Greg Gann is featured in Proactive Magazine 5/14
http://www.proactiveadvisormagazine.com/greg-gann
Monday, May 19, 2014
Two Steps Forward
Greg Gann is featured in Proactive Magazine 5/14
http://www.proactiveadvisormagazine.com/greg-gann
Wednesday, April 9, 2014
Unbelievable
The data in the email I received yesterday from Howard Silverblatt, senior index analyst for Standard & Poors Dow Jones Indices*, was so impactful that I feel compelled to share it.
Howard calculated that the S&P500 reached 45 record-setting days in 2013.Considering the fact that there are approximately 230 trading days in a year, this means that roughly 20% of those days were historical.
He also identified that within the first quarter of 2014, there have been 8 record-setting days. Unlike last year, 2014 has seen a few market reversals that have evaporated prior YTD gains.
Prior to 2013, the last record breaking high for the S&P500 was achieved on October 9, 2007. Think about that for a moment. It took from 2007 until 2013 to beat the prior high. Yet, within the last 15 months, a whopping 53 sessions have set milestones.
Using terms like "bubble" or "irrational exuberance" can sound sensational. And, trends can definitely continue beyond prediction. Nonetheless, 53 record-breaking sessions within a 15 month time horizon is not "normal". Furthermore, the significant price escalation can certainly limit the rate of future growth.
Two other indicators illustrate other important analysis. Doug Short in his March 2014 dshort.com references the fact that the greatest number of investors in 2014 are doing so using borrowed money, and this is significantly higher than at any other point within the last 20 years. That is a clear sign of excessive optimism. Furthermore, MarketWatch on March 14, 2014 reported that the greatest number of corporate executives of publicly traded companies are selling their shares at the greatest rate in 25 years.
Pendulums swing too far in one direction and then too far in the reverse. The pendulum of the market has moved a whole lot from 2008 to 2014. Chances are that you have seen this movie before. The question becomes how to avoid the sequel. In my humble opinion this requires diversifying away from stocks and bonds to protect your net worth from being so tied to the direction of these markets. Institutional investors, pensions, and endowments invest in assets and strategies that might underperform in a year of 45 record-setting days, but they incorporate investments that are designed to insulate downtrends, and can even provide growth during these periods through inverse exposure. I advocate investing along many of these same lines.
What worked when the pendulum was moving in one direction will likely fail after the tipping point. Investing for retirement is a marathon that far too many treat as a sprint. It is a sport that requires both discipline and preparation. Now is the time to heed Warren Buffett's sage advice to be fearful when others are greedy. Now is the time for a deep financial check-up. Nothing ever stays the same. And, no one rings the bell before it changes. The fear of 2008 is a distant past. Once again, just like in the 1990s, greed dominates. If you can't muster the strength of the Oracle of Omaha, please remember -- pigs eat, but hogs get slaughtered.
Greg Gann
*The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Howard calculated that the S&P500 reached 45 record-setting days in 2013.Considering the fact that there are approximately 230 trading days in a year, this means that roughly 20% of those days were historical.
He also identified that within the first quarter of 2014, there have been 8 record-setting days. Unlike last year, 2014 has seen a few market reversals that have evaporated prior YTD gains.
Prior to 2013, the last record breaking high for the S&P500 was achieved on October 9, 2007. Think about that for a moment. It took from 2007 until 2013 to beat the prior high. Yet, within the last 15 months, a whopping 53 sessions have set milestones.
Using terms like "bubble" or "irrational exuberance" can sound sensational. And, trends can definitely continue beyond prediction. Nonetheless, 53 record-breaking sessions within a 15 month time horizon is not "normal". Furthermore, the significant price escalation can certainly limit the rate of future growth.
Two other indicators illustrate other important analysis. Doug Short in his March 2014 dshort.com references the fact that the greatest number of investors in 2014 are doing so using borrowed money, and this is significantly higher than at any other point within the last 20 years. That is a clear sign of excessive optimism. Furthermore, MarketWatch on March 14, 2014 reported that the greatest number of corporate executives of publicly traded companies are selling their shares at the greatest rate in 25 years.
Pendulums swing too far in one direction and then too far in the reverse. The pendulum of the market has moved a whole lot from 2008 to 2014. Chances are that you have seen this movie before. The question becomes how to avoid the sequel. In my humble opinion this requires diversifying away from stocks and bonds to protect your net worth from being so tied to the direction of these markets. Institutional investors, pensions, and endowments invest in assets and strategies that might underperform in a year of 45 record-setting days, but they incorporate investments that are designed to insulate downtrends, and can even provide growth during these periods through inverse exposure. I advocate investing along many of these same lines.
What worked when the pendulum was moving in one direction will likely fail after the tipping point. Investing for retirement is a marathon that far too many treat as a sprint. It is a sport that requires both discipline and preparation. Now is the time to heed Warren Buffett's sage advice to be fearful when others are greedy. Now is the time for a deep financial check-up. Nothing ever stays the same. And, no one rings the bell before it changes. The fear of 2008 is a distant past. Once again, just like in the 1990s, greed dominates. If you can't muster the strength of the Oracle of Omaha, please remember -- pigs eat, but hogs get slaughtered.
Greg Gann
*The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Monday, February 10, 2014
Breakfast Buffet: $50
I traveled with my family the week between Christmas and New Year's to Copenhagen. Because of my interest in economics and the social aspects of diverse cultures, this became the lens through which I experienced the journey.
