Category Archives: Investment Planning

Top 10 Benefits and Risks of Forming a Captive

retirement_roadMy Comments: I recently published an eBook with the title CAPTIVE WEALTH!

It explains how to use an 831(b) Captive Insurance Company to create, to grow, and to preserve wealth.

While not a simple idea, it does have the blessing of the IRS if you do it the right way, under the right circumstances. That alone makes it valuable and something to know about.

From the perspective of a successful small business owner, it allows him or her to turn a current expense item into an asset at a later date. Think about it; money spent now comes back later as an asset, which can be used many different ways. This article outlines some of the caveats you should be aware of.

By Donald Riggin, from Guide to Captives and Alternative Risk Financing | November 11, 2013

Investors’ Next Disappointment Will Come From Risk Mismanagement

080519_USEconomy1My Comments: Reader of this blog know that I try to include meaningful comments about investments and investment outcomes. Over the years, I’ve done well for some clients and done poorly for others. And while the past is history, there are always lessons to be learned. I have a personal mandate to try and do better in the coming months and years.

Here are some really good insights that I think will help you. Mistakes are part of the game, whether you prefer to make your own mistakes or hire someone to make them for you. I’ve you’ve hired me, you know that we’re on a really solid track these days and the future looks really good.

John S. Tobey / 3/29/2014

Risk mismanagement is everywhere. Many investors (individual and professional), investment advisors and even Wall Street are guilty of overstating, underweighting or misunderstanding risk. As a result, portfolios are being designed to disappoint. Worse, we have finally reached the best of times for investing, only to have investors’ prospects mucked up by bad investment decisions.

Disclosure: Fully invested in stocks, stock funds and bond funds. No position in Oppenheimer Holdings, mentioned below.

So, what’s wrong? There are three basic mistakes being made:
1. Overstating risk and investing for the next catastrophe. Here, protection from risk is taking priority. The focus is on what could go wrong. The result? Invest for protection, avoiding or hedging (watering down) equity risk/return and holding “safe” investments.
2. Understating risk and investing for top return. This attitude is a return of the performance chaser, looking for more return and less risk. The mistake is buying into a trend that happens to be exhibiting those characteristics, thereby underestimating risk.
3. Misunderstanding risk and investing inappropriately. There are many types of risk at work. Understanding them and how they relate to the investor’s situation is imperative for investing appropriately. Too often, a risk measure is chosen that over- or under-emphasizes an investment’s risk (e.g., a high or low price/earnings ratio for a stock).

How to avoid the mistakes

First, realize risk is everywhere. OppenheimerFunds has a current ad, headlined “Taking risks is not the same as using risk.” It makes the key point about investing: All investments carry risk, so make sure to carry (use) risk for your benefit, not simply accept it as a cost of owning a desired investment. (Even cash carries risk – the loss of purchasing power through inflation – so an investor must choose which risks are acceptable and in what combination.)

Second, realize you can’t have it all. As a new stockbroker in the 1960s, I was given a sales kit that included the golden triangle. It depicts investing’s tradeoffs that exist in all markets – i.e., within the triangle below, we must pick our desired point. There is no ducking the fact that investing is the ultimate compromise – that we cannot have our cake and eat it, too. (Interestingly, Oppenheimer has brought this message back in its aptly-named website,

Third, start with the basic allocation and work from there. The long-held, rule-of-thumb allocation is 60% stocks (equities) and 40% bonds (fixed-income). This mix provides the most oomph (return) per unit of risk. That doesn’t mean it should be every investor’s choice, but it is the perfect place to start. Varying from it has consequences that need to be understood and accepted.

Fourth, control that risk over time.
Controlling a portfolio’s risk means taking two actions:
1. Rebalance as needed. Different investments will follow different paths. The resulting performance differences reset the portfolio’s risk, so it’s important to periodically rebalance back to the desired allocation and risk level.
2. Monitor the chosen investments. Changes happen to funds and companies, so it’s important to ensure the reasons for choosing them remain in place. If not, they should be replaced.

Fifth, check performance infrequently and do not use it to change allocation. It’s a proven fact that more frequent checking makes risk look greater and trends look longer. Both erroneous perceptions can lead to equally erroneous portfolio allocation changes that adversely affect risk and return. If the portfolio has been designed appropriately, expect to keep the allocation unaltered. Only a change in personal circumstances might require an allocation change.

