Q4 2016 Review & Outlook: An Early Take

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

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.

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2016 Q2 review & comment: nothing happened?

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

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

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On Negative Interest Rates: Whimpy Rules

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

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

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

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.

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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%. 

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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

 

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

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

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

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

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

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

“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

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James Grant on the Fed's hike

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

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

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

Update on Monday, December 21, 2015 at 06:42AM by hb

How timely.

J.P. Morgan to Pay $307 Million Over Client ‘Steering’

Update on Wednesday, December 30, 2015 at 07:44AM by hb

Barclays Capital Settles Allegations of Unsuitable Mutual-Fund Switches

"Barclays Capital Inc., a unit of British bank Barclays PLC, will pay $13.75 million in fines and restitution to settle allegations that its former U.S. wealth and investment-management unit failed to prevent thousands of unsuitable mutual-fund switches in customer accounts "

Q3 2015 Review & Comment: Keeping Frankenstein on the Table

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

“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...

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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.

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Aggregate funded and unfunded liabilities of the states divided by the number of taxpayers

We came across The 2013 Financial State of the States and wanted to bring broader attention to it. The report addresses the scale of the problem of unfunded liabilities of state pensions & other retirement benefits. Recall these amounts are typically off balance sheet items, unseen & poorly understood by the public, and therefore a great source of financial & fiscal abuse by politicians. They are very real and large.

Below is an estimate of the scale of the aggregate problem: you can see that only $195 billion of the estimated $1.1 trillion of liabilities are actually reported on states’ balance sheets. So how is a citizen to know? Well, the intent was that citizens were not supposed to know and that’s the point of abuse. The deception has largely been successful:

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WWB comments on DoL's Proposed Conflict of Interest Rule

Watson Wilkins & Brown, LLC, submitted formal comments to the Department of Labor on it's Proposed Conflict of Interest Rule.

Although the formal comment period is formally closed, we understand DoL is still accepting comments. We wanted to submit the comments by email, but after 5 phone calls to various offices in the Office of Regulations and Interpretations... well, we snail mailed it.

And that, my friends, is part of the problem.

Update on Monday, August 17, 2015 at 10:50AM by hb

WWB's comments posted on DoL's page here: http://www.dol.gov/ebsa/pdf/1210-AB32-2-02605.pdf

Come play the backtest and overfit game!

 We've written before about the risks of excessive back testing in our posting The Effect was Never There... It Was Just a Random Pattern. But now thanks to the good folks at the Scientific Data Management Group at Lawrence Berkeley National Laboratory at UC, we have a nifty little gizmo that will take you for a test drive.

Give it a go on the link below: then open your own quant hedge fund!

Backtest Overfitting: An Interactive Example

If you want to actually read about the toy before you use it, well, you go here, Backtest Overfitting Demonstration Tool: An Online Interface, a paper in the Big Data & Innovative Financial Technologies Paper Series. If you do that, however, you are not qualified by disposition to run a quant fund.

One suspects this phenomena, which is rampant in the investment arena, is going to get some attention in the form of litigation or regulatory scrutiny. In the meantime caveat emptor. A different group is coming to the same conclusion:

"We argue that most claimed research findings in financial economics are likely false."

Remember, kids, actual results may vary!

Q2 2015 Commentary: the pruning knife vs two issues

Updated on Saturday, July 18, 2015 at 11:27AM by hb

Updated on Monday, July 20, 2015 at 02:53PM by hb

Our market outlook is simple. Nothing will happen between now and November 8, 2016, that is, nothing particularly good. Anticipate no reform of policy or regulations...  tax, fiscal, monetary, environmental, energy, labor, or educational matters. We may see futile, symbolic, political gestures, and we will most certainly see Obama launch a last wave of initiatives, mostly by Presidential fiat, and some will likely be materially destructive. A cynic might argue Republicans have incentive to let them roll, to sit and watch the rubble in advance of the elections. But who among us would be a cynic?

Meanwhile the big economic picture remains the same. Our national problems remain unsolved, and so they compound, become more deeply embedded, more complex & costly to remedy.

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Cochrane on Tucker and Bagehot at Hoover

A must read, probably one of the most important pieces we've seen recently on financial regulation & systemic risk.  It is concise & easy to understand and has links to all the good stuff.

Tucker and Bagehot at Hoover

Caring for Digital Assets

We encourage all our clients to read Digital Assets and Fiduciaries to get an understanding of an important and frequently overlooked necessity of personal financial planning: managing online personal data, financial & otherwise. From the article:

“As we live more of our lives online, important parts of our lives continue to live online, when we die. Legally appointed fiduciaries need to access our online lives in order to delete, preserve, and pass along digital assets as appropriate. Estate planning attorneys are increasingly advising their clients of the importance of planning for their digital assets just as they plan for their non-digital assets. And the laws on trusts and estates (and other fiduciaries) are moving slowly towards ensuring appropriate fiduciary access.”

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Mutual funds or mutual fund companies as Systemically Important Financial Institutions (SIFI)

We strongly recommend all read Bill McNabb's piece in today's Wall Street Journal. He is the CEO of Vanguard.

The Tax Threat to Your Mutual Fund

Regulators prepare to declare that large funds pose a ‘systemic’ financial risk. Investors will pay the price

This is an important issue: the proposed regulations are hugely destructive to the US capital markets and investors alike. Unlike the assets of banks, mutual funds have no maturity, hence no roll-over risk therefore no risk of default. They merely have price which reflects supply and demand.

At base we can extend the terribly flawed notions implicit in this regulation: equity investors now will be the lender of last resort to (or you may read that as "owners without voting rights" of) the TBTF banks. 

Of course, consider the preferred, but politically unavailable solution (at least for now) these regulators really want: the ability to prohibit sales of mutual funds whenever the Fed so macro-prudentially deems it appropriate. We jest? The institutional money market funds already have gating mechanisms, and they are now trying to push them in a slightly different form to the equity markets.

And we haven't even mentioned the costs which present yet another taking, a confiscation & transfer, of property rights & wealth to the regulatory state.

On mythology: Q1 2015 review & outlook

Updated on Friday, April 10, 2015 at 07:47AM by hb

Our fundamental outlook has not changed from last quarter’s review, and we think we got the broader mechanics right. We actually suggest readers go back and read the first five paragraphs. These are long lived themes, and we’re going to be multiplying and extending some of them.

What is new, or slightly different, is that the pressures are building, some accelerating, and there seems to be increasing recognition by the markets and electorate that something is amiss.

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Q4 Review & Outlook for 2015

Updated on Thursday, January 15, 2015 at 08:37AM by hb

Updated on Thursday, January 15, 2015 at 08:42AM by hb

Our intermediate term outlook is shaped by the sense that ill conceived macro policies - fiscal, monetary, tax, regulatory & social - have done large scale damage to essential components of the US economy and that recovery of the wealth creation process will be slow & increasingly risky.

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Review & outlook Q3 2014: how long will this last?

 Since the market low of 2009 to date we have seen an incredible run of domestic and foreign equities. We’re in the 6th year of a ~300% cumulative bull run with domestic equities and ~200% in non-US equities. It one of the longest, if not the longest, sustained bull runs in the equity market.

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