Category Archives: Investment Planning

Powered by the U.S., Global Assets Forecast to Hit $100 Trillion

My Comments: So, just how much is $100 Trillion?

Can you say “A lot!”?  What’s equally mind boggling to me is that in 1967 ( or maybe it was 1966?) I built a house for myself and my wife. In those days I acted as my own general contractor. Back then, I could also dig my own footers. The plans were drawn by an architect friend who charged me something but I have no idea what.

My point is the house cost less than $10 per square foot to build. And today is stands proudly in a quiet Gainesville neighborhood, though it could use a coat of paint. At the time, though the total was less than $17,000, it was a lot of money. Back then, to have been told that in 2014 it would cost at least $250,000 to build a house of similar size would have been equally mind boggling.

So while $100 Trillion is a lot of money, it’s all relative. It’s what you do with the money that counts, not how much there is. And if you can’t use it to spend on stuff you need and want, it has very little value.

By Nick Thornton / July 1, 2014

Worldwide assets under management are poised to hit $100 trillion by 2018, so long as U.S. markets continue to lead the way, according to Cerulli’s latest research.

The U.S. accounts for just under half of global assets under management.

Low interest rates around the globe have pushed cash into equity, boosting financial markets.

Cerulli’s five-year prognosis is optimistic, though the report predicts that managing assets going forward will be trickier than in the past several years.

“The dark days of late 2008 and early 2009 may be well behind us, but there continues to be pressure on net revenues,” said Shiv Taneja, a London-based managing director at Cerulli.

The firm’s annual report, now in its 13th year, is a massive analysis on markets around the world, from emerging markets to the developed economies of Europe, Asia and North America.

“For all the bashing the global emerging markets have taken over the past couple of years, Cerulli’s view is that it will be markets such as Southeast Asia and a handful of others that will top the leader board of mutual fund growth over the next five years,” said Ken F. Yap, Cerulli’s Singapore-based director of quantitative research.

3 Retirement Planning Essentials to Understand

retirement-exit-2My Comments: I’ve now reduced retirement years to three types of years. They are “go-go”, “slow-go” and “no-go”. Planning for them before you reach retirement is a matter of attempting to get as many $ in the pot as possbile.

After that, it’s a timing issue that is driven by health, the expected life style, and the nature of your bucket list. Plan to spend more in the “go-go” years than you will in the “slow-go” years and they dry up in the “no-go” years.

by: Rachel F. Elson / Financial Planning / Monday, June 9, 2014

HOLLYWOOD, Fla. — Longevity increases and cultural shifts have changed the way Americans plan for retirement — and advisors need to make sure they’re keeping pace.

That was the message from Lena Rizkallah, a retirement strategist at J.P. Morgan Asset Management, at the Pershing Insite conference here on Thursday.

A generation ago, said Rizkallah, the mantra was “be conservative” — whether in lifestyle or in investment decisions. “Now, though, boomers have a bucket list,” she said. “They want to retire in good condition financially but also have goals for themselves.”

That changes some of the calculus for advisors said Rizkallah, who joined Elaine Floyd, a director of retirement and life planning at Horsesmouth, for an energetic discussion of retirement planning.

Among the recommendations they made:

1. Make sure clients have a retirement plan.

“I call this the heart attack slide,” Rizkallah said, posting a chart that mapped a client’s age and current salary against retirement savings benchmarks. “It helps clients gauge where they are.”

She encouraged advisors to talk frankly about both saving rates, for those still in the workforce, and spending plans. In general, she said, spending tends to peak at age 45, then decline in all categories except health care.

But she added a big caveat: “Note that housing continues to be 40% of spending. … More people are entering retirement with a mortgage.”

2. Know the threats to a secure retirement.

Rizkallah outlined three big risks for retirees.

Outliving life expectancy. Remember, she cautioned, that as we age our life expectancy gets longer. There is now a 47% chance that one spouse in a 65-year-old couple will live to 90,” she said, pointing out that the likelihood had increased even during the last year.

Not being able to keep working. People may think they’re going to bolster their retirement plan by working longer, but not everyone can control the timing, Rizkallah said, citing such issues as poor health, family care needs, and layoffs and other workplace changes. “There is a disparity between people’s expectations and the reality,” she said, encouraging advisors to tell clients: “You want to keep working? Great. But don’t make that part of the plan.”

Facing higher costs of health care. Costs continue to rise, she pointed out, adding that there’s a lot of uncertainty around future costs. “It’s really crucial to have this conversation,” she said. “Say, ‘Because we’re seeing this, let’s talk about saving, let’s talk about diversifying.'”

3. Do the math on Social Security.

It’s critical that advisors understand — and are able to communicate to clients — the real impact of delaying Social Security benefits, Floyd told listeners.

She cited as an example a maximum earner who turns 62 this year, noting that if the client takes Social Security at 62, he or she will have collected $798,387 by age 85. But by deferring until age 70, that same client will have $1,035,653 by 85. If the client lives to 95, Floyd added, the deferral would have a more than $600,000 payoff.