Sixth, avoid all combination investments unless you fully understand and need them. Wall Street is filled with combination investment “products.” While some have a financial purpose (e.g., convertible bonds and mortgage pass-through bonds), some are designed more for investors’ desires (e.g., leveraged funds and stock + written call funds). Options, by themselves, are also a combined investment. All of these investments have odd risk-return characteristics that need to be understood. Otherwise, investors can see win-win where none exists.

The bottom line
Happily, we are now in a normal market environment. That does not mean everything is headed up and there is no uncertainty – that would be an abnormal market. Rather, it means we can rely on time-tested investment wisdom to design our investment approach. Starting with the basic 60%/40% mix, we can fashion a portfolio that best fits our needs, ignoring today’s headlines and any left over Great Recession worries.

Another risk, not discussed above
The academics refer to it as “specific” risk. It’s the uncertainty attached to an individual investment (e.g., a favorite stock), a non-diversified portfolio (e.g., a biotechnology fund) and an investment strategy (e.g., a small-cap growth fund). Selecting successfully can increase return, but picking poorly can reduce return. Because so many experienced investors are actively involved, Warren Buffett offered his advice to buy a broad index fund and leave the stock picking to others.


My Comments: A quick check using your smart phone will reveal that this word, used as a noun, means “… a person to whom property or power is entrusted for the benefit of another.” In addition, it can be used as an adjective, an example of which is fiduciary capacity or fiduciary duty or fiduciary obligation.

In my years as a financial planner and investment advisor, I early on assumed a fiduciary role in my relationship with clients. For me, this means an ethical, legal and moral obligation to do only that which is in a clients best interest.

This distinction is important these days as there are “Wall Street” companies working very hard and spending millions of dollars to enable their employees to function as ‘advisors” to members of the general public, and not be held to a fiduciary standard. From a marketing perspective, they want their salesmen and brokers to call themselves “advisors” and not be held to a fiduciary standard. Unlike those of us not affiliated with Wall Street who are fiduciaries when we call ourselves “advisors”.

An analogy from my past is when I tried to earn a living for several months as a salesman for a local car dealership. I was allowed to say virtually anything I wanted to a potential customer, the objective being to sell a car. That was to the benefit of the dealership, and if the buyer got what he wanted, that was an incidental benefit.

When I became a salesman for a life insurance company, it was suggested that I not tell lies, but beyond that, all that mattered was how many policies could I sell. The more I sold, the more money the company made, and if I crossed certain thresholds, I got more money and more goodies. Great trips to the south of France, etc.

Along the way, I increasingly wanted to be held in high regard by my peers who happened to be CPAs and attorneys. By law, if you are a CPA or a member of the bar, you are, by definition, a fiduciary. But in the insurance world, it wasn’t until the invention of the designation Certified Financial Planner, that the fiduciary role was assumed. If you were awarded a CFP designation, you effectively swore that your conduct going forward was as a fiduciary.

This now causes no amount of angst among the Wall Street crowd as many of their salesmen and brokers have been awarded CFP designations which at a personal level makes them fiduciaries but at the corporate level, they are not. How to remedy this apparent contradiction and conflict of interest?

For a time, there was an attempt to force the folks behind the CFP designation to create a CFP Lite, meaning some folks could use the CFP designation in their relationships with clients without being held to a fiduciary standard. That idea eventually fell apart.

The pressure behind this problem is that companies that sell financial products don’t want to be held accountable and be financially liable if a dispute happens and their salesman or broker, someone they have encouraged to be identified as an “advisor”, did something NOT IN THE CLIENTS BEST INTEREST, and it’s now come back to bite them.

My reasons for writing about this are that (a) I consider myself a fiduciary and for many years now have held myself out as a fiduciary in my advisor/client relationships; (b) I don’t have the resources to lobby the Securities and Exchange Commission, the SEC, to give me an out if I make a mistake, (c) I like being able to hold my head high and have the respect of my peers in the legal, accounting, and advisory community; and (d) I’m tired of not working and living on a level playing field. And I suppose I can stress it’s not in my clients best interest to be faced with this arcane conundrum which potentially puts their financial and legal future at risk.

Here’s a full definition I found several years ago that you might find helpful.

Fiduciary Responsibility: A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. [2] The fiduciary duty is a legal relationship of confidence or trust between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary. In the case of insurance the fiduciary duty is between the agent and his or her client. One party (the agent) acts in a fiduciary capacity to another (the insured). In a fiduciary relation one person justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests. In other words, the agent cannot consider commissions above the interests of the client.

A fiduciary duty is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (called the principal): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust.

