Tag Archives: financial advice

Get Ready For The Biggest Margin Call In History

My Comments: Like a broken clock that is right twice every 24 hours, I’ve been talking about the probability of us having a severe market correction for the past 12 months or more. It’s obviously not happened yet.

But every time I turn around, there are new observations from people who understand this better than I do. Most of them agree it’s going to happen. Each of us in our own way, depending on where we are in life and what we expect to achieve with our savings and investments, need to pay attention. There are ways to protect yourself and it won’t cost an arm and a leg to make it happen.

Chris Martenson | Apr. 20, 2015

Economist Steen Jakobsen, Chief Investment Officer of Saxo Bank, believes 2015 will be another “lost year” for the economy. And he predicts the Federal Reserve will indeed start to raise rates later this year, surprising the market and taking the wind out of asset prices.

He recommends building cash and waiting to see how the coming storm – which he calls the “greatest margin call in history” – plays out:
0% interest rates at $0 down has not created the additional momentum to the economy The Fed was hoping for. The trickle down effect, the wealth effect, has instead made for bigger inequality in society. So I think we’re set for a rate hike in either in June or in September. I think this will be the biggest margin call in history on the asset inflation created by the Fed.

That’s where I differ from most Fed watchers. Everyone else is looking at employment, inflation targeting. I don’t think Fed is at all looking at those. They are saying “Listen, the 0% interest rate is getting us absolutely nowhere, we think it’s very, very important for us to move to a more neutral place”. At the same time we will communicate that we are open-minded to additional programs or whatever needs to be done to secure the long term growth of the economy. But that will be on the down side, not on the up side. And as year has progressed, and I’ve said this publicly, I think 2015 is already lost in terms of recovery here. And that will take the market by surprise.

The market will ask in September when the Fed hikes: “Why are you hiking interest rate when growth is below target, inflation below target”? Well, the Fed’s response will be “Because this is the biggest asset inflation we’ve seen in human history and we need to address it“.

What the Fed is saying is that we have unintended consequences of low interest rates. Money is chasing yield: it’s going to real estate making it over-valued, and flowing into the equity markets making them over-valued. And then the Fed says “Well, we have two choices. We can allow the market to run into a bubble, or we can burst the bubble and start all over again”. But they wrongly, in my opinion, believe they can actually micro manage that, even macro manage this. So what they would rather do is “lean up against the market”. To take some of the excess out of prices by going in and telling in the market “We are concerned, we don’t want you to have more leverage. We want you to have less. And we certainly would like to see that market become flat-lined for a while in terms of return.” Which by all metrics of measurements is actually also the expected return of the stock market. Don’t forget three, five and seven years expected return at the present multiples is exactly 0%.

Given this, at a bare minimum, I recommend taking the leverage out of your own portfolio so you sit with a nice pot of cash if the market does correct. If it doesn’t, you’re not really losing out much because again, they expect a return is 0% for the next couple of years.

Some time the best advice to anybody is to do nothing. And of course being, part of an online bank I’m not exactly popular with management for putting this advice out there. But I have to give the advice I believe in and share what I do myself; and I’m certainly reducing whatever equity I have in my portfolio to a minimum. So I’m scaling back to where I was in January last year.

I’ll put it another way. I’m advising a hedge fund in London, analyzing 10,500 stocks from the bottom up. How many do you think of these 10,500 world stocks are cheap? Only 23. Which means 98% of all stocks are either fairly-priced or expensive.

Click the link below to listen to Chris’ interview with Steen Jakobsen (40m:27s)

https://www.youtube.com/watch?v=fnp5ETnKylU

Rioting In The Streets Of Gainesville?

retirement_roadMy Comments: The blog post title above comes from me; the one that actually accompanied the article is Public Pensions Face New Challenges As We Live Longer. Huh?

As a financial planner, I try to make people aware of the existential threats we face as we all grow older. These threats are things that “might” happen, may not happen, but if they do can be devastating to individuals and families. If you are already dead, you can skip this blog post, but if not, then…

No one seems upset that modern medicine has resulted in more of us living longer lives than could have been expected when we were born. Along the way, many of us worked for organizations such as the State of Florida or somewhere in corporate America. Or maybe the City of Gainesville or the Sherrif’s Department. We participated in a pension plan that promised benefits based on our years of service and sometimes our level of pay.