The Danish people, pretty much universally, are considered liberal. In terms of global neutrality, their reputation is similar to Switzerland. One example of this trait was evident in World War II when the Danes helped their Jewish population evacuate days before the Nazi round -up. This liberalism today is evidenced in their economic and social programs. Free healthcare is just one example. Another example is evidenced by the fact that not only is university free, but additionally all students receive a stipend to cover living expenses, regardless of financial need, in the amount of about $12,000 per year. Another safety net provided by the government is unlimited unemployment benefits provided the recipient provides rudimentary evidence that he or she is actively seeking employment. One Dane with whom I was discussing this policy told me that what satisfies as "actively seeking employment" is a joke. He said that it is quite common for recipients to apply for jobs for which they are clearly not qualified, and therefore have no real shot at being hired. Nonetheless, going through those motions fulfills the obligation and continues the benefits.
Free healthcare, free university education, free income for university students, "unlimited" unemployment benefits, generous social security benefits, a public transportation system that is state of the art that links their subway system with their rail system, and makes the United States look like its infrastructure is still in the Stone Age, how do they do it you ask? Taxes! Tax rates start at 30% and increase from there. In the United States, we have a progressive tax rate where all thresholds of income are taxed at the same rate regardless of total income. So, the first $50,000 of a millionaire's income is taxed at the same rate as a wage earner who makes only a fraction of that income. In Denmark and most of Europe the tax rate is applied to all income on an absolute basis. So a Danish millionaire will pay substantially more taxes than his American counterpart. In addition, a 30% tax rate is a significantly greater portion of income deducted from a low or modest wage earner.
Furthermore, Denmark and Europe impose a hefty 25% sales tax known as the value added tax (VAT) that applies to all purchases. The effect of the VAT is that it inflated the cost of the very simple breakfast buffet at the Crowne Plaza Hotel from an advertised cost of $30 to nearly $40 per person. Adding further hardship to the VAT is the incredible weakness of the shrinking US dollar. Base prices are high in Europe, and adding the VAT and the dollar exchange rate resulted in a self- service breakfast buffet costing $50 per person. This is just one example of many evidencing the effects of European liberalism coupled with US monetary policy. A single can of beer cost $20, and a cocktail would set you back by $35. To raise revenues as well as to legislate social morals such as caring for the environment, certain items such as automobiles have imposed on them an additional tax. In the case of an automobile, the additional tax is equivalent to 120% of the purchase price. This makes owning an automobile out of reach for most citizens, and consequently, bicycles proliferate everywhere.
All of this got me thinking who has the better system, especially in light of the fact that the US is debating these issues today on the domestic front. I was also especially sensitive to the juxtaposition because I personally was a university student in Europe 32 years ago. And, I was a beneficiary of some of the generous social promotions, but at a time when the dollar was king. Notwithstanding the fact that I attended an American college, the Italian government - subsidized cafeteria was available to me and all who had a university ID card. With my college identification, I was welcomed into the cafeteria, and enjoyed a four course meal including wine for about $.75. This coupled with the fact that the dollar was at an all - time high, enabled me to travel throughout Europe on my "lunch money".
Now, as an adult and a financial planner, I am certainly supportive of policies that make life worthwhile and less stressful. As a society, we should look out for our brothers and sisters who are in need and who are in route to becoming independent and successful. The great challenge is balancing these values with policies that do not inhibit innovation, motivation, and incentivization. In striking the right balance, it is important to appreciate the fact that sometimes providing more translates into less. What I mean by this is the law of diminishing returns. When social promises and programs cost so much to support, then there becomes less of an exchange. When breakfast costs $50 per person, or a can of beer costs $20, there are fewer and fewer people who can or are willing to partake. And this becomes a vicious cycle because there is less commerce and therefore less income to support the entire system. If we think of no other industry beyond tourism, at current expenses, it does not take a rocket scientist to realize the effects of diminishing returns. Furthermore, while the Federal Reserve has used unprecedented tools in recent years to suppress interest rates in order to invigorate the US economy, it has also resulted in a dollar that doesn't provide much abroad. A weak dollar makes US exports much more competitive, but it does not help our purchasing power in terms of goods and services that are best rendered outside our borders.
I must say that Danes appear happy with their lifestyle and their government. The policies have been ingrained as a fabric within their society, and they seemed content. My sense was that there is not a large income disparity in Denmark. I felt that there would be relatively few extremes in terms of poverty or wealth. Additionally, I felt that the incomes of the middle class would fall into a fairly narrow range. Their housing and furnishings appeared quite uniform. Along the subway route, the new condominium buildings were all modern, filled with similar looking apartment boxes within. Perhaps due to the fact that there is limited light during the winter, most of the condominium buildings that we passed had limited window coverings. We could see right into the apartments, and literally saw the same furniture down to and including light fixtures in a great number of these units. Even though the Danish design aesthetic is filled with attractive and simple lines with optimum function, the uniformity was so pronounced that, it became monotone. And, with all the talk about income disparity in America, it made me question whether from a purely social rather than economic standpoint, income parity could in fact breed a monotone society.
There are of course no easy or right or wrong answers to these social and economic philosophies. What is clear is the inter-linking of economics and sociology. The monetary and economic policies that we enact are reflective of our values and therefore culture. With every pro, there is a con. At the core of America is individualism coupled with collectivism, the notion of equal opportunity irrespective of how tainted it may be, hard work and sacrifice, and a melting pot that is supposed to celebrate diversity. As our middle is getting marginalized today by the extremes on both the left and the right, I only hope that we continue to debate the social/economic framework that we want for our society in the most respectful manner. As our population ages and our demographics shift, and technology realigns the fabric of our society, these issues will become even more challenging and daunting. We must understand and appreciate both the costs and consequences of moving too far in the European direction, and too far in a direction that results in a large portion of the
populace hurting or becoming disenfranchised. And, what is so interesting and timely in light of this discussion, is the fact that it was just announced that the Danish government has agreed to sell an interest in one of their largest state owned energy companies to Goldman Sachs because like most governments, even the Danes are finding themselves cash-strapped. This reinforces the need to strike the proper balance government largesse and austerity, and the recognition that we will only prevail when that balance is struck.