When a fiduciary duty is imposed, equity requires a stricter standard of behavior than the comparable tortuous duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without express knowledge and consent (acknowledging, for example, that a commission will be paid). A fiduciary cannot have a conflict of interest. It has been said that fiduciaries must conduct themselves “at a level higher than that trodden by the crowd” and that “the distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty.”

Checking In On The 1929 Stock Market Parallel

Scary chart 1My Comments: The other day, on February 17th, I had a post that explained how today is NOT 1929 all over again. If you found that story, and this chart interesting, then here is a follow up. Hopefully, it will help you navigate the waters as they are flowing today in 2014.

Chris Ciovacco, Ciovacco Capital Management / Feb. 25, 2014

Houses Appreciate At Slower Rate

With the Federal Reserve tapering their bond-buying program, investors are looking for evidence of an improving economy. Given that mortgage rates are well off their recent lows, it is not surprising to see some slowing momentum in the housing market, which is exactly what the data showed Tuesday.

From Bloomberg:
The S&P/Case-Shiller index of property values in 20 cities rose 13.4 percent from December 2012 after increasing 13.7 percent in the year ended in November, the group said today in New York. It was the first deceleration since June. The gain matched the median estimate of 33 economists surveyed by Bloomberg. “The housing recovery continues, but perhaps not as vigorously as it did in the first half of last year,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. and the best forecaster of the home-price index during the past two years, according to Bloomberg calculations. “Even so, appreciation trends still look pretty good even though they may not be as strong as they were.”

Head-and-Shoulders Off Table

On February 11 we outlined a simple “don’t lose too much sleep” strategy for the scary 1929 parallel chart that has been making the rounds on Wall Street. The 1929-like scenario involved a pattern known as a head-and-shoulders top. Monday’s new intraday high in the S&P 500 pretty much put the head-and-shoulders scenario to bed, which for the most part negates the 1929 analogy for the S&P 500.

( If this topic interests you, then I encourage you to click HERE to get to the source article. There are a number of charts which are important for you to see. I could probably replicate them here but… If you’ve come this far, then click HERE to find the rest of the article and the charts. – TK )

Retirement Planning for the Very Long-term

cookie jar My Comments: You have perhaps heard the expression that “… it’s like watching grass grow.” Or perhaps “… it’s like watching paint dry.” I use it when something I’m supposed to be paying attention to is progressing slooooooowly.

It comes to mind in the constext of this article which has demographic overtones. Personally, I’m on the leading edge of the baby boom generation, that group of people born shortly after the end of WWII who are now reaching their late 60’s.

It came to mind recently with an article about how the economy is improving, but very slooooooowly. My conclusion was that if I’m any example, my wife and I simply don’t spend as much money as we used to. Dropping 20 bucks on something trivial seems foolish and unnecessary. So we don’t. I’ll wager there are a lot of us now, and soon to be more.

Clients of my generation, or soon to be, are increasingly worried about running out of money before they die. So I help them find ways to help make sure that doesn’t happen. It’s a fine line at best. What if you find yourself dying at age 75 with enough money in the bank to realize you could have had an apartment in London or Paris for the summer months every year?

By Robert Powell, MarketWatch

The world’s population is aging, rapidly. So much so in fact that roughly one in six people is expected to be 65 and older by 2050, double the proportion today, according to a recent Pew Research Center report. Put another way, the global population of people ages 65 and older is expected to triple from 530.5 million in 2010 to 1.5 billion by midcentury.

And all that aging is, well, likely to affect your, and more likely, your children’s retirement plan.

How so?

Social Security and Medicare

First off, Social Security and Medicare are likely to change dramatically in the coming four decades.

Consider: Public expenditures around the world on pensions and health care — driven largely by aging — are generally projected to increase as a share of gross domestic product (GDP), according to Pew. Read Attitudes about Aging: A Global Perspective.

The good news for U.S citizens, at least, is that pension expenditures are predicted to represent a lower percent of GDP than in other parts of the world. For instance, public pension expenditures are expected to consume about 15% of GDP by 2050 in several European countries, according to Pew. By contrast, U.S. pension expenditures are projected to rise from 6.8% of GDP in 2010 to 8.5% in 2050.

Meanwhile, public health-care expenditures as a percent of GDP are rising even faster than pension expenditures in most countries, according to Pew. In the U.S., public-health expenditures — due in part to the graying of the population as well as cost inflation — are projected to more than double, from 6.7% of GDP in 2010 to 14.9% in 2050.