The promise typically included a schedule of monthly payments for either our lifetime, a number of years, and might have included a contingency benefit to our spouse. All well and good. But the calculations to make those promises did not take into account the fact that our lives now end much later than they did in years past.

The net effect of this is a shrinking of the pool of money available to make those payments. I’m not talking about Social Security here, where there is an obvious parallel, but the pensions paid to the millions of Americans who toiled for years at large companies like General Motors and the hundreds of thousands of smaller places.

Non-public pension plans are grossly underfunded across this nation. Part of that is the very low interest rates that ‘safe’ investments earn and have earned for the past decade. And pension funds are required to invest their pools of money in ‘safe’ investments. Revenue is going to have to come from somewhere or there is likely to be rioting in the streets.

My personal opinion, having watched this growing problem for a number of years, is that the author is somewhat blind to the problem and suggesting there is no reason for alarm. Tell that to the elderly couple whose pension check from a local plumbers union somewhere in Ohio just got cut in half.

There are millions of people across these 50 states with situations like this and to pretend they don’t exist is a potential violation of the social contract all of us have as citizens of these United States. Unfortunately, too many of them rely on Fox News to help them interpret what is going on.

April 10, 2015  by Marlene Y. Satter

Certain mortality projections would increase life expectancy by 2.3 years and reduce the funded ratio of the nation’s public pension plans to 67 percent.

That’s according to a just-out brief from the Center for State and Local Government Excellence, “How Will Longer Lifespans Affect State and Local Pension Funding?” which concludes that, while the impact of longer lives is not exactly a positive for funds, there’s no imminent threat to pension funding levels.

It explores what public plan liabilities and funded ratios would look like under two alternative scenarios:

1. If public plans were required to use the new mortality tables designed for private sector plans; and

2. if public plans were required to go one step further and fully incorporate expected future mortality improvements.

The brief’s key findings include:
• Using the private-sector standard, public plans underestimate life expectancy by only 0.5 years, reducing the 2013 funded status of state and local plans from 73 percent to 72 percent.
• Incorporating future mortality improvements would increase life expectancy by 2.3 years and reduce the funded ratio of public plans from 73 percent to 67 percent.
Plans’ liabilities are affected, of course, by the longevity of their members, and the brief explores the degree to which liabilities are affected, calculating that “state and local pension plans would see their liabilities increase by 3.5 percent for each additional year of life expectancy.”

When the differences among longevity tables are factored in, it becomes clear that some plans, because of the way they calculate life expectancy, will be more greatly affected by a change from one table to another, while other plans will not see such drastic effects.

The public sector, the brief said, is going to great efforts to make sure its life expectancy assumptions are up to date. Reassuringly, the brief said, “The question underlying this analysis is whether outdated mortality assumptions are a serious problem among state and local plans. The answer appears to be ‘no.’

If Trees Don’t Grow To The Sky: The Next 6 Years

rolling 6 year numbersMy Comments: You’ve read my earlier comments about whether the world we now live in is a different world. The details have changed, but the fundamentals have not. The following article will cause you to think twice if have not made plans for your money to be protected going forward.

Charlie Bilello, Pension Partners, Mar. 18, 2015

Summary
• The last six years have been one of the strongest periods in history for U.S. equities.
• Investors need to lower their expectations for the next six years.
• This is quite possibly the worst starting point (looking ahead six years) for a 60/40 portfolio in history.

The Bull Market turned six last week and what an incredible six years it has been. From the depths of despair in March 2009, the S&P 500 (NYSEARCA:SPY) has more than tripled in one of the greatest six year bull market runs in history.

The Next 6 Years

There is a growing contingent of market participants today that seem to believe 20% annualized returns are the “new normal,” and the next six years will mirror the last. The crux of their argument is as follows: with central banks around the world engaging in unprecedented easing, there is no limit to how high a multiple the S&P 500 can fetch. In short, the narrative is that in the new central bank era, historical norms can be safely discarded as trees can grow to the sky.

While anything is possible, we should also consider a world where trees do not grow to the sky and mean reversion still exists. In that world, the “old normal,” a repeat performance is unlikely for the following reasons:

1) The average annualized return for the S&P 500 since 1928 is 9.3%. To expect the market to more than double this return for another six years is to expect the greatest bubble in the history of markets, far surpassing the dot-com bubble that peaked in 2000.

2) The long-term price-to-earnings ratio (CAPE or Shiller P/E) of 28 is now higher than all prior periods since 1871 with the exception of 1929 and the dot-com bubble which peaked in 2000.

