Thursday
Oct252018

When X ≠ X 

"At a seminar held last week in Philadelphia sponsored by the Institute for the Fiduciary Standard, several speakers slammed the SEC for what they say is a rule that favors broker-dealers over RIAs because the proposed regulation applies the term “best interest” to brokers without requiring them to abide by the fiduciary standard, the publication writes."
...
The best regulation money can buy.

Friday
Aug102018

We float uneasily along

 

Our first stop is the fixed income markets. Take a look at where we were a year ago & the movement of nominal and real rates.  Green is today, blue a year ago.

A natural tightening

Nominal rates are up across the curve with the biggest movement in the short end, looks like 2 years. Real rates are up significantly in the short end and no movement in the long end. We note again that the 5 year is as short as the Treasury choses to display (which strikes us as an odd and biased limitation on the information displayed). Nominal rates rose also, but we believe real rates drive the real economy.

If we focus a bit on the movement of the yield curve as presented below we see a trend of continued flattening (5 years data below, 10 year less 2’s), maybe some stub of an uptick.

 

So here we are with 4.1% latest GDP, a continuing trend of flattening, and no movement whatsoever in the real 30 rate year from a year ago. Maybe the lack of movement in the 30 year real rate  is telling us that whole barrel of QE monkeys was a useless exercise?

Credit spreads seem stable notwithstanding some outstanding sovereign events like Turkey or Venezuela or coming attractions like Illinois or Connecticut. Small potatoes?

 

GDP Now expects another increase in Q3, about 4.3%, trade wars, Russians, and all:

Even VIX has gone into a state of deep relaxation, trading at 12.7 as of this writing.

Perhaps money velocity has seen a slight point of inflection upwards after almost a decade of decline. It’s quite possible. All the more reason to watch the inflation indicators.

 

And inflation, which is the fuse that can be very short and by that we mean change very quickly, seems to be holding, at least if we’re looking backwards. Below 10 year nominal less 10 year TIPS, constant maturity, followed by the 5 year, 5 year forward inflation expectation, a measure of expected inflation (on average) over the five-year period that begins five years from today.

Neither seem particularly lathered up.

 

 

Valuation ratios of the S&P 500 continue to be high by most metrics.  Pick your favorite:

 We again return to the long view

Driven by habit and experience we take the long look back, about 10 years. We’ve selected four ETF’s which are broadly based to represent the respective asset classes. Do we really think the long green line is going to keep going up at a 14% annual compound growth rate? Perhaps. Or perhaps not.



 Source: https://www.etfreplay.com/charts.aspx

Take a look at the drawdowns which measure the greatest percentage drop from the high (based on Total Return). This we call sober risk assessment.

There are two ways an investor can see a drawdown: the quick way or the long slow grind. We’re not prepared to say whether a downturn will happen or not. Or if one does occur, whether it will be fast & furious kind or the death by a thousand cuts. We are suggesting investors should be prepared.

We stipulate our philosophy is that time in the market determines returns and risk, not timing of the markets, is foundational. In beta returns we trust, not in brokers or ‘smart’ products. We do not pretend that we or anyone else can predict the markets, so we do not try.

We also believe there is such a thing as a business and/or credit cycle. It has not gone away notwithstanding the efforts of the many central planners around the globe. These cycles can perhaps be modified, delayed, accelerated, disrupted or magnified by various policies, scientent or not, but they can not be eliminated. The markets win, central planners lose. 

And the whole notion of time in the market is true, provided, however, investors require the liquidity to ride out the full length of the cycle. This is the sober part of asset allocation, the risk budget. We despise the imbecilic, all too brief questionnaires that are so often presented to ~ “help you determine your risk tolerance.” Malpractice comes to mind... 

We encourage all to take a look at the data below which we hope will be more helpful. We’ve been looking at it lately. 

Source: https://www.schwab.com/resource-center/insights/content/retirement-income-planning-whats-your-risk-capacity

 

 

Friday
Jan052018

2017 Q4 Review & Outlook

Updated on Friday, January 5, 2018 at 02:25PM by Registered Commenterhb

We really don’t know what the future holds, nor do we claim to understand all the moving parts of the present, but here are some of our thoughts and some of those we respect.  This is going to be quick & simple:

Outlook

Presumably, Vanguard is smarter than we are, so here are some excerpts from their recent economic review and market:

■ "For 2018 and beyond, our investment outlook is one of higher risks and lower returns. Elevated valuations, low volatility, and secularly low bond yields are unlikely to be allies for robust financial market returns over the next five years. Downside risks are more elevated in the equity market than in the bond market, even with higher-than-expected inflation."