And all that spells change. “Our Social Security and Medicare systems are not sustainable under current law, and thus we have no choice but to eventually reduce the level of promised benefits or increase taxes,” said Jeff Brown, a professor at the University of Illinois. “But we are still at a point where, if we act soon, we can make these changes without fundamentally threatening retirement security or economic growth. Of course, if we continue to kick the can down the road, then the choices will become much more stark in the years ahead.”

Now, in response to public-pension expenditures representing a larger and larger percent of GDP over time, Pew reports that many countries have or plan to implement reforms, such as increasing the retirement age, as way to stem the rate.

The good news for U.S. citizens — born and not yet born — is that the expected rise in pension expenditures is lower among the developed economies because they are currently aging at a less rapid pace than other countries and because many have implemented reforms that are expected to limit the growth in pension expenditures, Pew wrote.

In the U.S., for example, the original Social Security full retirement age of 65 has been gradually on the rise since 1983, Pew noted. It is scheduled to level off at 67 for people born after 1959. Brown said it’s worth looking at increasing Social Security’s full retirement age above 67, but it can’t be done without a great deal of thought. “We may also want to consider gradually raising the early entitlement age for Social Security, although this is tricky to do because some occupations, for example, firefighters, may still have good reason to retire early,” said Brown.

To be sure, it’s hard to predict whether lawmakers in the U.S. will ever increase Social Security’s full retirement age above 67. But one should at least consider that in their retirement plan.

Other experts, meanwhile, note that public expenditures on pensions and health care rising as a percent of GDP isn’t always a bad thing. “Pension and health care spending will increase but don’t confuse budget issues of one segment of the economy with an economic issue,” said Teresa Ghilarducci, a professor at The New School’s New School for Social Research. “Government expenditure is another sector’s income — spending equals income — and the aging economy in the U.S. will be the source of new jobs and innovation.”

Working longer, living longer

No matter whether lawmakers increase this nation’s full retirement age, current and future citizens of the U.S. will have to contemplate working longer and living longer.

Two issues are at play. One is longevity and the other is the old-age dependency ratio.

The average U.S. resident born between 2010 and 2015 could expect to live for 79 years. By contrast, the average U.S. resident born between 1950 and 1955 could expect to live to 69 years. Meanwhile, the total dependency ratio in the U.S. is expected to rise from 49 dependents per 100 working-age people in 2010 to 66 in 2050, according to Pew.

Brown said these facts call attention to the need for “an attitudinal and cultural shift” away from this idea that people ought to leave the labor force in their early 60s.

“Over the past 50 years, our lives have not only lengthened, they have also gotten healthier,” he said. “In addition, the nature of work has changed, and a smaller proportion of jobs today are as physically demanding as 50 years ago. If we are leading longer and healthier lives, we ought to stay in the labor force for longer.”

And to accomplish this, Brown said government and employers could help by removing barriers to longer working lives. “There are a range of ideas out there on how to do this: everything from removing barriers to part-time work to exempting older workers from paying payroll taxes.

Aging population highlights need to save more

Consider too the notion that you will be bearing an even greater responsibility for your economic well-being when you’re older. To be sure, a good percentage of Americans (46%) already say they — rather than government or their families — bear the greatest responsibility of the economic well-being of the elderly in the U.S., according to Pew.

But even more will have to do so in the future. “We need to continue to encourage people to save and invest,” said Brown. “I would (also) suggest we need to shift the discussion of retirement away from just saving and toward making money last for a lifetime.”

Others, however, say that it might take a village to ensure the economic well-being of the elderly in the U.S. and elsewhere. “We are living longer and, as such, we are living longer with chronic disease,” said Cyndi Hutchins, director of gerontology for Bank of America Merrill Lynch.

According to Hutchins, elder care issues are a major concern, not just for the elderly, but for the boomer generation and generations that follow. That’s because elder care for most will be a shared responsibility. “Each individual will have responsibility for their own care and, as costs escalate, families are likely to share responsibility for the care of parents and grandparents as they age into their 80s, 90s and beyond,” she said. “This responsibility will be financial as well as instrumental, providing hands-on physical support, and emotional.”

Economic slowdown or not

Current and future citizens of the U.S. also need to consider what an aging population could mean for economic growth. In general, there’s concern that a shrinking proportion of working-age people (ages 15 to 64) in the population may lead to an economic slowdown.

But according to Pew, that might not happen here in the U.S. “Although the U.S. population is anticipated to turn older and grow at a slower rate in the future, it is projected to increase at a faster pace and age less than the populations of most of the rest of the developed world,” Pew noted. “Thus, to the extent that demography is destiny, the U.S. may be in a position to experience a more robust economic future in comparison with other developed nations.”