Greg Gann
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Wednesday, October 2, 2013
Bad=Good. Good=Bad.
The September-October timeframe is traditionally one of the most volatile for the stock market. It is during this season when the unexpected has often become reality. This year is no exception. On Thursday September 18, 2013, the Federal Reserve shocked the market which was being prepped for a tapering of its most massive bond buying stimulus program in its history.
In September of 2012, the Fed initiated its third round of stimulus known as quantitative easing with hopes of igniting a tepid economy. Quantitative easing is a fancy term for the Fed calling on the Treasury to provide it (including printing) dollars so as to buy government bonds as well as mortgages from private banks. These purchases have occurred at a rate of $85 billion per month, or approximately $1 trillion per year. To provide some perspective, it is important to appreciate the full context of these purchases. In 2007, the entire balance sheet of the Fed was $1 trillion. This year alone, the Fed is increasing its balance sheet by absorbing assets from banks in the amount of its entire balance sheet value as of a mere six years ago.
Beginning in earnest in May, the Fed started dropping hints that it was looking for ways to curtail these purchases, and most were expecting it to announce at this September's meeting some form of "Septaper", even if it were only modest and symbolic. The common thought was that the economy is improving, and as such, the Fed should clearly be in a position to limit its purchases a mere $5 billion - $10 billion a month.
By the way, quantitative easing is a highly contentious issue not only for the public and policy makers at large, but even amongst voting members of the Fed Board, there are many who not only question the efficacy of the program, but actually think it is harmful from a long-term perspective on the economy. Nonetheless, The Fed announced that it would not slow down its purchases not even one iota. With high frequency trading the technology du jour, it only took seconds for the Dow to reach another historical all-time high. Just like an addict getting high from narcotics, the Dow is getting "high" from on-going Fed stimulus. The other 2013 all-time highs for the Dow were March 11th, May 7th, May 28th, July 11th, and August 2nd. So, with a series of unprecedented all-time highs, it begs the question is this because things are good, or on a more sinister level, is it because things are actually not so good, but rather bad?
Although the market rallied significantly after the Fed's announcement to do nothing, I think this was a bad decision, and an objective indication that things are not so good. I say this because inherent in the Fed's decision is an acknowledgment that the economy, notwithstanding so many back-to-back record highs for the Dow, is not strong enough to stand on its own two feet. It still needs coddling from Mother Fed. Those in the know who are orchestrating monetary policy are announcing that we are not out of the woods, and things could easily slip backwards. Just like it takes time to adequately wean an addict, I do not believe the Fed should have jolted the system with a large taper. But, I think that once the euphoria dissipates from the fact that the drug was re-administered in full force, it will sink in that things are not as good as one would reasonably surmise based solely on stock market performance.
At this particular moment, the equation controlling the market is bad=good. And, the concern is that when the economy unequivocally indicates that things are steady and good, then the stimulus will be cut or at least tapered. And, so, the equation under that scenario is good=bad. Until times resume to normal and logic prevails such that good things in the economy translate into good things for the market, then this is a market that should be strategized by playing the "winning by not losing" game, rather than rolling the dice, doubling down and playing the "winning by winning" game. In other words, until good=good, and bad=bad, the market is subject to exogenous shocks that could wipe out the 2013 gains faster than most people can protect themselves.
Now, there are those who postulate that this year's gains in the stock market are real, and that they reflect a true and improving American and global economy. They point to the improvements in the stated unemployment figures, the amount of cash that major corporations hold on their balance sheets, the rebounding of the housing market, and incredibly strong auto sales.
For any who say that the stock market's gains are separate and removed from the Fed's purchases which have resulted in some of the lowest interest rates on record, I would simply refer them to last week's market surge. On Monday the 16th, the first day of trading following Larry Summers announced withdrawal from being considered for Chair of the Fed, the Dow went up over 100 points. (Larry Summers is much less supportive of Fed policies than Janet Yellen, the other major contender.) Then, two days later when the Fed announced it would do no tapering, the Dow increased 176 points above its previous day's close.
The market is treating bad economic news as good news because the thought is that the stimulus "punch bowl" will continue to be replenished. It is a short-sighted reaction without considering the long-term implications of manipulating interest rates or even how the policies are leading to "strengths", which may in fact be weaknesses. For example, I cite Bloomberg Businessweek that reports that the labor participation rate has hit a 35-year low. This means that much of the improvement in the unemployment rate relates to workers dropping out of the market rather than landing gainful employment. The amount of cash sitting on corporate balance sheets is also not as rosy as it is portrayed. Why? It is because corporations are afraid to deploy their cash. Inherent in hoarding cash is an acknowledgement that although cash yields virtually nothing, there are no better places to deploy it. With respect to the highly encouraging auto sales, it is important to note that the average age of an automobile today in the U.S. is eleven years according to autonews.com. Autos been driven far beyond their life expectancies. Furthermore, there has been a vast elevation in the number of auto leases rather than purchases, which indicates to me that money is still quite tight. With respect to housing, there was an immediate slow-down in mortgage applications once interest rates started increasing over the summer.