Other Social Security nuances are important as well, said Floyd, who received the lion’s share of questions during the Q&A period at the end of the panel. “We are getting lots of questions about the earnings test … which suggests that people are continuing to work and filing for Social Security” — something she said clients “just shouldn’t do.”

Advisors should understand whether their clients are eligible for spousal benefits, whether and when clients can change their minds and undo a Social Security election, and how to maximize benefits for a surviving spouse. That last part gets particularly tricky given boomers’ penchant for divorce, Floyd added: “Social Security rules can get really complicated when there are multiple divorces.”

The Rise of Tactical Asset Allocation

retirement_roadMy Comments: Yesterday I talked about investment risk, and how we, both clients and advisors alike, should understand it. Today, I’m reposting an article that describes, for me, a way to help clients achieve their perceived objectives, and keep the risk element under control.

As before, risk is not to be avoided, but to be managed. It’s only with risk can we hope to realize our financial goals, which for most people is a bigger pile of money than you started with, one that will translate to peace of mind and a greater ability to enjoy life.

It’s somewhat technical, so if that turns you off, then either struggle with it or call me for an explanation. Or both.

Posted by Michael Kitces on Wednesday, June 20th, 2012

The foundation of investment education for Certified Financial Planner (CFP) certificants is modern portfolio theory, which gives us tools to craft portfolios that effectively balance risk and return and reach the efficient frontier. Yet in his original paper, Markowitz himself acknowledged that the modern portfolio theory tool was simply designed to determine how to allocate a portfolio, given the expected returns, volatilities, and correlations of the available investments.

Determining what those inputs should be, however, was left up to the person using the model. As a result, the risk of using modern portfolio theory – like any model – is that if poor inputs go into the model, poor results come out. Yet what happens when the inputs to modern portfolio theory are determined more proactively in response to an ever-changing investment environment? The asset allocation of the portfolio tactically shifts in response to varying inputs!

The evolution of the industry for much of the past 60 years since Markowitz’ seminal paper has been to assume that markets are at least “relatively” efficient and will follow their long-term trends, and as a result have used historical averages of return (mean), volatility (standard deviation), and correlation as inputs to determination an appropriate asset allocation. Yet the striking reality is that this methodology was never intended by the designer of the system itself; indeed, even in his original paper, Markowitz provided his own suggestions about how to apply his model, as follows:

“To use [modern portfolio theory] in the selection of securities we must have procedures for finding reasonable [estimates of expected return and volatility]. These procedures, I believe, should combined statistical techniques and the judgment of practical men. My feeling is that the statistical computations should be used to arrive at a tentative set of [mean and volatility]. Judgment should then be used in increasing or decreasing some of these [mean and volatility inputs] on the basis of factors or nuances not taken into account by the formal computations…
…One suggestion as to tentative [mean and volatility] is to use the observed [mean and volatility] for some period of the past. I believe that better methods, which take into account more information, can be found.”
– Harry Markowitz, “Portfolio Selection”, The Journal of Finance, March 1952.

Thus, for most of the past 6 decades, we have ignored Markowitz’ own advice about how to apply his model to portfolio design and the selection of investments; while Markowitz recommended against using observed means and volatility of the past as inputs, planners have persisted nonetheless in using long-term historical averages as inputs and assumptions for portfolio design. Through the rise of financial planning in the 1980s and 1990s, though, it didn’t much matter; the extended 18-year period with virtually no material adverse risk event – except for the “blip” of the crash of 1987 that recovered within a year – suggested that long-term returns worked just fine, as they led to a stocks-for-the-long-run portfolio that succeeded unimpeded for almost two decades. Until it didn’t.

As discussed in the 2006 Journal of Financial Planning paper “Understanding Secular Bear Markets: Concerns and Strategies for Financial Planners” by Solow and Kitces, the year 2000 marked the onset of a so-called Secular Bear Market – a one or two decade time period where equities deliver significantly below average (and often, also more volatile) returns. The article predicted that the sustained environment of low returns would lead planners and their clients to question the traditional approach of designing portfolios based on a single, static long-term historical average input (which leads to a buy-and-hold portfolio), and instead would turn to different strategies, including more concentrated stock picking, sector rotation, alternative investments, and tactical asset allocation. In other words, stated more simply: planners would find that relying solely on long-term historical averages without applying any further judgment regarding the outlook for investments, as Markowitz himself warned 60 years ago, would become increasingly problematic.

The Growing Trend of Tactical
Although not widely discussed across the profession, the FPA’s latest Trends in Investing study reveals that the rise of tactical asset allocation has quietly but steadily been underway, and in fact now constitutes the majority investing style. Although not all financial planners necessarily characterize themselves in this manner, the study revealed that a shocking 61% of planners stated that they “did recently (within the past 3 months) or are currently re-evaluating the asset allocation strategy [they] typically recommend/implement” which is essentially what it takes to be deemed “tactical” in some manner.

