5% during the past two quarters.

But Yellen was hopeful that the economy will get a boost once Americans start spending the hundreds of dollars each person is expected to receive from the federal government’s $150 billion economic stimulus package.

“Half of that will be distributed in May. The main effect to hit this quarter and next quarter could be substantial.”

She noted, however, that overall growth for the year will remain sluggish and increase unemployment while inflation is also rising.

Yellen said commodity prices have fuelled inflation. But she projected that, while those prices will remain high, they should level off.

Yellen added that it’s unlikely that the economy will get mired in stagflation – high inflation and low economic growth.

While parallels have been drawn with the economic situation in the 1970s, economics professor and 1999 Nobel laureate Robert Mundell noted that the economy in ’70s was far worse than it is now.

In the late ’70s and early ’80s, the had an inflation rate of between 11% and 13%, gold prices had shot up to $875 per ounce and oil was at $34 a barrel. While oil and gold have jumped to record prices recently, inflation in the past few years has been relatively low at between 3% and 4%, so the economy has been better able to absorb the price spikes.

Mundell noted that while the value of the U.S. dollar has dropped significantly compared with other global currencies, it’s unlikely that the world will switch to the Euro or another currency as the main medium of international trade, given that 75% of the world’s $6.5 trillion in international reserves are in U.S. dollars.

Despite the ongoing economic uncertainty and market volatility, Lustig said the bond market offers numerous investment opportunities. Because of the illiquidity of the financial markets, prices have been falling for everything from corporate bonds to mortgage-backed securities.

“Even with some pessimistic predictions of what can happen, some bonds may still provide excellent returns at today’s prices,” said Lustig.

But he added that participation in the markets requires investors to “delve into the credit details, getting your hands dirty, understanding these structures and how the credit performance is going to affect the paydown through the structure.”