3) While a terrible short-term predictor, there is a strong inverse relationship between longer-term returns and beginning price-to-earnings ratios, particularly at extremes. The worst decile of Shiller P/E values in the past (levels >26.3) have shown the worst average forward returns at 1.7%.

4) The gains of the past six years have not been lost on investors, who are about as bullish as they have ever been. The 45% spread between bulls and bears today stands in stark contrast to the -20% spread six years ago. The strongest gains in equity markets are built on a wall of worry and there is no such wall to speak of anymore.

While these factors may certainly be ignored in the short-run, they will be harder to ignore over a six-year period. At the very least, they suggest that the odds of above-average returns from here are low.

Borrowing From the Future if Trees Don’t Grow to the Sky

In the end, what the Fed has accomplished through the most expansionary monetary policy in history is not a new paradigm but simply a shift in the natural order of returns. In search of a “wealth effect,” they have borrowed returns from the future to satisfy the whims of today. They did so with the hope that the American people would borrow and spend more money and economic growth would accelerate because of short-term gains in the stock market.

Unfortunately, after six years, this “wealth effect” has failed to materialize, as this has been the slowest growth recovery in history in terms of real GDP and real wage growth. What we are left with is a boom only in the stock market, not in the real economy.

If trees don’t grow to the sky, then, future returns will have to suffer because past returns have been so strong. There is no other way unless you believe that multiples can continue to expand to infinity without reverting back to historical norms.

For anyone still saving and adding to their investments without having sold a single share, this has not been a gift from the Fed but a tremendous burden. The net savers have been forced to add money to stocks at propped-up levels, which will ultimately lower their long-term returns. The savers would have been far better off with a more moderate price advance with declines along the way which would have enabled them to buy in at lower prices and increase long-term returns. This is a mathematical truism.

In the bond market, math is also working against investors as the Fed has suppressed interest rates for over six years now. At the current level of 2.1%, the U.S. 10-year Treasury yield suggests that bond returns (NYSEARCA:AGG) are likely to be far below average in the years to come.

If trees don’t grow to the sky, the next six years will look nothing like the previous six and investors are likely to face a much more challenging environment. But don’t just take my word for it. I’ll leave you with a quote from Clifford Asness of AQR who had this to say in a recent interview with Barry Ritholtz:

“We find the 60/40 portfolio is about as bad as it’s ever been, prospectively” – Cliff Asness, February 21, 2015

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Note: here is the URL from which I took this article to share with you: http://seekingalpha.com/article/3010966-if-trees-dont-grow-to-the-sky-the-next-6-years?ifp=0

Euro: Parity Like It’s 1999

My Comments: The writer featured here provides, in my judgment, the most insightful reflections on what is happening economically across the globe. It appears here without his permission, but unless and until I’m told not to share them with you, I plan to continue.

March 20, 2015 / Commentary by Scott Minerd, Guggenheim Partners

Europe stands to benefit as the euro nears parity with the U.S. dollar – the Fed knows the U.S. economy faces a winter soft patch – the outlook for equities and fixed income remains fundamentally strong.

When the euro was introduced as an accounting currency on Jan. 1, 1999, it declined quickly, depreciating by 14.7 percent by Dec. 31 and hitting parity with the dollar early in 2000 before plunging to $0.83 by October of the same year. The euro’s recent slide has been no less severe, falling by 21 percent against the dollar since July of last year. With parity once again within sight, it seems quite plausible that one euro will once again equate to one dollar, and could potentially head even lower.

Of course, the biggest beneficiary of the depreciating euro has been Europe itself. Economic data coming out of the euro zone has been decent of late, and economic sentiment in Germany remains at a high level. The ZEW index of economic expectations for Germany, although perhaps tempered slightly by concerns over Greece and the Ukraine, still rose to a reading of 54.8 for March, up from 53 the previous month and the highest level since February 2014. Meanwhile, European equities are being powered higher—on Monday, Germany’s DAX Index breeched the 12,000 barrier for the first time and is now trading at just above that level—and euro zone consumer confidence is at levels last seen in 2007.

In contrast to the party spirit emanating from Europe, the U.S. economy faces some tough sledding in the weeks ahead, although not so much that it prevented the Federal Reserve from removing the word “patient” from its March meeting statement, signaling that there is enough strength in the economy for the Fed to start raising rates, most likely in September. In the short-term, temporary seasonal factors will likely tarnish investors’ faith in the economy. This seasonal downturn is not lost on the Fed. In the Federal Open Market Committee’s March meeting statement, it changed its description of economic growth from “has been expanding at a solid pace” to “has moderated somewhat.”