When further asked what factors are being re-evaluated to alter the asset allocation strategy, a whopping 84% of respondents indicated they are continually re-evaluating a variety of factors: 69% indicated following changes in the economic in general, 58% indicated they watch for changes in inflation, and another 58% monitor for changes in specific investments in the portfolio. Notably, only 14% indicated that they expected to make changes based on what historically would have been the most popular reasons to change an investment, such as changes in cost, lead manager, or other administrative aspects of the investment.

Although not directly surveyed in the FPA study, another rising factor being used to alter investment allocations appears to be market valuation, on the backs of recent studies showing the value and effectiveness of the approach, such as “Improving Risk-Adjusted Returns Using Market-Valuation-Based Tactical Asset Allocation Strategies” by Solow, Kitces, and Locatelli in the December 2011 issue of the Journal of Financial Planning, and more recently “Withdrawal Rates, Savings ratings, and Valuation-Based Asset Allocation” by Pfau in the April 2012 issue, along with “Dynamic Asset Allocation and Safe Withdrawal Rates” published in The Kitces Report in April of 2009.

Notwithstanding the magnitude of this emerging trend towards more active management, it doesn’t necessarily mean financial planners are becoming market-timing day traders. The average number of tactical asset allocation changes that planners made over the past 12 months was fewer than 2 adjustments, and approximately 95% of all tactical asset allocators made no more than 6-7 allocation changes over the span of an entire year, many of which may have been fairly modest trades relative to the size of the portfolio. In other words, planners appear to be recognizing that the outlook for investments doesn’t change dramatically overnight; however, it does change over time, and can merit a series of ongoing changes and adjustments to recognize that.

Tactical Asset Allocation: An Extension of MPT

At a more basic level, though, the trend towards tactical asset allocation is simply an acknowledgement of the fact that it feels somewhat “odd” to craft portfolios using long-term historical averages that are clearly not reflective of the current environment, whether it’s using a long-term bond return of 5% when investors today are lucky to get 2% on a 10-year government bond, or using a long-term historical equity risk premium of 7% despite the ongoing stream of research for the past decade suggesting that the equity risk premium of the future may be lower.

Consistent with the idea that financial planners are recognizing tactical asset allocation as an extension of modern portfolio theory and not an alternative to it, a mere 26% of financial planners answered in the Trends in Investing survey that they believe modern portfolio theory failed in 2008. For the rest, the answer was “no”, modern portfolio theory is still intact, or at least “I don’t know” – perhaps an acknowledgement that while MPT may still work, many of us lack the training in new and better ways to apply it. Nonetheless, that hasn’t stopped the majority of planners adopting a process of making ongoing changes to their asset allocation based on the economic outlook and other similar factors.

Unfortunately, though, perhaps the greatest challenge for planners implementing tactical asset allocation is that we simply aren’t trained to do so in our standard educational process. Some financial planning practices are responding to the challenge by investing in training, staff, and/or research to support a more tactical process. Others are responding by outsourcing to firms that can help; the Trends in Investing survey showed nearly 38% of advisors intend to outsource more investment management over the next 12 months, and 42% are already outsourcing more now than they were 3 years ago.

Regardless of how it is implemented, though, the trend towards tactical itself appears to have grown from a broad dissatisfaction amongst planners and their clients that the “lost decade” of equity returns has left many clients lagging their retirement goals. Even if diversified portfolios have eked out a positive return, it is still far behind the projections put forth when clients made their plans in the 1990s, forcing them to adjust by saving more, spending less, or working longer, to make up for the historical returns that never manifested. And as long as the secular bear market continues, the strategy will continue to be appealing. Ultimately, though, the sustainability of the tactical asset allocation trend will depend on it delivering effective results for clients.

So what do you think? Would you characterize yourself as a tactical trader? Is tactical asset allocation a short-term phenomenon, or here to stay? Is tactical asset allocation simply modern portfolio theory done right, or does it represent an entirely new investing approach?

The Paradox of Investment Risk

profit-loss-riskMy Comments: First, let’s both understand we are talking about financial risk. Second, financial risk for me is likely to be defined differently from how you define it. Third, there is always an element of uncertainty about any future outcome, whether it’s getting married, having children, accepting a new job, etc. Uncertainty implies a potentially unfavorable outcome for almost anything we do, but to the extent it is “risky” depends on our frame of reference.

For example, walking along the roofline of my house, at age 73, is much riskier for me that it might be for someone age 22, who is a chamption gymnast. Mind you that’s physical risk and not financial risk, but there are parallels when it comes to money.

I’ve just taken a step that caused me to reflect very carefully because it has caused me to trust someone to do something with my money that I personally cannot replicate. For me, I had to come to terms with the “risk” involved because it’s something I can’t do. The person who I’m trusting has done this successfully for the past 35 years. For him, it is considered safe and conservative. Only I don’t “know” that, so there is an element of risk involved.

by: Franklin J. Parker / Tuesday, June 17, 2014

Like most retail financial advisors, I have thought a lot about how to reduce both actual risk and the perception of risk in my client’s portfolios. Since 2008 we have all thought, rethought, written and rewritten about risk.