By the way, part of that economic future will include building and/or adapting infrastructures in the U.S. to its aging population. “Just as we built schools and sprawling suburbs to accommodate the needs of a generation of children in the 1950s and ‘60s, we now need to adapt to meet the rising needs of an older population,” said Hutchins. “The numbers of ‘elder communities’ will increase and move into suburban areas, and services for this population — such as age-friendly transportation systems and medical facilities — will need to follow.”

Still, Pew noted that smaller working-age populations must support growing numbers of older dependents and that could create financial stress for social insurance systems and dim the economic outlook for the elderly.

Future looks bright for U.S. citizens

In the main, however, the future doesn’t look as bleak for U.S. citizens as some might fear. “There is a critical difference between the aging of the population and the aging of an individual,” said Michael Hurd, the director of the RAND Center for the Study of Aging. “Individuals should not be overly worried if the population ages because of low fertility provided they have saved adequately, whereas society needs to be worried about an aging population because of the supply of workers and of financing transfer programs.”

In fact, it’s his take that “individuals in the U.S. population are mostly well prepared which is reflected in their generally optimistic attitude.” In the Pew study, Americans are fairly confident about their ability to maintain an adequate standard of living in their old age. Some 63% are either very confident or somewhat confident regarding the adequacy of their living standards in old age, according to Pew.

And for the record, the U.S. is not nearly as bad off as other countries when it comes to the aging of its population. “Japan’s aging problem is far worse than ours, and Germany’s birthrates are so low that their population will decline absent immigration,” said Brown. “China’s one-child policy is going to be the cause of serious long-term problems if they fund their pensions on a pay-as-you-go basis. This is not to say that problems in the U.S. are not severe, it is just that things here are not nearly as bad as many other nations.”

About That ‘Scary’ 1929 Graph

My Comments: So, is it 1929 all over again? Is the world as we know it coming to an end? We’re doomed, I tell you, DOOMED!. Well, maybe not.

As a financial planner and investment advisor, I try to have something posted about investments at least once a week. I’m not sure if I’m successful, but I try.

So much of investing, especially for us amateurs, is mental. We can’t see the forest for the trees most of the time, so we make what are essentially emotional decisions about what to invest in and when.

Here’s a common theme that has surfaced again recently. Promoting fear is always a popular pastime for professional writers since it appeals to the mental side that so often drives us amateurs. Just remember, the pundits on TV and other promoters of fear are not necessarily investment professionals. If they were, they’d be making a living investing money. Instead they do what most of us do, which is what one does best, and in this case it’s selling ideas to a gullible public.

Feb. 11, 2014 8:57 PM ET

The lead story on MarketWatch this morning  ( 2/11/14 )  is hyping a graph showing a “scary parallel” between the Dow Jones’ performance in 1928-29 with the market’s performance since July of 2012. By distorting the scale, the author appears to want to either warn you or scare you about where the market is heading. There is a whole cottage industry of investment newsletters that essentially attempt to frighten people into buying their newsletter to learn how to protect themselves. I’m not familiar with any of the parties mentioned in the article and only peripherally aware of the author, so I’m not making any allegations against anyone associated with the graph or the article, but let’s look at the graph as presented.

Scary chart 1

That does look pretty damning. But take a look at the scales. They have been constructed to make a point, not to necessarily provide an illuminating argument. I pulled the daily price data on the Dow Jones index from 1928 and 1928 from this site. I then took daily price information from July 1, 2012 through the present and scaled both into percentage changes. This is the same data set used in the graph, according to the notes on the graph. By examining the percentage change in the index during these two time periods, we see a very different story.

Scary chart 2

Looking at the chart in this manner, there does not appear to any relationship between the two time periods. My graph does not generate website clicks or sell newsletters though. I’m not suggesting that we don’t have real problems in our economy and that there is not downside risk in the stock market. The reality is there is always downside risk and no one knows what is going to happen over the next six to twelve months. I am suggesting it is important to study charts/graphs and determine if information is being presented in a way intended to enlighten the reader or mislead the reader. People can make their own determination on the “scary parallel” graph, but I know where I come out on the issue.

The Future Still Belongs to the Emerging Markets

question-markMy Comments: As someone who has helped clients manage their money for almost four decades, I’m still often caught up in the “crisis de jour”, what’s happening TODAY, as opposed to stepping back and looking at things from further away. Our society has become obsessed with WHAT IS HAPPENING NOW, and often fails to put that in a larger context.

For the last few weeks, the markets have been in turmoil. Everyone is running helter skelter to explain this. Is China about the implode? Terrorists in Sochi and the Olympic Games! 2013 was a good year so 2014 has to be a bad year!