The Fed's policies have significantly helped the banks and the very small minority of affluent Americans whose wealth is tied to financial instruments. It has resulted in a weak US dollar, which is good for exports. But because food, commodities, gasoline, and precious metals are priced in dollars, as the dollar has weakened, it has resulted in higher prices for these essentials. Also impacted are the millions of retirees who live on fixed incomes and depend on interest payments for their maintenance. So, clearly what is good for some is bad for others.
And, so we witness the law of unintended consequences. And, we live in a land of confusion where bad=good and good=bad. As we witnessed from the housing market, Fed policies do create bubbles that can inflate longer than predictable or rational. Without any recognition of debt ceiling debates, the ineptitudes of Washington, or geopolitical risks, it is important to appreciate in financial and risk management that it takes a lot more time to inflate a balloon than it does to pop it.
Today's market and risks are not like your daddy's Oldsmobile, a car which is now extinct. Unusual times call for alternative investment strategies and different perspectives. Drop me an email, and I am happy to share our research and/or market game plans because retirement is a terrible thing to waste.
Greg Gann
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
In September of 2012, the Fed initiated its third round of stimulus known as quantitative easing with hopes of igniting a tepid economy. Quantitative easing is a fancy term for the Fed calling on the Treasury to provide it (including printing) dollars so as to buy government bonds as well as mortgages from private banks. These purchases have occurred at a rate of $85 billion per month, or approximately $1 trillion per year. To provide some perspective, it is important to appreciate the full context of these purchases. In 2007, the entire balance sheet of the Fed was $1 trillion. This year alone, the Fed is increasing its balance sheet by absorbing assets from banks in the amount of its entire balance sheet value as of a mere six years ago.
Beginning in earnest in May, the Fed started dropping hints that it was looking for ways to curtail these purchases, and most were expecting it to announce at this September's meeting some form of "Septaper", even if it were only modest and symbolic. The common thought was that the economy is improving, and as such, the Fed should clearly be in a position to limit its purchases a mere $5 billion - $10 billion a month.
By the way, quantitative easing is a highly contentious issue not only for the public and policy makers at large, but even amongst voting members of the Fed Board, there are many who not only question the efficacy of the program, but actually think it is harmful from a long-term perspective on the economy. Nonetheless, The Fed announced that it would not slow down its purchases not even one iota. With high frequency trading the technology du jour, it only took seconds for the Dow to reach another historical all-time high. Just like an addict getting high from narcotics, the Dow is getting "high" from on-going Fed stimulus. The other 2013 all-time highs for the Dow were March 11th, May 7th, May 28th, July 11th, and August 2nd. So, with a series of unprecedented all-time highs, it begs the question is this because things are good, or on a more sinister level, is it because things are actually not so good, but rather bad?
Although the market rallied significantly after the Fed's announcement to do nothing, I think this was a bad decision, and an objective indication that things are not so good. I say this because inherent in the Fed's decision is an acknowledgment that the economy, notwithstanding so many back-to-back record highs for the Dow, is not strong enough to stand on its own two feet. It still needs coddling from Mother Fed. Those in the know who are orchestrating monetary policy are announcing that we are not out of the woods, and things could easily slip backwards. Just like it takes time to adequately wean an addict, I do not believe the Fed should have jolted the system with a large taper. But, I think that once the euphoria dissipates from the fact that the drug was re-administered in full force, it will sink in that things are not as good as one would reasonably surmise based solely on stock market performance.
At this particular moment, the equation controlling the market is bad=good. And, the concern is that when the economy unequivocally indicates that things are steady and good, then the stimulus will be cut or at least tapered. And, so, the equation under that scenario is good=bad. Until times resume to normal and logic prevails such that good things in the economy translate into good things for the market, then this is a market that should be strategized by playing the "winning by not losing" game, rather than rolling the dice, doubling down and playing the "winning by winning" game. In other words, until good=good, and bad=bad, the market is subject to exogenous shocks that could wipe out the 2013 gains faster than most people can protect themselves.
Now, there are those who postulate that this year's gains in the stock market are real, and that they reflect a true and improving American and global economy. They point to the improvements in the stated unemployment figures, the amount of cash that major corporations hold on their balance sheets, the rebounding of the housing market, and incredibly strong auto sales.
For any who say that the stock market's gains are separate and removed from the Fed's purchases which have resulted in some of the lowest interest rates on record, I would simply refer them to last week's market surge. On Monday the 16th, the first day of trading following Larry Summers announced withdrawal from being considered for Chair of the Fed, the Dow went up over 100 points. (Larry Summers is much less supportive of Fed policies than Janet Yellen, the other major contender.) Then, two days later when the Fed announced it would do no tapering, the Dow increased 176 points above its previous day's close.
The market is treating bad economic news as good news because the thought is that the stimulus "punch bowl" will continue to be replenished. It is a short-sighted reaction without considering the long-term implications of manipulating interest rates or even how the policies are leading to "strengths", which may in fact be weaknesses. For example, I cite Bloomberg Businessweek that reports that the labor participation rate has hit a 35-year low. This means that much of the improvement in the unemployment rate relates to workers dropping out of the market rather than landing gainful employment. The amount of cash sitting on corporate balance sheets is also not as rosy as it is portrayed. Why? It is because corporations are afraid to deploy their cash. Inherent in hoarding cash is an acknowledgement that although cash yields virtually nothing, there are no better places to deploy it. With respect to the highly encouraging auto sales, it is important to note that the average age of an automobile today in the U.S. is eleven years according to autonews.com. Autos been driven far beyond their life expectancies. Furthermore, there has been a vast elevation in the number of auto leases rather than purchases, which indicates to me that money is still quite tight. With respect to housing, there was an immediate slow-down in mortgage applications once interest rates started increasing over the summer.