I focus on financial planning to help clients understand why they are investing. I have had discussions about why portfolio allocation helps to protect clients; I’ve used all the financial metrics and Monte Carlo simulations. But no matter the conversation, it seems that clients see themselves forever in danger of falling off a 1,000-foot cliff — a fall they feel is one small misstep away.

And this, to me, is the real problem with the current wealth management paradigm. We do hours of financial planning work: calculating different saving scenarios, market returns and retirement dates. But when it comes time to actually construct a portfolio, we give the client a risk-tolerance questionnaire that is entirely unrelated to their financial planning needs.

What if a client scores very conservatively on the questionnaire but actually needs a more aggressive portfolio? Or vice versa? To not use the financial planning process to directly inform the investment management process makes no sense to me. Well, actually it does.

Let’s be honest: As an industry, planners continue to use risk-tolerance questionnaires because they are defensible in court. But these do the client a disservice; they let advisors avoid the real conversations our clients need.

We must ask clients which competing risks they are willing to accept: Are you willing to accept the risk of not retiring on time? If not, are you willing to take on more portfolio risk? That is the proper role of a risk-tolerance questionnaire: to inform the conversation about risk, but not to dictate it.

It is an easy thing to calculate the return requirement of a future goal. It seems sensible to assign a portfolio allocation that has the best likelihood of achieving that goal. And, taking this idea a step further, it is not a hard thing to figure out the maximum loss a portfolio can sustain before a plan gets derailed. You can even dust off the old stop-loss tool to help limit the risk of those catastrophic losses.

Using such a process might help give clients context, and a better sense of the risks they are actually willing to take. By assigning a loss threshold coupled with some hedging strategies (even as simple as stop-losses), we can help clients better understand which losses are tolerable and which are not.

This may be the point. As retail advisors, it is our job to keep clients rational and on track. With some safety nets, we may be able to help clients stay rational and not fear that 1,000-foot cliff so viscerally.

Franklin J. Parker is managing director of CH Wealth Management in Dallas.

There Isn’t Going To Be A Crash Anytime Soon

080519_USEconomy1My Comments: Last week I posted an article that suggested you be very cautious with your investments going forward. This article says “never mind”, all is well, keep going.

Unfortunately, from my perspective, both are completely rational, plausible, and probably accurate. Which means that I have no earthly idea how this is going to play out. One thing I do agree  with this author about is there is not going to be a giant market drop anytime soon. Those things come along about once every 65-75 years which means most of us will be dead before the next one.

In the meantime, find someone to help you maintain a healthy balance, with the ability to adjust quickly to changing fortunes, leaving you at the end of the day with more money than you started with. Go here to see my best soluttion:

Jun. 8, 2014 1:01 AM ET

• The SPY is not rising out of control and there is a lot of data to prove it.
• As of May 2014, the Domestic Market Capitalization of the main U.S. Exchanges was $24.9 trillion, not that drastically higher than the 2007 and 2008 time period.
• For ETFs like SPY, there will continue to be allocations away from other smaller capitalization companies to companies indexed by the SPY ETF.

For the last few months, the amount of articles published about the “impending market meltdown” has gotten a bit excessive after considering the contributors’ conclusions and how they reached them (using some sort of data set with no actual triangulation of ideas). So here is my shot at this topical obsession.
Just a general note, my position on the markets is that market levels are just not that out of the ordinary. I strongly believe that market levels are warranted and I have the data to back it up. This article will mainly cover the objectivity of a sound SPY investment and how investors should not be too worried about ridiculously volatile changes in the market (there will not be another giant market drop anytime soon).

Instrument of Choice: SPDR S&P 500 (SPY)
The SPY seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. The Trust holds the portfolio and cash and is not actively managed. To maintain the correspondence between the composition and weightings of portfolio securities and component stocks of the S&P 500 Index, the Trustee adjusts the portfolio from time to time to conform to periodic changes in the identity and/or relative weightings of Index Securities.

Below is a summary of indices, comparing the S&P 500 index to the rest of the major indices. It’s fairly easy to point out that SPY is not narrow enough to be classified as a “narrow” indicator and not broad enough to be a “broad” indicator (I consider the Russell 2000 a broad index), so this will need to be kept in mind throughout the remainder of the article. Overall, the SPY has captured a significant portion of the 2013 to 2014 price rises and that may be a direct link to market confidence; however, this is a premature conclusion and will need more than just loaded statements to defend my position on the market (that a market crash is not coming anytime soon and current levels are not that out of the ordinary).


Be Flexible On 4% Rule

retirement_roadMy Comments: Increasingly, I find myself working with older clients. After all, I’m an older advisor. From time to time there is a question of how fast you should decumulate your nest egg(s). (I’m not sure if “decumulate” is an approved word, but the intent is to convey the opposite of accumulate.)