Not to imply that tactical approaches to investment are not appropriate for long term investors, ie someone with a ten year need for money, what appears to be happening is the expected correction of 2014 is happening now, and not waiting for warmer weather. This artcle from the Financial Times helps put what is happening TODAY in a larger context, one that will hopefully put your mind at ease a little bit.

By Gideon Rachman / February 3, 2014 / The Financial Times

Just as the west has emerged from crisis before, the newcomer economies will return to growth.

In 1996 a friend of mine called Jim Rohwer published a book called Asia Rising. A few months later, Asia crashed. The financial crisis of 1997 made my colleague’s book look foolish. I thought of Jim Rohwer (who died prematurely in 2001) last week as a I listened to another Jim – Jim O’Neill, formerly of Goldman Sachs – defending his bullish views on emerging markets in a radio interview.

Mr O’Neill coined the term Brics for Brazil, Russia, India and China, just before the emerging market boom of the past decade really got going. He was rewarded for his prescience, and his ability to coin a good acronym, with guru status. Now Mr O’Neill is back, talking up the delicious-sounding Mints (Mexico, Indonesia, Nigeria, Turkey) as the next group of rising economic powers. But this year his timing is a bit off. Investors are panicking about emerging markets and Turkey – the pay-off in the Mint – is at the forefront of the crisis.

One moral of these stories is that in punditry, as in investment, timing is everything. It is possible to be right at the wrong time – and that is what happened to Rohwer. His bullishness about Asia was fully vindicated in the 17 years after the appearance of his book. It just looked badly wrong in the crucial months after publication, as the International Monetary Fund was forced to bail out South Korea, Thailand and Indonesia.

The speed of the recovery in Asia was just as startling as the speed of the collapse. South Korea is once again regarded as a model economy, and its per capita gross domestic product has almost tripled since the near disaster of 1997. Thailand and Indonesia also bounced back.

Those stories are worth remembering amid the current panic. The next year could make boosters of emerging markets, such as Mr O’Neill, look like false prophets. But over the course of the next decade, they will be proved right – again.

The reason for this is that the factors that have propelled the rise of non-western economies in the past 40 years still apply. These include lower labour costs, rising productivity, huge improvements in the communications and transport that connect them to global markets, a rising middle class, a boom in world trade as tariffs have fallen and the spread of best practice in everything from management techniques to macroeconomic policy. Added to this is the drive of people all over the world – from factory hands to entrepreneurs – who have realised that they are not condemned to poverty, and that a better life is there for the taking.

In the past half century, these powerful forces have allowed emerging markets (or developing nations or rising powers, if you prefer) to grow much faster than the developed world. In their recent book, Emerging Markets, Ayhan Kose and Eswar Prasad show that the economies of a group of the most prominent emerging markets (including China, India and Brazil) have grown by about 600 per cent since 1960 – compared with 300 per cent for the richer, industrialised nations. Even over the past 20 years, they write, “emerging markets’ share of world GDP, private consumption, investment and trade nearly doubled”.

The effect has been to transform the global economy. Michael Spence, a Nobel Prize-winning economist, writes that in 1950 only about 15 per cent of the world’s population lived in developed economies. In the intervening 65 years, the benefits of industrialisation, trade and rapid economic growth have spread to large parts of Asia, Latin America – and now Africa.

The story is far from over. Professor Spence argues that we are in the midst of a “century-long journey in the global economy. The end point is likely to be a world in which perhaps 75 per cent or more of the world’s people live in advanced countries.” If anything, the pace is likely to increase as the implications of the communications revolution become clearer and more entrenched.

The rise of the emerging markets will, however, be punctuated by crises such as the one we are experiencing today. These, too, have been part of the story all along. The Asian financial crisis of 1997 was not an isolated event. There was the tequila crisis in Mexico in 1994 and the Indian financial crisis of 1991. If you enter the words “Latin American financial crisis” into Google, it helpfully offers to complete the phrase with the dates – 1980, 1990s, 1998 and 2002. Yet despite all this, most of the leading economies of Latin America – Brazil, Mexico, Chile and others – have experienced real improvements in living standards and reductions in poverty.

The emerging markets have also sometimes been rocked by political crises that led investors to panic. Most dramatically of all, there were the protests in Beijing’s Tiananmen Square and subsequent massacre in 1989. Who at the time would have predicted that – in spite of all this political turmoil – the Chinese economy would more than double in size over the next decade, and then do the same again in the decade after that?