The Fed's policies have significantly helped the banks and the very small minority of affluent Americans whose wealth is tied to financial instruments. It has resulted in a weak US dollar, which is good for exports. But because food, commodities, gasoline, and precious metals are priced in dollars, as the dollar has weakened, it has resulted in higher prices for these essentials. Also impacted are the millions of retirees who live on fixed incomes and depend on interest payments for their maintenance. So, clearly what is good for some is bad for others.
And, so we witness the law of unintended consequences. And, we live in a land of confusion where bad=good and good=bad. As we witnessed from the housing market, Fed policies do create bubbles that can inflate longer than predictable or rational. Without any recognition of debt ceiling debates, the ineptitudes of Washington, or geopolitical risks, it is important to appreciate in financial and risk management that it takes a lot more time to inflate a balloon than it does to pop it.
Today's market and risks are not like your daddy's Oldsmobile, a car which is now extinct. Unusual times call for alternative investment strategies and different perspectives. Drop me an email, and I am happy to share our research and/or market game plans because retirement is a terrible thing to waste.
Greg Gann
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Friday, April 19, 2013
Quantitative Easing Explained in Plain English
Every country has a central bank. The most fundamental role of a central bank is to control the speed of a nation's economy, mostly by setting interest rates. To stimulate growth, ordinarily the central bank would lower interest rates, thereby encouraging expansion through loan activity. When the economy has heated up too much, and to keep inflation in check, normally there would be a policy shift to raise rates. This process requires a lot of forecasting and juggling. The strategies which central banks are using today to ward off another great recession are unprecedented and of historical proportions.
Our central bank in the United States is known as The Federal Reserve (The Fed), and it is chaired by Ben Bernanke. The Fed and numerous other central banks today are engaged in an economic experiment (yes, it is an experiment) referred to as quantitative easing (QE). Here is how QE in essence works.
The Fed, which is a private entity with quasi-governmental authority, is literally buying assets such as mortgages and other holdings from large private banks including JPMorgan, Bank of America, and Wells Fargo. It provides the banks with cash which is retained in a reserve account for the bank. So the bank removes the mortgage from its balance sheet and transfers the mortgage onto the Fed's balance sheet. In the exchange, the bank is credited cash and that cash earns interest which is credited by the Fed as well. Since September, the Fed has been buying "assets" from banks and crediting their reserve accounts in the amount of $85 Billion per month.
Where does the Fed come up with the cash to buy these financial instruments from banks, you ask? It calls the U.S. Treasury and says print us the $85 Billion each month until we tell you to stop and then the Fed wires the funds to the banks. The rationale for this is to boost demand for financial instruments because the greater the demand for these instruments, the lower the ensuing interest rates which will prevail in the marketplace. The Fed is the largest buyer of these financial instruments today. The Fed is arbitrarily creating demand. When there are more buyers for financial instruments which pay interest, then the seller doesn't have to pay as much interest to induce more purchasers to buy. And, conversely, when there are fewer purchasers, the seller has to pay higher interest to entice more buyers. It is in this way that our Fed and other central banks are seeking to maintain low interest rates to stimulate economic activity.
One of the consequences however of printing so much money and raising the monetary base, is that the currency loses value and eventually can become debased. If the U.S. dollar loses too much value, then our creditors, such as China, may decide that we are a greater risk and could curtail their lending. China lends us dollars to pay our debts and we are obligated to repay the debt in dollars. So, if the value of the dollar is undermined, there could come a point where the Chinese and other lenders decide it's not worth lending to the U.S. and/or demand higher interest rates. Even just a half point increase in interest rates would substantially increase U.S. debt service obligations and hence budget deficit. Trying to navigate these opposing forces is like pulling on a very thin string. It would be nearly impossible to get it just right.
The point is that economics is never a precise science. It is not quantum physics. And, there is often an equal and opposite reaction for every action as well as unintended consequences which cannot be examined in a test tube. No one, that's right, no one, knows how all of this will transpire once the Fed reduces and/or stops its massive purchases.
What is known is that the Fed was established in 1913. It took from 1913-2007 for the Fed to create a balance sheet of approximately $1 Trillion. By the end of the current calendar year, as a result of the Fed's monthly purchasing activities, it is estimated that that the Fed's balance sheet will have ballooned to $4 Trillion. That equates to a four-fold increase in just six years from a balance sheet which had previously taken 94 years to establish. All of this has resulted in the yield on a ten year Treasury note at the time of this writing of approximately 1.7%. Think about that for a second. Simultaneously in a month during which the stock market has reached all-time highs, investors are lining up to buy ten year paper from the U.S. Treasury which is yielding less than inflation. So, clearly not everyone has bought into the notion that QE is the panacea. Furthermore, unemployment has remained stubbornly high even in the midst of all of this monetary stimulus.
Notwithstanding the disparity of opinions about the efficacy of QE or the unintended consequences, just two weeks ago, The Bank of Japan (BOJ), the central bank for the country, propelled the QE bandwagon by announcing its new mandate to double its bond buying program. This is for a nation whose total debt is almost 2.5 times its GDP, and twenty times its tax revenue. Kyle Bass, principal of Hayman Capital, and one of the infamous strategists who hit a home run betting against subprime loans, points out that the BOJ is monetizing at a rate of 75% of the Fed for a country whose economy is only one-third of the United States. Consequently, the value of the Japanese Yen has depreciated drastically since the policy announcement.