The rule of thumb has been to restrict withdrawals to 4% annually to help insure the money will last until you die. Only no one is willing to tell me when they will die. From my perspective as an advisor, I try to find common ground with a client so that in their mind we have reached a reasonable conclusion. It might be 3% or it might be 6%, leaving 4% somewhere in netherland.

May 21, 2014 • Debbie Carlson

Although many advisors have used the 4 Percent Rule for determining clients’ retirement withdrawals, there are times to break it, says J.P. Morgan Asset Management’s chief retirement strategist.

After taking account of longevity, health, investment returns, income and other factors, financial advisors need to talk to their clients about what makes their retired clients happy, said Katherine Roy, executive director of individual retirement at J.P. Morgan Asset Management.

Rather than looking at how much money can be withdrawn from portfolios and then adjusting spending, she said, financial advisors should run simulations to determine how much money clients can spend based on their risk profile and projected investment returns. Retirees should be able to enjoy the early years of their retirement when they are more active but still have enough money for their later years when health-care costs start to rise, she said.

In other words, if an active retiree couple wants to take their family to Europe, they should do that while they are healthy enough to enjoy the time and not worry about making a future trade off. By talking with their clients about their portfolio income and projected returns, financial advisors can guide spending decisions to maximize happiness in retirement and avoid the fear of running out of money at an older age. What she’s concerned about is clients regretting not having enjoyed their golden years, she said.

Roy spoke at the HighTower Apex 2014 conference in Chicago Tuesday and presented J.P. Morgan Funds’ 2014 Guide to Retirement, released earlier this year.

She broke down retirement spending into three categories, “go-go,” “slow-go” and “no-go,” a concept popularized by Michael Stein, CFA, in his book, The Prosperous Retirement, Guide to the New Reality. The concept suggests that in the “go-go” stage, usually the first 10 years of retirement, retirees spend more on travel and other luxuries. In the “slow-go” years, clients stay home more and spending less on luxuries, while in the “no-go” years, they may do even less but spend more on health-care costs.

She said she spoke to Stein, who is now retired, and he told her his own retirement trajectory has fallen into these categories. “But he said if he could go back and write his book, he would add that it doesn’t matter how much money you have, but that you must be happy,” she said.

Thus, she said, taking a dynamic approach to retirement planning is critical for financial advisors and their clients, rather than advisors sticking to the 4 Percent Rule, which basically sets the total withdrawal in the first year of retirement at roughly 4 percent of a client’s portfolio and in every subsequent year that initial amount is adjusted for inflation. In a more dynamic approach, advisors may adjust client’s spending annually so that they spend less when portfolio returns are lower and may spend more when returns are higher.

Roy said one way financial advisors can map out spending in retirement is to make health-care costs their own line item. Health-care costs rise toward the end of a person’s life and have higher inflation than other expenses. By making health care its own category, it will help clients understand what they have available for other living expenses.

What’s critical to making this dynamic approach work, versus sticking to the 4 Percent Rule, is that financial advisors meet at least annually to update the client’s goals, age, portfolio size, market assumptions and other factors.

“It’s important to have discussions with clients, rather than (relying on) just a rule of thumb,” Roy said.

The SWIFT way to get Putin to scale back his ambitions

My Comments: How many of you have heard of SWIFT? Do you recall it was used in 2012 with Iran?

I’ve commented earlier about the events in Ukraine and how they may effect us and our investments. Not to mention the bad feelings they generate in my head given my personal history.

While the talking heads imply there is little we can do about matters in Ukraine, and there is overwhelming reluctance to put boots on the ground, SWIFT has relevance and needs to be remembered.

By Gideon Rachman | Last updated: May 12, 2014

The disputed referendums in eastern Ukraine give President Vladimir Putin time to take stock and choose between two very different paths. The first involves grabbing more territory for Russia, attempting to rebuild an empire in the old Soviet sphere, and accepting a prolonged confrontation with the west. The second is more pragmatic – and involves attempting to pocket his Crimean winnings and rebuild relations with the US and the EU.

Which path he chooses depends on events on the ground and, crucially, on the resistance that he encounters from the outside world.

The Kremlin has reason to pause and take stock because future rounds of economic sanctions aimed at Russia are potentially very damaging. Western governments have the power in effect to exclude Russia from the world’s financial system. The key to that system is based in Brussels. It is the Society for Worldwide Interbank Financial Telecommunication, otherwise known as Swift.

Even the sanctions enacted so far have come as an unpleasant surprise to the Kremlin. After all, far more blood was shed in the Russian invasion of Georgia in 2008 than the annexation of Crimea. Yet the west barely reacted to the Georgian war. (America’s diplomatic “reset” with Russia came just a few months later.) By contrast, the annexation of Crimea swiftly provoked sanctions – with the threat of more to come.

Moscow has tried to give the impression that it is unconcerned by the travel bans and asset seizures enacted. Prominent Russians who are on the banned list profess to be delighted.
The reality is that some in Mr Putin’s circle are genuinely dismayed by the restrictions on their ability to travel and move their money. Even more important, there is real anxiety in the Kremlin about what a third stage of sanctions could entail. In particular, the Russians fear the kinds of measure that cut off Iran from the global financial system.