While U.S. job growth has been impressive, retail sales were weaker than expected, with last week’s sales print again coming in below expectations. But weak, weather-distorted first-quarter data is nothing new, and should not be taken as a sign of lasting weakness. In the early months of 2014, key economic data points, such as housing, retail sales, and even employment, were negatively impacted by an extended winter cold snap. Indeed, the U.S. economy shrank by 2.1 percent in the first quarter of 2014 before promptly turning back around in the second quarter. I expect a similar scenario to play out in 2015 as a result of another severe winter season.

The most likely place where we will see the direct impact of weaker economic data is the bond markets. Yields on U.S. 10-year Treasuries could fall meaningfully from 1.93 percent, perhaps even making a run on the lows we saw in January, with investors likely to be spooked by weaker economic data as the current quarter progresses. Personally, I have a great deal of confidence that the U.S. economic recovery remains on track and I don’t see weather-related economic data distortions having a lasting impact on the real economy. The prospects for U.S. equities and credit remain strong this year and recent weakness represents a buying opportunity.

Tough Sledding: Winter Weather Could Weigh on Interest Rates
As it did last winter, recent economic data has surprised to the downside as a result of severe weather. Retail sales have fallen the past three months, housing starts plunged 17 percent in February, and consumer confidence has backed off its recent highs. With economic momentum temporarily slowing, the Fed signaling the possibility of a later rate hike, and capital continuing to pour in from overseas, U.S. Treasury yields could be headed lower in the near term.

Why Invest in Real Estate?

home mortgageMy Comments: This is a topic about which I know relatively little. But it’s real, people do make money, sometimes lots of it, and over the few years since the crash that started in 2008, some folks have made tons of money.

The dramatic opportunities are probably behind us for a while as after several years, life tends to move on. But I have clients who would like to allocate some of their money to real estate. This is a helpful introduction if this is you.

By John Miller, posted in Real Estate on 02/28/2015

Real estate is one of the most stable and wisest investments you can make for your personal finances. Unlike bonds and other non-material investments, land and homes are material products that don’t go away.

In fact, real estate values remain quite high, and their rates improve with time. Many people have become millionaires because of real estate investments.

It takes a lot of money and capital to start out in real estate. People with big real property investments usually start out with the profits they get from their own businesses, from the gains they get from the stock market, or from other sources of income.

Some people think that real estate investments are an easy way to make money. Some think that one can just sit back, relax, and watch the profits grow. On the contrary, real estate requires a lot of dedication, hard work, and patience. Real estate investments do not grow overnight; you need a lot of skill and dedication to make earn profits from a real estate investment.

Where to Get Real Estate Deals
Any property for sale that has land in it has a great potential to be a serious money maker. If you’re only starting out to invest in real estate, you would do well to consult with an experienced real estate broker or investor who can guide you through your first land purchases.

Books, magazines, and other print resources can help you greatly just in case you don’t know what you’re doing with your real estate investment. Like any investment, you shouldn’t put your hard-earned money on land that will not rake in good profits.

Keys to Success
The trick to making the most of real estate is to buy the best land at exactly the right place at exactly the right time. Remember that real estate purchases are relatively permanent. You should also consider how much you’re willing to spend. Land costs millions, and you don’t want to end up with a piece of real estate that doesn’t pay for itself very well.

This Too Shall Pass

moneyMy Comments: The daily grind of figuring out if you are going to make or lose money today can become tiresome. It’s the primary reason most of us turn the responsibility over to others. We tend to hope we made a good decision and leave it alone. It’s one reason I never subscribed to the Wall Street Journal; worring about what was happening today caused me to lose sight of the long term perspective, which is financial freedom, for my clients and for myself.

I really like the thoughts expressed weekly by Scott Minerd. Here are some more.

March 13, 2015 Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Partners

Behavioral finance reminds us that ignoring daily volatility roiling the market is wise. Instead, investors should focus on the positive, fundamental outlook for equities and fixed income.

At Guggenheim, a key tenet of our investment process draws on the Nobel Prize-winning work of behavioral finance pioneer Daniel Kahneman. In his most recent book, Thinking Fast and Slow, Kahneman admonishes investors that “closely following daily fluctuations is a losing proposition.” I often honor this principle by reminding individuals that they would be better off checking their portfolios much less frequently (Kahneman recommends once a quarter, for example).