A weaker currency augments exports because the net cost for the importers is reduced as their currencies strengthen, in this case against the Yen. But, while increased exports is obviously advantageous for a nation, there are no free lunches and often a zero-sum gain. For instance, Kyle Bass predicts that Japan's monetary policies and economic challenges will result in Japanese retirees losing up to half their life savings. Plus, it is difficult to achieve real gains when so many countries are racing to the bottom simultaneously, resulting in what many consider the precipice of a great currency war.
The other great challenge and perhaps unintended consequence of easy monetary policies which have resulted in historically low interest rates is that bond prices which have served as a conservative anchor since 1982 when interest rates peaked at close to 20%, provide real headwinds looking forward. When interest rates decrease, that strengthens the price of bonds. However, increasing interest rates weakens bond prices. That is because new bonds would be issued typically paying out higher interest rates than older bonds that were issued when rates were lower. All things being equal, I'd rather own a newer bond paying higher interest than the older bond with the lower rate. So, to induce us to purchase the old bond with the lower interest rate, we would demand a discount.
The 401k money which for numerous Americans was cut in half twice over the last twelve years to become the notorious 201k was nonetheless buoyed by rising bond prices. Investors do not have those tailwinds today with interest rates currently at rock bottom. When interest rates do begin their inevitable ascent, that will wreak havoc on the one major investment asset class which has had remarkably superior performance over the last thirty plus years.
Even ignoring all the challenges and what I consider inevitable financial catastrophe in the Euro zone as well as geopolitical risks associated with Korea, Iran, the Middle East, and Africa, I take the position that today represents a crucial period in world economic history to diversify away from allocations primarily to stocks and bonds. Real, hard assets and investment strategies which can profit when traditional markets devalue need to be well understood and incorporated. In a world flush with economic experimentation, what worked in the past will not necessarily be a winning formula for tomorrow. New ideas and innovative financial products are more critical than ever. Today's market is not your father's Oldsmobile. Feel free to call us to arrange a phone consultation to see if you may be a candidate for a comprehensive review and how the strategies that are helping our clients might help you.
*Source: Byron Wien, Vice-Chair Blackstone Group, LP. Bloomberg TV Interview 3/5/13
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Also, the opinions expressed in this material do not necessarily reflect the views of LPL Financial. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Our central bank in the United States is known as The Federal Reserve (The Fed), and it is chaired by Ben Bernanke. The Fed and numerous other central banks today are engaged in an economic experiment (yes, it is an experiment) referred to as quantitative easing (QE). Here is how QE in essence works.
The Fed, which is a private entity with quasi-governmental authority, is literally buying assets such as mortgages and other holdings from large private banks including JPMorgan, Bank of America, and Wells Fargo. It provides the banks with cash which is retained in a reserve account for the bank. So the bank removes the mortgage from its balance sheet and transfers the mortgage onto the Fed's balance sheet. In the exchange, the bank is credited cash and that cash earns interest which is credited by the Fed as well. Since September, the Fed has been buying "assets" from banks and crediting their reserve accounts in the amount of $85 Billion per month.
Where does the Fed come up with the cash to buy these financial instruments from banks, you ask? It calls the U.S. Treasury and says print us the $85 Billion each month until we tell you to stop and then the Fed wires the funds to the banks. The rationale for this is to boost demand for financial instruments because the greater the demand for these instruments, the lower the ensuing interest rates which will prevail in the marketplace. The Fed is the largest buyer of these financial instruments today. The Fed is arbitrarily creating demand. When there are more buyers for financial instruments which pay interest, then the seller doesn't have to pay as much interest to induce more purchasers to buy. And, conversely, when there are fewer purchasers, the seller has to pay higher interest to entice more buyers. It is in this way that our Fed and other central banks are seeking to maintain low interest rates to stimulate economic activity.
One of the consequences however of printing so much money and raising the monetary base, is that the currency loses value and eventually can become debased. If the U.S. dollar loses too much value, then our creditors, such as China, may decide that we are a greater risk and could curtail their lending. China lends us dollars to pay our debts and we are obligated to repay the debt in dollars. So, if the value of the dollar is undermined, there could come a point where the Chinese and other lenders decide it's not worth lending to the U.S. and/or demand higher interest rates. Even just a half point increase in interest rates would substantially increase U.S. debt service obligations and hence budget deficit. Trying to navigate these opposing forces is like pulling on a very thin string. It would be nearly impossible to get it just right.
The point is that economics is never a precise science. It is not quantum physics. And, there is often an equal and opposite reaction for every action as well as unintended consequences which cannot be examined in a test tube. No one, that's right, no one, knows how all of this will transpire once the Fed reduces and/or stops its massive purchases.
What is known is that the Fed was established in 1913. It took from 1913-2007 for the Fed to create a balance sheet of approximately $1 Trillion. By the end of the current calendar year, as a result of the Fed's monthly purchasing activities, it is estimated that that the Fed's balance sheet will have ballooned to $4 Trillion. That equates to a four-fold increase in just six years from a balance sheet which had previously taken 94 years to establish. All of this has resulted in the yield on a ten year Treasury note at the time of this writing of approximately 1.7%. Think about that for a second. Simultaneously in a month during which the stock market has reached all-time highs, investors are lining up to buy ten year paper from the U.S. Treasury which is yielding less than inflation. So, clearly not everyone has bought into the notion that QE is the panacea. Furthermore, unemployment has remained stubbornly high even in the midst of all of this monetary stimulus.