In private, officials fulminate against the possibility of being shut out of the Swift system of international banking payments, a measure that was taken against Iran in 2012 and that would hugely complicate efforts to do international business from Russia. Without access to Swift it will become extremely difficult to transfer money in and out of Russia.

Swift is a private institution, owned by its member banks, and based in Brussels. But, as the Iran case illustrated, it is susceptible to pressure from the EU and the US. European and American financial sanctions against Iran forced Swift to take action last time. Similar measures against Russia are on the list of possible sanctions.

Nonetheless, western officials are also aware of the downside of using the Swift weapon. It is advantageous to the west that such a significant part of the world’s financial structure is run from Europe – and indeed, based in the same city as the EU and Nato. The fact that Russian people and institutions use Swift for their financial transactions makes it easier for western governments to monitor how they are moving their money around. Cutting Russia out of Swift would cause chaos in Moscow in the short term.

In the longer term, however, it might hasten the day when Russia and, more significantly, China establish alternative systems for moving money between international banks. This is no easy task – otherwise it would have been done already. But it is something that the Russians and Chinese are known to be looking at.

Just as it is not in the west’s interests to fracture the governance of the internet, so it might be damaging in the long term to block the financial pipes that are needed to sustain a global economic system, particularly when those pipes are routed through the west.

Russia’s President Vladimir Putin moved swiftly to annex Crimea, in the first land grab in Europe since the second world war, and the EU and US are worried over Moscow’s intentions elsewhere in Ukraine.

However, even if the US and the EU decided that including Swift in a stage-three sanctions package would be too drastic a step for now, there are other ways of hitting Russia with severe financial sanctions. Indeed, America could act alone, without the need for similar measures by the more cautious EU, by forcing international financial institutions to choose between doing business in Russia and doing business in America.

Even though Russia is the eighth- largest economy in the world, it is hard to think of any big financial institution that would voluntarily cut itself off from the dollar system so that it could keep its Moscow office open.

Would the US really go this far? Not as things stand. But if the Russian government is intent on annexing more of Ukraine and threatening other independent nations that were once part of the Soviet Union – such as Moldova, Georgia or the Baltic states – it is inevitable that there will be further sanctions packages. At some point on the ladder of escalation, serious financial sanctions, probably involving Swift, would move from pulp fiction to reality.

Of course, if Mr Putin really fancies himself as a new emperor, intent on reclaiming for Moscow the old territories of the Soviet Union – whatever the cost – then these kinds of risk will not deter him. However, the evidence of the Putin years suggests that while the Russian president is bold, he is not mindlessly reckless.

The west should now make it very clear to Mr Putin, preferably in private, just how damaging stage-three sanctions could be. Frank messages now may help the Russian president to decide which path to take.

Uncertainty, Not China, is Replacing US Power

USA ChinaMy Comments: Do you lay awake at night, worrying about this? Me either.

But global political dynamics will influence our lives, and the lives of those we love, in ways that cannot be predicted. I’ve been part of the world of financial planning and investments for almost four decades and over that span, the extent to which we have invested our money outside the US has increased leaps and bounds. And going forward, that trend will continue.

Along with increased economic influence, what we used to call “emerging markets” now command global political influence. They are no longer teenagers, and fully capable of throwing their weight around. Much of it because we as a nation saw it as in our best interest following the end of World War II. We worked hard to help the rest of the world improve their standard of living. And it was OK that we got paid for it.

So to those who can only see gloom in front of them, help find a way for us to remain exceptional economically with a growing standard of living and equality. People who are afraid of immigration or try to stack the deck against minority voting are doing us no favors.

By Edward Luce / May 4, 2014 / The Financial Times

First things first. China is not about to replace the US as the world’s superpower. Last week’s news that China’s economy was close to overtaking that of the US on a purchasing-power basis marked a statistical milestone. But little more.

China is neither able nor ambitious to step into America’s shoes. It will be a decade or so before it overtakes the US in dollar terms. The story of our age is that the US is increasingly unwilling – and in crucial respects, unable – to continue in the role it has played for the past 70 years. After America comes multipolarity – not China. The question is, what type? Will it be based on a system of US-framed global rules? Or will it be “après moi, le déluge”?

The shift in geopolitics is already well under way at both ends of the Eurasian land mass. Last week Barack Obama returned from a four-nation Asian tour of China’s neighbours, all of whom fear an expanding regional hegemon. The US president spends much of the rest of his time trying to shore up unity among those living in Russia’s vicinity, from Ukraine westwards. They too fear an increasingly predatory regional power. Two generations ago George Kennan framed America’s famous “containment” strategy for the Soviet Union. Today, the US is stumbling into dual containment of China and Russia.

The demand for US leadership remains strong. But America’s ability to sustain a dual containment strategy is an open question.