Click to read more ...

Wednesday
Oct042017

Fed: now go do that voodoo that you do so well

The great Unwind of the Fed has now arrived, and we are grateful for it’s modest and seemingly benign form:

the Federal Open Market Committee directed the Open Market Trading Desk at the Federal Reserve Bank of New York to initiate, in October 2017, the program to gradually reduce the reinvestment of principal payments from the Federal Reserve’s securities holdings that is described in the Committee’s June 2017 addendum to its Policy Normalization Principles and Plans.  Specifically, the Committee directed the Desk to reinvest each month’s principal payments from Treasury securities, agency debt, and agency mortgage-backed securities (MBS) only to the extent that such payments exceed gradually rising caps.

The schedule of monthly caps consistent with the Committee’s September 20 decision and the June 2017 addendum is as follows:

 

Click to read more ...

Tuesday
Sep122017

Calling out mal-investment or worse

Exposing Government Favoritism

This is the new frontier that cries out for further analysis & disclosure:

“Tax abatements are a common tool used by governments to stimulate economic development, but the taxpayer costs of such agreements are often hidden. This is a problem, because the cost of such corporate handouts from state and local governments is estimated to be as high as $70 billion per year.”

An obvious inequity: a company that has been a lifelong resident of a state can see a competitor be granted an immediate & huge tax subsidy.  Equitable? Equal treatment under the law? Not likely.

Worse, tax abatements provide a formal market for rent seeking and political corruption.  Chicago or Connecticut come to mind. We need more data on & analysis of this broad phenomena for the benefit of taxpayers and the economy.


 

Wednesday
Jun142017

Massive unfunded pension liabilities: political malfeasance?

The absolute fraud of pension accounting of unimaginable scale. Citizens and businesses need to understand this is a massive generational transfer of liabilities. Current benefits have neither been adequately funded nor accounted for. They have been essentially hidden... and abused. Willful political malfeasance?

“Despite the introduction of new accounting standards, the vast majority of state and local governments continue to understate their pension costs and liabilities by relying on investment return assumptions of 7-8 percent per year. This report applies market valuation to pension liabilities for 649 state and local pension funds. Considering only already-earned benefits and treating those liabilities as the guaranteed government debt that they are, I find that as of FY 2015 accrued unfunded liabilities of U.S. state and local pension systems are at least $3.846 trillion, or 2.8 times more than the value reflected in government disclosures. Furthermore, while total government employer contributions to pension systems were $111

Click to read more ...

Monday
Apr242017

On the fiduciary rule

WWB strongly supports this position.

Regulations that facilitate conflicts and transacting under an overly complex body of regulation combined with poor but legalesed disclosure are what caused the problem. Together they enable, effectively, a regulatory safe harbor for operating under false color.  Its not complex... but gets so when regulatory capture holds the day. And that's where we are. 

"I do not believe a broker can act as a fiduciary to an investor seeking advice for his personal investments for one simple reason – he can’t serve two masters. A broker already owes a fiduciary duty to his client. It’s just that his client is not the public that buys his wares; his client is the issuer of securities, companies, municipalities, mutual fund companies and other investment product manufacturers. And frankly, Wall Street is already failing at fulfilling this duty. Any IPO that has a large pop on the first day of trading is a failure of the brokerage underwriter to meet his fiduciary duty to his client. What is needed is more education, not a blurring of the lines between advisers and brokers."

The Fiduciary Rule Educates The Public

Thursday
Apr132017

An update on active vs passive management

The first graph from Indexes Beat Stock Pickers Even Over 15 Years explains the second.

 

Click to read more ...

Wednesday
Apr122017

LPL Financial No Longer Claiming to Be ‘Conflict Free’

Investors take note. This is a big deal. We've always encouraged investors to read & understand the fine print of advisory & brokerage agreements, particularly disclosure of conflicts. Of course, many have been written in legalese so as to obscure, if not misrepresent, the substance. The fog of advertizing under false color is slowly receding and with significant consequences for conflicted business models. And more will follow.  This from today’s WSJ LPL Financial No Longer Claiming to Be ‘Conflict Free’ .

LPL Financial Holdings, the Boston-based independent brokerage, is moving to prevent its affiliated financial advisers from claiming they are “conflict free.”