Notwithstanding the disparity of opinions about the efficacy of QE or the unintended consequences, just two weeks ago, The Bank of Japan (BOJ), the central bank for the country, propelled the QE bandwagon by announcing its new mandate to double its bond buying program. This is for a nation whose total debt is almost 2.5 times its GDP, and twenty times its tax revenue. Kyle Bass, principal of Hayman Capital, and one of the infamous strategists who hit a home run betting against subprime loans, points out that the BOJ is monetizing at a rate of 75% of the Fed for a country whose economy is only one-third of the United States. Consequently, the value of the Japanese Yen has depreciated drastically since the policy announcement.
A weaker currency augments exports because the net cost for the importers is reduced as their currencies strengthen, in this case against the Yen. But, while increased exports is obviously advantageous for a nation, there are no free lunches and often a zero-sum gain. For instance, Kyle Bass predicts that Japan's monetary policies and economic challenges will result in Japanese retirees losing up to half their life savings. Plus, it is difficult to achieve real gains when so many countries are racing to the bottom simultaneously, resulting in what many consider the precipice of a great currency war.
The other great challenge and perhaps unintended consequence of easy monetary policies which have resulted in historically low interest rates is that bond prices which have served as a conservative anchor since 1982 when interest rates peaked at close to 20%, provide real headwinds looking forward. When interest rates decrease, that strengthens the price of bonds. However, increasing interest rates weakens bond prices. That is because new bonds would be issued typically paying out higher interest rates than older bonds that were issued when rates were lower. All things being equal, I'd rather own a newer bond paying higher interest than the older bond with the lower rate. So, to induce us to purchase the old bond with the lower interest rate, we would demand a discount.
The 401k money which for numerous Americans was cut in half twice over the last twelve years to become the notorious 201k was nonetheless buoyed by rising bond prices. Investors do not have those tailwinds today with interest rates currently at rock bottom. When interest rates do begin their inevitable ascent, that will wreak havoc on the one major investment asset class which has had remarkably superior performance over the last thirty plus years.
Even ignoring all the challenges and what I consider inevitable financial catastrophe in the Euro zone as well as geopolitical risks associated with Korea, Iran, the Middle East, and Africa, I take the position that today represents a crucial period in world economic history to diversify away from allocations primarily to stocks and bonds. Real, hard assets and investment strategies which can profit when traditional markets devalue need to be well understood and incorporated. In a world flush with economic experimentation, what worked in the past will not necessarily be a winning formula for tomorrow. New ideas and innovative financial products are more critical than ever. Today's market is not your father's Oldsmobile. Feel free to call us to arrange a phone consultation to see if you may be a candidate for a comprehensive review and how the strategies that are helping our clients might help you.
*Source: Byron Wien, Vice-Chair Blackstone Group, LP. Bloomberg TV Interview 3/5/13
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Also, the opinions expressed in this material do not necessarily reflect the views of LPL Financial. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Thursday, November 8, 2012
What Kind of World Are We Leaving Them?/What Follows?
Here are just the facts relating to youth unemployment across the globe:
A) United States of America: As reported by Young Entrepreneur Council*, unemployment for high school grads (ages 17-20) is 31.1%, and 9.4% for college grads between ages 21-24. Total student debt load has surpassed the $1 TRILLION mark. This figure exceeds ALL credit card debt in the country.
Eurostat* tracks unemployment in the Eurozone as follows:
B) Poland: Youth unemployment: 26.5% Overall unemployment: 10.1%
C) Ireland: Youth unemployment: 29.7% Overall unemployment: 15.1%
D) Italy: Youth unemployment: 35.1% Overall unemployment: 10.8%
E) Portugal: Youth Unemployment:35.1% Overall unemployment: 15.7%
F) Spain: Youth unemployment: 54.2% Overall unemployment: 25.8%
G) Greece: Youth unemployment:55.6% Overall unemployment:25.1%
H) Germany: Youth unemployment: 8% Overall unemployment:5.4%
I) Austria Youth unemployment: 9.9% Overall unemployment: 4.4%
J) Belgium: Youth unemployment:18% Overall unemployment: 7.4%
K) Finland: Youth unemployment:18.9% Overall unemployment: 7.9%
L) United Kingdom: Youth unemployment:20.4% Overall unemployment: 7.9%
M) France: Youth unemployment: 25.7% Overall unemployment: 10.8%
Statistics from countries in the Middle East and Africa are even worse. Tracking long-term historical cycles indicates that major geopolitical events and rebellions occur within the first fifteen years of the start of each millennium. Disenfranchised youth living with fear and without real hope is not a good combination even ignoring historical cycles. Desperation brings out the worst in humans. Even natural catastrophes like hurricanes are unfortunately too often followed by looting amongst the youth and down and out. Asset protection needs to incorporate and protect against risks even beyond statistical analysis and market corrections. If you are doing things like you have always done, and if you are thinking about your money and how to invest and protect in ways similar to what you have always done, this will not be adequate in this new normal. The future will be very dissimilar from the past; so you should not rely on the past as your guide. There are known unknowns and unknown unknowns. Today's world is not your daddy's Oldsmobile. The Oldsmobile is extinct. Are your financial and estate plans? Let us know if you need an inspection or millennium check-up.
*Young Entrepreneur Council, website 11/1/12. Eurostat, 10/31/12
Greg Gann
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Also, the opinions expressed in this material do not necessarily reflect the views of LPL Financial.
A) United States of America: As reported by Young Entrepreneur Council*, unemployment for high school grads (ages 17-20) is 31.1%, and 9.4% for college grads between ages 21-24. Total student debt load has surpassed the $1 TRILLION mark. This figure exceeds ALL credit card debt in the country.