The return of great power rivalry in Asia and Europe finds a close parallel in global economic shifts. The US remains much the top dog in dollar terms – the only measure that counts. Its per capita income remains five times that of China. It may take 40 years or more for China’s living standards to catch up. But the speed with which it is catching up is breathtaking. At the start of the century China accounted for barely 4 per cent of the global economy in dollar terms. Today it is about 12 per cent. The US has fallen from just under a third, to barely 20 per cent.

China will overtake the US sometime in the next decade. But it can never replace it. Therein lies the danger. The US will no longer have the capacity to uphold the global order, while China will always lack the legitimacy. In addition to being an autocracy, China is not built on immigration and has never sought to project universal values.

We are already in the early stages of a multipolar economic world. The postwar US global order was built around the international institutions that it launched – the UN, the International Monetary Fund, the World Bank and Nato. It was also founded on the successive world trade agreements that culminated in the Uruguay Round of 1994.

Since then the US has lacked the capacity to finish a new round. The Doha trade round is all but dead. Mr Obama’s big trade initiatives in Europe and the Pacific are foundering. Both were launched for defensive reasons – China was not included in the Transpacific Partnership and Russia is not part of the transatlantic talks. But the US lacks the clout to see them through.

The same applies to reform of the IMF. It is absurd that China’s voting share of the world’s top economic body is just 4 per cent – barely a third of its dollar weighting in the global economy.

Countries such as India, Mexico and Brazil are also woefully under-represented: Belgium still has a greater voting weight than either. Understandably they are beginning to drift away from the institutions the US built. To his credit, Mr Obama concluded the IMF governance negotiations that were begun under George W Bush and reached a deal to increase the emerging world’s representation. But even this marginal reweighting has been blocked by Congress, which is also blocking Mr Obama’s leeway to pursue his trade initiatives. The US is behaving like a declining hegemon: unwilling to share power, yet unable to impose outcomes.

The same influences are visible in America’s approach to tackling climate change. As the world’s richest country, the US cut a deal to subsidise carbon emission reductions in the emerging world. But the so-called “cash for cuts” strategy is missing a vital ingredient – cash.

Neither the US nor its partners will come up with anything like the $100bn a year in climate aid promised in the Copenhagen talks in 2009. Again, Congress is blocking America’s leadership.
Mr Obama is powerless to do much about it. Thankfully, China, India and others are beginning to see that energy efficiency is in their own interests. But they are making changes on their own initiative.

The die has not yet been cast. The US holds more cards than any other in shaping what the multipolar world will look like. It has more legitimacy than any potential rival – China in particular. But America’s ability to address these vast challenges is stymied by domestic paralysis. Central to this is the declining fortunes of America’s middle class – the foundation of its postwar global strength. Growing economic inequality across the US, and the political fallout in Washington, have killed the spirit of magnanimity that defined cold war American leadership. This loss is impossible to quantify. It is no less real for that.

America still has the power to set the tone of global engagement and negotiate outcomes that benefit both itself and the world. But it will require the US to retrieve the spirit of enlightened self-interest that once defined the nation. We must all hope that spirit is dormant rather than extinct.

10 Bear Market Catalysts To Watch For

My Comments: I guess it’s human nature to abhor a vacuum. If there isn’t a crisis, we invent one. We’ve had 5 years of mostly good times in the markets, since about the first of April in 2009. The second chart below kinda proves that.

From a timing standpoint, we’ve had people predicting the end of the world on a daily basis, probably since the beginning of time. For the most part, they’ve been wrong. But as I get older, I realize almost daily that what I could have easily overcome twenty years ago is increasingly difficult. What used to take an hour to get done now takes two hours, or more. So I guess I look for excuses instead of remedies.

I offer you this chart, which is the S&P500 over the past 20 years, with peaks in 2000, in 2008 and now. My point? That the good times come to an end, but then so do the bad.

David Moenning / Apr. 29, 2014

To be sure, the current stock market environment is challenging. Intraday volatility is quite high, the major indices are not marching to the beat of the same drum, and holding the wrong stock or sector ETF has proved to be a frightening affair in 2014.

In case you can’t relate to this sentiment, check out the charts of the ETFs in Biotech (XBI), Internet (FDN), and Social Media (SOCL) or names like Netflix (NFLX), (AMZN), LinkedIn (LNKD), Pandora (P), Yelp, and Twitter (TWTR).

In short, the action has been more than a little scary at times. This is a market where it has been oh-so easy to lose money and with the exception of the strategy of being long only on Tuesday’s (according to Bespoke, being long on Tuesday’s would have produced a gain of 9 percent so far this year), making money has been downright difficult.

Time For The Bears To Return?

The action has left many analysts worried that the current bull market, which is clearly long in the tooth by just about any measure, could be slowly morphing into something far grizzlier in nature. As such, this might be a good time to review what might cause the bears to suddenly awaken from their hibernation and begin wreaking havoc on people’s investment portfolios again.

But before we get started on a review of potential bear market catalysts, let’s remember that, as the chart below of the S&P 500 plotted weekly clearly illustrates, this remains a bull market.