The moral of the story is that the rise of non-western economies is a deeply rooted historic shift that can survive any number of economic and political shocks. It would be a big mistake to confuse a temporary crisis with a change to this powerful trend. The bursting of the dotcom bubble in 2001 did not mean that the internet was massively overhyped, even though some people jumped to that conclusion at the time. In the same way, today’s turmoil will not change the fact that emerging markets will grow faster than the developed world for decades to come.

Why IS The Fed Tapering?

profit-loss-riskMy Comments: Tapering is the term used to describe efforts by the Federal Reserve to slow down the monthly purchase of bonds. They have made these purchases for many months to help prop up the economy and keep interest rates low. It’s an important question for you if you have money in the markets because its going to stop sooner or later.

This article reveals the extent to which the Federal Reserve and other financial forces can bring pressure on the financial markets to move in the direction wanted by those who have an incentive to make it happen.

The article takes a while to the meat of the question, which is to help explain what those of us in the financial world know as Quantitative Easing or QE. Last June, there was an offhand remark by Ben Bernancke that pushed the markets into a tizzy for a few days. Now with Janet Yellon taking over as Chair of the Federal Reserve, there are real questions being asked about when and how the Fed will slow or stop the current QE which has served to prop up the economy for several years.

If you have money invested with me, it’s less of a threat since the programs we use all have the ability to shift gears on a daily basis and make money when the rest of civilization is losing money.

The three paragraphs below are copied from the middle of the article and are intended to help you decide if this is something you want to read about.

Jason Hamlin / Jan. 31, 2014

Manipulation of the gold price is a foregone conclusion. The question is: why is the Fed tapering? The official reason is that the recovery is now strong enough not to need the stimulus.

There are two problems with the official explanation. One is that the purpose of QE has always been to support the prices of the debt-related derivatives on the balance sheets of the banks too big to fail. The other is that the Fed has enough economists and statisticians to know that the recovery is a statistical artifact of deflating GDP with an understated measure of inflation. No other indicator, be it employment, labor force participation, real median family income, real retail sales, or new construction, indicates economic recovery. Moreover, if in fact the economy has been in recovery since June 2009, after 4.5 years of recovery it is now time for a new recession.

One possible explanation for the tapering is that the Fed has created enough new dollars with which to purchase the worst part of the banks’ balance sheet problems and transfer them to the Fed’s balance sheet, while in other ways enhancing the banks’ profits. With the job done, the Fed can slowly back off.

The problem with this explanation is that the liquidity that the Fed has created found its way into the stock and bond markets and into emerging economies. Curtailing the flow of liquidity crashes the markets, bringing on a new financial crisis.


5 Simple Reasons The U.S. Market Will Go Straight Up From Here

global investingMy Comments: Yesterday, my blog post gave you lots of reasons to believe the world was coming to an end., at least for a while. Did you read all of it?

Today, you only have to look at the headline above to think I’m either a raving lunatic or as puzzled as you and the next guy about what is likely to happen to our investments. ( If you find the name of the author somewhere, please let me know. )

But is does create an opportunity to move away from simple mutual funds with a buy and hold mantra for something with the ability to take advantage as changes happen. Think how happy you might have been following the crash of 2008-09 if your investments had the ability to go short during those 7 bad months.

Feb. 5, 2014

U.S. equity markets have just seen their worst January since 2009….

According to an article in Businessweek, Emerging Market stocks have had their worst start ever – down 8.5%…

The Volatility index hit 20%+, levels we haven’t seen since Mario Draghi had to step in and save the world in the summer of 2012.

CNBC commentators are hedging themselves – wait for the 200 day moving average to buy – and those who bought protection in January and posted flat to up performance are patting themselves on the back (after that protection cost them half their return in 2013).

Even I myself have written about the perils of investing in Emerging Markets!

And yet now, after being on radio silence for half a year, I have the audacity to say, ignore it, buy, and close your eyes…

Where have I been in the past many months? Other than being quite happy I don’t live in a Polar Vortex zone, I retooled my models keeping the good – of which there was a lot – and leaving out the bad – of which there was some. You certainly got a taste of it when I said stocks were a pretty good buying opportunity and wouldn’t crash like 1987 (they didn’t) or when I suggested Europe was quite cheap (it was and still is), but avoid the Staples and stick with the Cyclicals.

And based on that retooling, I conclude that the recent selloff presents an incredible opportunity to purchase U.S. stocks (SPY, IWB) which I think have the potential for further multiple re-rating. In fact, the recent baffling moves in the bond market have made U.S. stocks even more appealing because they have made fixed income even more unappealing.