Eurostat* tracks unemployment in the Eurozone as follows:
B) Poland: Youth unemployment: 26.5% Overall unemployment: 10.1%
C) Ireland: Youth unemployment: 29.7% Overall unemployment: 15.1%
D) Italy: Youth unemployment: 35.1% Overall unemployment: 10.8%
E) Portugal: Youth Unemployment:35.1% Overall unemployment: 15.7%
F) Spain: Youth unemployment: 54.2% Overall unemployment: 25.8%
G) Greece: Youth unemployment:55.6% Overall unemployment:25.1%
H) Germany: Youth unemployment: 8% Overall unemployment:5.4%
I) Austria Youth unemployment: 9.9% Overall unemployment: 4.4%
J) Belgium: Youth unemployment:18% Overall unemployment: 7.4%
K) Finland: Youth unemployment:18.9% Overall unemployment: 7.9%
L) United Kingdom: Youth unemployment:20.4% Overall unemployment: 7.9%
M) France: Youth unemployment: 25.7% Overall unemployment: 10.8%
Statistics from countries in the Middle East and Africa are even worse. Tracking long-term historical cycles indicates that major geopolitical events and rebellions occur within the first fifteen years of the start of each millennium. Disenfranchised youth living with fear and without real hope is not a good combination even ignoring historical cycles. Desperation brings out the worst in humans. Even natural catastrophes like hurricanes are unfortunately too often followed by looting amongst the youth and down and out. Asset protection needs to incorporate and protect against risks even beyond statistical analysis and market corrections. If you are doing things like you have always done, and if you are thinking about your money and how to invest and protect in ways similar to what you have always done, this will not be adequate in this new normal. The future will be very dissimilar from the past; so you should not rely on the past as your guide. There are known unknowns and unknown unknowns. Today's world is not your daddy's Oldsmobile. The Oldsmobile is extinct. Are your financial and estate plans? Let us know if you need an inspection or millennium check-up.
*Young Entrepreneur Council, website 11/1/12. Eurostat, 10/31/12
Greg Gann
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Also, the opinions expressed in this material do not necessarily reflect the views of LPL Financial.
Wednesday, September 19, 2012
Helping that College Grad Land a Job
The Associated Press reports that last year 53.6% of graduates who had ever earned a bachelor's degree and who were under age 25 were either jobless or underemployed. This is the highest percentage in over eleven years. In 2000, before the dot-com bust wiped out telecommunications and IT jobs for graduates, the percentage was down to 41%. Also in the report were metrics indicating that recent college graduates were more likely to be employed as waiters, waitresses, bartenders, and food service personnel than in fields which actually required a college education. Those who were employed in offices were much more likely to have been hired as a receptionist or payroll clerk, or cashiers or retail clerks than in a skilled position. It also reported that government projections indicate that only 3 of the 30 occupations with the largest number of job openings by 2020 will require a bachelor's degree or higher to fill the position. The three professions with this distinction are teachers, college professors, and accountants. Most job openings will exist for jobs which cannot be easily replaced by computers, such as retail sales, truck driving, and fast food.
For all the good that derives from technological innovations, it also results in what the famous Austrian-American economist, Joseph Schumpeter, termed "creative destruction" where jobs are destroyed and new skill sets are required. Creative destruction is the price of advancement. There wasn't much need for the horse and buggy after the automobile was invented. Kodak refused to accept the reality that digital cameras had changed the film industry, resulting in its bankruptcy filing. Creative destruction is magnified in a world where major revolutionary technological advances are brought to market practically every six months.
While it is true that technology has resulted in creative destruction, job seekers today, and especially the younger, less experienced ones, have to go beyond traditional means and think and act in ways of creative construction as the means to overcome this creative destruction. Making connections on a proactive basis rather than reactively responding to a job posting is especially important for young graduates today because not only are they competing with so many of their own demographic, but they are also seeking to fill jobs held by a massive baby boomer generation and beyond who refuse to retire from the workforce. Since 2008, the number of employed age 55 and over has steadily risen, growing by over 4 million, while the number of jobs for all workers dropped by 8 million and is still down by over 4 million.
There are many ways in which young grads can bring energy, enthusiasm, and productivity to a company. But, the graduate has to create the opportunity and sell the need. I believe that prospects for employment currently have and will continue to have less traction going the traditional route. Job hunting through traditional means has the odds unfavorably stacked. There are too many applicants for too few advertised job openings The grad who learns about an industry, and learns the skills necessary to enhance the company's bottom line, and actively focuses and markets and sells this need will have job offers from employers who never thought to hire, much less advertise for employment. This will require learning how to network and arrange informational sessions and follow-through. Tenacity will go a long way.
I believe that there are jobs out there that don't actually currently exist, but are there for the taking for the interviewer/networker who takes the initiative and creates and sells the need. Creating and selling the need are skills that are not generally taught or stressed in college. Hence, very few graduates possess them. Yet, these are the very skills necessary not only to land the right employment opportunity, but they are also the same skills which every business requires in order to grow and prosper.
So many young people are innovative when it comes to computers and technology. They need to channel this energy in ways in which they are both unaware and uncomfortable. Instead of waiting for the existing employee to leave behind a position to fill, your child or grandchild or niece or nephew or friend needs to just get out there and "play in the traffic."
Speaking of traffic, the road to success is always under construction. We have to persevere and continue driving forward. I have built my practice in this way, with sufficient dents to prove it. And, I would be honored and humbled to meet and/or speak with any friend or relative who you think would benefit from these perspectives and straight talk.
Respectfully,
Greg Gann
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