SPX-Weekly-4-28-15However, if investors have learned anything over the last 15 years, it is that (a) all good things come to an end and (b) bear markets are no fun (and should be avoided if at all possible).

So, given that this bull has run a long way and as it can be argued, is looking a little tired, it is a good idea to be on the lookout for potential bear market catalysts.

We’ve come up with about a dozen. So, let’s review.

Bear Market Catalysts

Fed Surprise: Experienced investors know that markets don’t like surprises – especially when it comes to the Federal Reserve. One of the oldest clichés on Wall Street is “Don’t fight the Fed.” Remember, the Fed usually gets what it wants. So, if Ms. Yellen and her merry band of central bankers suddenly have to make a course correction due to inflation or some such thing, stocks will NOT react well.

Therefore, it is a good idea to listen carefully to everything the Fed says and writes these days. The bottom line here is that this bull has been sponsored in large part by the Fed’s uber-easy monetary policies and the QE money printing programs. And while Bernanke and Yellen have gone out of their way to try and provide an expected course of action for the Fed to follow, if they were forced to take a different tack, well, it might not be pretty.


Spring Check-Up: 5 Investment Ideas For Your Portfolio

global capitalismMy Comments: OK, we’re a long way into Spring, but the dramatic push to finish taxes by April 15th is behind us. Time now to review and reflect before the heat of summer is here.

These five ideas make sense to me. And yes, the approach I take with clients is a little different, ( go here when you have a few minutes ) but these five are fundamentally sound.

Russ Koesterich, Blackrock Apr. 21, 2014

Since my colleagues and I put out our 2014 outlook late last year, much has changed and the economic backdrop has shifted.

Severe weather had a significant impact on first quarter economic data and a major new geopolitical risk popped up in Ukraine. Indeed, if I could use one phrase to describe what’s happened over the last three months, it would probably be “reversal of fortune,” since the best-performing assets of 2013 underperformed while the 2013 losers flourished. In the biggest surprise, bond yields fell as prices rose.

Nonetheless, we’re sticking with the broad game plan we laid out in December for how to navigate this environment. As we enter the second quarter of 2014, investing opportunities appear more elusive than at the beginning of the year (and the challenges more evident).

However, as Jeffrey Rosenberg, Peter Hayes and I write in the spring update to our 2014 Outlook – The List: What to Know, What to Do, even though it’s a tough environment, it’s not one without opportunity. Here are five opportunities we think are worth considering this spring:

1. Stick with stocks. We still believe that stocks offer better value than bonds, even after a five-year bull market. At the same time, we expect to see continued low inflation and low interest rates, as well as a gradually improving economy – all factors that are supportive of stocks. As such, we expect that the market will push ahead in the months to come, although it will likely be a slow and uneven grind given ongoing geopolitical turmoil and Federal Reserve (Fed) tapering. As such, investors should have modest expectations, at least compared to 2013′s outsized gains.

2. More international exposure. Within equities, we believe that, in general, many investors should consider paring back some U.S. exposure in favor of non-U.S. stocks. Despite the reality of geopolitical uncertainty, we see plenty of growth opportunities abroad and would encourage investors to expand their reach globally.

In particular, we have a favorable view toward eurozone and Japanese stocks. Events in Ukraine present some risks for Europe, but we believe both European and Japanese equities look attractively valued compared to U.S. stocks. Finally, for investors with a strong stomach and long time horizon, we suggest having some exposure to emerging markets, which offer a combination of attractive value and compelling long-term growth prospects.

3. Consider a flexible bond approach. It has been a tough time for bond investors, and conditions aren’t getting any easier. What to do? Being flexible and diversified globally remains key. With yields likely to be volatile, and some areas of the fixed income market feeling the effects more so than others, a flexible, go-anywhere bond portfolio that can make adjustments on the fly is something to consider having in your fixed income toolkit.

4. Think high yield and municipal bonds. We continue to believe that investments such as high yield bonds and municipal bonds remain attractive sources of income. In regards to the latter, municipal bonds continue to look attractive versus both Treasuries and corporate bonds. We’re seeing competitive yields on a before-tax basis which only further illuminates the after-tax value. However given the likelihood of rising rates and improving data, a diversified and unconstrained approach is a necessary strategy in the tax-exempt space as well.

5. Go beyond traditional stocks and bonds. Investors could incorporate alternative strategies that can help broaden their diversification, protect against rising rates and contribute to growth. (Remember, however, that diversification does not ensure profits or protect against loss.)

Diversifying with alternatives means adding new asset classes such as physical real estate and infrastructure investments.
You also may want to consider new strategies such as long/short approaches that can be employed with both stocks and bonds to mitigate volatility, seek out returns and contribute to diversification. While the risks of long/short strategies include the possibility of losses larger than invested capital, we believe they can offer a powerful differentiated source of return and the potential for more consistent results over time. To learn more about what might occur in the months ahead and how to capitalize on some potential opportunities, check out the spring update to our 2014 Outlook – The List: What to Know, What to Do.