On Monday LPL removed those words from its web site following a story in The Wall Street Journal showing that some advisory firms claim to be “conflict free” on their public websites even though they also list numerous potential conflicts in their disclosures to government regulators.

LPL also asked its advisers to review their websites “for any use of that language and address the concerns that have been raised,” said a spokeswoman for the firm...

LPL’s regulatory filings disclose several conflicts, yet a Journal analysis found that the websites of approximately 70 LPL advisers asserted they were conflict free. As of last week LPL’s own website said the firm’s “objective research” enabled advisers to “provide conflict-free advice and guidance.”

Now one wonders if any of LPL's or its advisors' prior disclosures were misleading? What changed from an operational or policy perspective? One suspects nothing but sunshine. No doubt litigators will sort that one out.

 

Tuesday
Apr112017

Q1 2017 Review & Outlook: first, the rear view mirror

Equities

It is difficult to convey the magnitude of the quarterly performance of the equity sectors, perhaps less so for the fixed income markets. Below are the total returns of exchange traded funds that we use to represent the total US stock market [VTI], all non-US equities [VEU], emerging markets [VWO], the aggregate US bond market [BND] and the short term investment grade sector of the US bond market [VCSH].

 

 

Click to read more ...

Wednesday
Nov302016

Q4 2016 Review & Outlook: An Early Take

Updated on Thursday, December 1, 2016 at 07:45AM by Registered Commenterhb

Equities

Below we show the pre-tax year to date total returns (includes changes in price  & dividends) of three broad based index funds representing the total US market (VTI) , all foreign equities (VEU), and emerging markets (VWO). The total returns are impressive in the main. If we convert them to compound annual basis, they get bigger: 11.9% for US equities, 2.7% for foreign equities, and 14.2% for emerging markets stocks.  We note, although do not show it in the graph, Developed Foreign Markets are down -.2% on a total return basis for the same time period. We see a strong argument for diversification.

Click to read more ...

Tuesday
Jul052016

2016 Q2 review & comment: nothing happened?

Updated on Thursday, July 7, 2016 at 07:30AM by Registered Commenterhb

Our outlook is not one we encourage anyone to bet on. We see continuing weakness in the US economy, and it strikes us that the economic damage or benefit to markets from the EU will largely be a function of political decisions yet to be made.

Brexit is a signal event in the battle between democracy & the wisdom of the crowds against the great Leviathan of the regulatory state and its central planners.  Think of the aggregate of markets, the collective & instantaneous grouping and expression of all known information and all  preferences. This we call “price”, and on which all free persons, everyone, vote every day. In the opposing camp are the endlessly elegant and constantly revised computations of the central planners, the ‘Let X= my summer vacation” types in Brussels and Washington whose pronouncements always seem to translate to some variation of less individual freedom, less choice, and no accountability.

“We have been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. But if no one among us is capable of governing himself, then who among us has the capacity to govern someone else?” - Ronald Reagan

Click to read more ...

Thursday
Jun162016

On Negative Interest Rates: Whimpy Rules

Updated on Thursday, June 16, 2016 at 09:43AM by Registered Commenterhb

Updated on Thursday, June 16, 2016 at 02:23PM by Registered Commenterhb

Updated on Thursday, June 30, 2016 at 06:53AM by Registered Commenterhb

An article in the Financial Times  was the catalyst for this overdue posting on negative rates. Veteran bond managers Jeffery Gundlach and Bill Gross, respectively as excerpted below, sum it up nicely:

negative interest rates “are the stupidest idea I have ever experienced”, and warned that “the next major event [for markets] will be the moment when central banks in Japan and in Europe give up and cancel the experiment”.

“Global yields lowest in 500 years of recorded history…. This is a supernova that will explode one day.”

Our thoughts on the general topic:

  • Negative rates are first and foremost a taking from savers & investors for the benefit of borrowers. One might note the most levered institutions in the world are fiscally irresponsible governments, most of which could not service their debt absent artificially low rates. Negative rates are a hidden tax designed to enable and cover up excessive government spending.

  • Negative rates do not address the causes of our economic problems: defective  tax, regulatory, labor, and fiscal policies which have caused massive distortion of all the markets & economic behavior they touch. And that’s a lot: the entire global economy.  Negative rates will only exacerbate the problems of excess debt, malinvestment, declining labor participation and productivity. We will see even slower growth and declining productivity.

Click to read more ...

Tuesday
Mar292016

Q1 2016 market review & outlook: what you already know

Equity markets

In the first quarter the US markets (VTI) were slightly negative on a total return basis at -1.4% to be surpassed by the Emerging Markets (VWO) at +1.5%, and foreign Developed Markets (VEA) went negative -4.2%. Note our quarterly data is as labeled, to March 28. 