In the spirit of this Nobel laureate’s foundational work, investors closely following the recent daily convulsions in the financial markets could be prone to overreaction. It never ceases to amaze me how a few days of sell-off in the stock market—or a modest back-up in rates, for that matter—can have everybody talking about bear markets. Looking beyond the myopic churn and burn, the important macro indicators remain positive, and nothing has occurred to fundamentally alter our positive outlook for equities or credit.

In U.S. interest rates, generally speaking, the pattern since 2009 has been for Treasury yields to decline, only for a sell-off to ensue before conditions stabilize and rates test their previous lows. This is the pattern I believe we are witnessing play out now. The yield on the 10-year Treasury note declined in January by more than 50 basis points before rebounding in February. Today, with quantitative easing underway in the euro zone, the risk is that U.S. 10-year rates are headed back lower. Despite the recent back-up, and the incessant chatter around the Federal Reserve’s “patience,” or lack thereof, the near-term risk to U.S. rates is likely to the downside. Fixed-income investors would be wise to stay fully invested given the current backdrop.

Meanwhile in the euro zone, central bankers commenced their commission to buy sovereign debt despite concerns over the fact that some bonds eligible for QE are trading at negative yields. If the program is successful, investors should see a weaker euro, improved growth, a sustained uptick in lending to the non-financial corporate and household sectors, and an increase in future inflation expectations. Early indications are that QE is working as the European Central Bank intends—bond yields are dropping and the euro continues to depreciate, which is stimulative to growth. In the United States, it’s very likely that we will see more demand for U.S. Treasury securities as a result of these record low rates in Europe, thus keeping a cap on U.S. rates.

In equities, instability in the U.S. market has caused the S&P 500 and the Dow Jones Industrial Average to lose the ground they gained thus far in 2015, but I believe this downward movement is just a momentary blip. Breadth remains strong. Seasonal factors are strong. The bottom line is that in the near term I see very little risk for stocks, and credit also remains a compelling proposition for investors. The recent turmoil is a quintessential call for the wisdom of behavioral finance and principled, long-term investing. To quote an old, sage scripture, “this too shall pass.”

Despite Recent Decline, Bull Market in Equities Should Remain Intact

Put into historical context, the recent move in U.S. equities appears normal. Since 1954, U.S. equities have rallied 12 out of 13 times in the 12-month period leading up to the first rate hike, with an average return of 18 percent. Despite a pickup in volatility recently, the underlying momentum for U.S. equities remains strong.

The Great Monetary Expansion

US economyMy Comments: Dozens of emails cross my desk daily, some promoting stuff that is clearly not relevant, many with a narrow focus that is largely self-serving, few of them truly informative. Those that come from Scott Minerd and Guggenheim Partners are usually worth paying attention to. They’re not too long, and they seem to have relevance for many of us. This is one of them.

March 05, 2015 by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Partners

While winter weather will likely distort first-quarter economic data, accommodative monetary policy around the world means the long-term outlook remains positive.

The European Central Bank will this month begin a program of full-scale quantitative easing to match what the central banks of Japan, the U.K., and the U.S. have been doing for some years now. The People’s Bank of China, by cutting its benchmark deposit and lending interest rates by 25 basis points last Saturday, provided further evidence—if any was needed—that the global economy will remain flush with liquidity for some time to come. The takeaway from this is that the great global monetary expansion is far from over and the outlook for stocks remains positive.

With regard to economic data here in the United States, we are potentially headed toward a period marred by winter distortions. This is nothing new. In the early months of 2014, key economic data points such as housing, retail sales, and even employment were negatively impacted by an extended winter cold snap. When the economy shrank by 2.1 percent in the first quarter of 2014, investors debated the fundamentals of the American economy. Of course, the economic soft patch of early 2014 proved temporary and the economy quickly regained momentum upon the arrival of the spring thaw. If similar factors are now at play, economic activity may be temporarily delayed, but not canceled.

If we do begin to witness a similar softening in economic data over the coming weeks, debate around the fundamentals of the U.S. economy will likely start afresh. Investors may even begin to question the Fed’s appetite for raising rates. However, I believe the underlying economy remains exceptionally strong and investors should not be panicked by seasonal setbacks. Indeed, considering the strength of the U.S. economy and the wave of liquidity emanating from various central banks around the world, the general investment environment should remain attractive.