5 simple reasons that stocks are attractive is because there is…
1) No recession or major slowdown on the horizon
2) No red flags coming from credit markets and continued improvement still possible
3) Deleveraged corporate balance sheets
4) Nothing else to do with one’s money
5) Short-term there is way too much fear in the market and as usual investors are doing dumb things

Let me address my claims point by point.

1) No recession or major slowdown…

Other than the Permabears, no rational person is calling for a recession here. Here is the latest global PMI survey. Despite the brouhaha about China flatlining and the U.S. expansion slowing, global PMIs are above average thanks to other parts of the world (Europe) picking up the slack. What we have folks, is a pretty good global growth story with one region picking up slack for another.

(The rest of this article includes several charts that help make the authors point. So my comments stop here and encourage you to click somewhere on this paragraph to see the charts and the other 4 of the 5 Reasons.)

The 7-Year Cycle That Will Crush Uninformed Investors, Again

My Comments: Many of you have seen, or soon will when you get your January statements, that 2014 has so far been a bad year for the stock market.

This is an article that suggests there is a pattern. I’m not convinced that what he says is not a coincidence, but then again, what happened in January is likely the start of the correction many of us expected sooner or later in 2014. But sooner than most of us expected.

Here I have to argue in favor of an approach to investing that allows whomever you select to simply move to cash whenever the signals suggest the market is going down today or tomorrow. (Cash does NOT go down in value!)

The investments I recomment for all my clients also have the ability to go short. This means if the trend is down, you invest to make money in a down market. This helps explain why clients in these programs made lots of money in 2008 and 2009, when the Buy & Hold folks were losing. So please, TRY and be an INFORMED investor.

Craig Brockie / Feb. 3, 2014

What do the years 2000, 2007 and 2014 have in common?

Some quick math reveals that they are all seven years apart. What is perhaps far more significant though is that each of these years mark all-time stock market highs.

The 2000 and 2007 peaks led to devastating stock market collapses that resulted in uninformed investors losing 30-60% of their wealth.

I believe that 2014 will also prove to be a year that average investors look back on with regret. Regret that they again failed to sell near the top and avoid the losses from the ensuing bear market.

There is a well-known saying that goes, “Fool me once, shame on you. Fool me twice, shame on me.” What does one say if they get fooled a third time?

The Seven-Year Cycle in the S&P 500 Index
2000-2007-2014In the chart above, it’s important to notice the pattern of higher highs and lower lows. With the economy far more fragile today than it was at either of the previous two peaks, I believe this pattern can be expected to continue. This would mean the S&P 500 dropping below the 2008 low of 666 for a loss of at least 64%.

Well, if stocks are dangerous, then bonds must be safe, right? I wouldn’t bet on it. Bonds dropped sharply in the last financial crisis as well. Furthermore, bonds appear to have already begun their next bear market as indicated in the following two-year chart of the Vanguard Total Bond Market ETF (BND).

The Bear Market in Bonds Has Started
bear mkt bondsFortunately, there are proven assets to protect and grow your money in a bear market. The US treasury funds, (TLT) and (ZROZ), as well as the short-selling fund (HDGE), reliably go up when the stock market goes down.

While these funds should prove very useful in the near future, I’m not positioning in any of these at this exact moment. The reason being that I don’t believe US treasuries have reached their ultimate bottom for this cycle nor do I believe that the US stock market (SPY) has reached its ultimate bubble peak.

With volatility (VIX) almost doubling in the past month on a modest pullback of only 6% by the S&P, it appears that investors are over-reacting. It appears that a multi-week rally is imminent. I expect that rally will result in a double top or more likely a new all-time high this spring.

Regarding U.S. treasuries, it’s encouraging to see them rally recently as stocks faltered. That said, after reaching a bubble peak less than two years ago, I expect the bear market in treasuries to continue until sentiment towards them has reached a nearly unanimous, negative consensus. This is because extremes in one direction usually result in extremes in the opposite direction before reversing. Examples of this behavior were crude oil in 2008 and the gold market more recently.

In the mean time, I expect there to be greater opportunities in the commodity and emerging market sectors in the early stages of this transition from bull to bear markets. That’s what happened in early 2008 and it appears that a repeat performance is highly probable.

Besides stock and bond prices falling, there are other risks that are more real today than in previous declines. With a global trend towards bank bail-ins, pension nationalization and other asset confiscations, it’s more important than ever to be prepared. I discuss these issues and solutions in my free special report, “How to Protect and Grow Your Money in 2014″.