We prefer a longer view, pictured below, and over the last 12 months all were negative. Before we start jumping out windows, let’s bear in mind that the total return of the US markets (VTI) over the last 36 months was 35.8%. 

Click to read more ...

Tuesday
Jan052016

FINRA's problem: arbitration, settlements, expungement & credibility

Let's say you have a legitimate complaint against a broker who behaved unethically (e.g. sold unsuitable investments or misrepresented or ommitted material facts). You go to arbitration and a settlement is offered; however, a requirement of the settlement is a release for expungement, a statement that you will not oppose the broker's request for expungement of the FINRA record of the whole matter.
 
So you take your money and move on, leaving the perpetrator or the public with no record of the event... about 92% of them in 2014. All the while FINRA proudly proclaims the virtue of its Broker Check function in the name of transparency and accountability.
 
The best regulation money can buy, and did. More here: Deleted: FINRA Erases Many Broker Disciplinary Records
 
Sunday
Jan032016

2015 Q4 Review and Outlook: What Every Flying Machine Man Thinks

Updated on Monday, January 4, 2016 at 02:11PM by Registered Commenterhb

Updated on Monday, January 4, 2016 at 02:13PM by Registered Commenterhb

Updated on Wednesday, January 13, 2016 at 07:33AM by Registered Commenterhb

Updated on Thursday, February 4, 2016 at 08:33AM by Registered Commenterhb

Updated on Thursday, February 4, 2016 at 08:33AM by Registered Commenterhb

“Monetary policy made itself ineffective with low interest rates, which were seen as a cure rather than a transitory painkiller.” - Nassim Taleb


Our economic view remains from last quarter’s. We anticipate a recession in the US with about a ~60-70% probability starting sometime in the next 6 to 24 months, assuming that we are not unknowingly in the front end of one now. Given the timing of the national elections, we do not anticipate any material reform of our wayward domestic policies. Political paralysis with essentially a sideways and weak GDP, say ~2%, seems our best case.

To the downside we see an increasing likelihood of a disruptive environment

Click to read more ...

Thursday
Dec172015

James Grant on the Fed's hike

Simple, clear, easy to understand, and hugely important. Watch:

http://video.cnbc.com/gallery/?video=3000466793

Wednesday
Dec162015

The duty of an advisor vs a broker operating under color of defective & misleading regulation

This is a huge issue, and most investors are unaware of it. It is driven by the best regulation that money can buy... and did.

"many financial professionals who hold themselves out as “trusted advisers” are legally allowed to recommend investments that pay the adviser more while exposing investors to higher costs, greater risks and poorer performance than available alternatives."

The Document You Should Ask Your Advisor to Sign

Wednesday
Sep302015

Q3 2015 Review & Comment: Keeping Frankenstein on the Table

Updated on Tuesday, October 6, 2015 at 02:06PM by Registered Commenterhb

“This is a monetary moment. I think we are looking at the beginning of the world’s reappraisal of the words and deeds of central bankers like Janet Yellen and Mario Draghi. What we’re waiting for is a sufficient recognition of the monetary disorder. You see monetary disorder manifested in super low interest rates, in the mispricing of credit broadly and you see it in the escalation of radical monetary nostrums that are floating out of the various central banks and established temples of thought...” - James Grant


Our economic view is not optimistic, but rather sanguine, and that in the archaic sense of  bloody. We anticipate a recession in the US with about a ~60-70% probability starting sometime in the next 9 to 24 months. One colleague hopes for timing before the election so as to clarify the outcomes created by policy over the last decade or so. I think “Democrats hanging from the lamp posts...” was the phrase he used. Well, perhaps he can scratch that ambassadorship...

Click to read more ...

Saturday
Aug222015

Comments on recent market events

Perspective is important to maintaining a clear head in face of market turbulence.

Below is a picture of the last 6 months price performance of VTI (in green), Vanguard Total U.S. Stock Market, which represents approximately 95% of the tradable US equity market. We added BIL (orange) , SPDR 1-3 Month T-Bill ETF (0.2yr) which tracks short term Treasury bills, and VEU (blue), Vanguard FTSE All-World ex-US, a proxy for all non-US equities.

You can see the decline of VTI of about -5.6% over the last 6 months and -8.5% for VEU. Not a good or pleasant thing.

Click to read more ...