The problems exchange-traded funds had last Monday, August 24, still haven’t received enough attention. The Wall Street Journal had a few good pieces on the problems, but I didn’t see much other coverage. This brief piece documents the extreme discrepancies between the market prices of a number of ETFs and the values of the assets they owned. While this is supposed to happen with closed-end funds, it wasn’t supposed to happen with ETFs.
There’s no other way around it — on Monday morning, a large portion of the U.S. ETF market experienced a structural crash. How else would you categorize it when an ETF like the S&P 500 equal-weighted “RSP” fell 43% on decent volume and took over 30 minutes to recover? This ETF tracks the 500 stocks in the S&P 500 on an equal-weighted basis instead of on a cap-weighted basis, and its underlying index was down well under 10% at its lows on Monday morning. Other U.S.-index tracking ETFs fell 30%+ as well. The S&P Smallcap 600 “IJR” fell 30% at its lows, while the Smallcap 600 Growth “IJT” fell 34%. Even the Nasdaq 100 ETF “QQQ” was down 17.25% at one point, while its underlying index was down just 9% at its lows.
A group of economists surveyed lawyers on their political views and found that they are much more liberal than the population in general. More interesting, is that the economists gathered a lot of information about the lawyers in addition to political views. That enabled them to divide the lawyers into different groups and analyze the political leanings of these groups. Here’s a summary with a link to the full paper.
We learn also that female attorneys are considerably more liberal than male attorneys, but the number of years of work predicts a conservative pull. Being a law firm partner also predicts views which are more conservative than average. If you consider “Big Law” attorneys, while they are overall to the Left, they are more conservative on average than the cities they live in, such as NYC or Los Angeles. Lawyers in Washington, D.C. are especially left-leaning.
Here’s an argument for not traveling to see all the places most people go to see. Learning from his father, the author argues that you should only travel to and visit places you really want to see and do the things you want to do.
A lot of travel can be about pretending. I should know – for years, I have been pretending to enjoy monuments in various countries. I have spent perfectly sunny mornings in museums that I did not care for and I have sat in cute trolley cars and I have thrown coins into wishing wells. I have tried hard to enjoy walking tours. There are good arguments for doing new things, but having made them all to myself, I am now beginning to see the case for doing only the things you are curious about. As I grow older, I hope to become more like my father, who caused much amusement by firmly declining a ride by the White House when we went to Washington DC to visit my in-laws. “It’s the White House,” my mother-in-law said to me. “Anyone would want to go.”
Some analysts are pointing out that back in 2009 when China led the world with a large, bold stimulus plan, that they warned us back then. They said that China was stimulating artificial growth, generating a lot of debt, and that at some point the chickens would come home to roost. They’re saying China might be in the same position the U.S. was in 2007 with too much debt, some assets in bubble territory, and not a lot of options for dealing with it. Here’s one example and here’s another example.
In the meantime, the consumption sector in China seems to be faring poorly. On the way up, investment rose at the expense of consumption, but on the way down they are falling together. Funny how things like that work out, and it does suggest that a consumption-oriented stimulus maybe can break the fall but it won’t restore prosperity.
It’s striking how little recent discussion I’ve seen of China’s much-heralded fiscal stimulus of 2008-2009.
In the past I’ve pointed to studies that show a lot of medical and health research shouldn’t be trusted because it can’t be duplicated by other researchers. We’re talking about peer-reviewed research published in recognized journals. Now, a paper argues that most financial research shouldn’t be relied on, especially regarding investments. There’s a summary here, which also gives a little background on statistical theory and practice. The point is that most researcher simply run a lot of computer tests to see what “works.” But it might not work in the real world. It might not even work if someone else tries to replicate the tests. Unlike in science, there aren’t many attempts by researchers to replicate the tests in already-published papers.
A large number of factor regressions like this are surely being done – an enormous number — and we don’t know how many. Some of them are sure to “work.” But most of those that work are accidents of randomness. How shall we know which ones? Harvey et al.’s approach – the multiple-testing approach – of simply raising the bar of significance won’t suffice because there might be thousands upon thousands of tests being done, and most of the results have been placed off the record. Harvey et al. mention that in the field of medicine attempts to replicate previously published research are frequently performed and often fail to confirm the previous results. But in the field of finance, attempts at replication are uncommon. Research in the field is a free-for-all without adequate rules or discipline.
Charlie Munger is Warren Buffett’s long-time partner who until the last few years didn’t receive nearly as much media attention as Buffett. In this post, his thoughts on mental models as ways of thinking and making decisions are collated and explained. He explains why you need models for thinking and analyzing things. Knowing facts and other things won’t help unless you have a model for processing the information.
Every human can assimilate only so much information through their senses and has only so much memory and processing power. Humans must make decisions constantly. Charlie Munger’s belief is that by learning and thinking using the big models which have been developed by the very best minds, you can become “worldly wise.” The good news is that you don’t need to have perfect understanding of all these models. What you will need is greater knowledge and understanding of the models than the other people you compete with in a given activity like investing.
Ben Hunt of Salient Partners regularly offers some of the more interesting views on investing and markets. In this post he explains what we need to learn from the recent market turmoil. You only need to change your investments when you decide that “the story is broken.” That means the forces that were driving the markets in one direction no longer are effective. In this post, he explains that one story that is broken is the China growth story. Investors need to get used to the idea that China isn’t always going to grow at a high rate. But Hunt also says there are a couple of other stories that haven’t been broken but that we need to watch closely.
The China growth story is now broken. To be clear, I am NOT saying that China’s economy is broken. On the contrary, I’m a China bull. What I’m saying is that what everyone believes that everyone believes about Chinese growth – the Common Knowledge about Chinese growth – has now shifted dramatically for the worse. What I’m also saying is that China-related stocks and markets are going to have a very hard time working until the investors who believed in the China growth story are replaced by investors who believe in a different China story, probably a China value story. That can take a long time and it can be a very painful transition, as any value investor who ever bought a mega-cap tech stock can attest. But it will happen, and that’s a very powerful – and ultimately positive – transformation. Ditto for Emerging Markets in general.
This post is a thought exercise but one worth reading. It shows what would happen to the S&P 500 in the future if the recent events were the beginning of repetitions of different historic stock market crashes. It shows that in most cases it makes sense to hold stocks through the crash and wait for the recovery. But there are a few repeat crashes that wouldn’t good to hold through, the ones that would mimic 1937 and the 1970s. It takes a long time to recover from them, especially in inflation-adjusted terms.
It’s amazing to think that just last Monday, August 17th, the S&P 500 closed at 2102. Today, it closed at 1868, falling 11.1% in 6 trading days. The shocking speed of the decline has injected a level of fear into markets not seen since the fall of 2011, when the Eurozone debt crisis was reaching its apex. Many traders have referenced 1987 as a paradigm for what might happen in a worst case scenario over the coming days and weeks, so I figured it would be interesting to explore where exactly a 1987 scenario would take us in terms of prices.
Housing is supposed to be a hedge against inflation, but it hasn’t been for a lot of people. While the prices of homes have slowly been increasing the last few years, they are still below their peak prices. More importantly, when adjusted for inflation they are well below peak prices. See details here.
Case-Shiller, CoreLogic and others report nominal house prices. As an example, if a house price was $200,000 in January 2000, the price would be close to $276,000 today adjusted for inflation (38%). That is why the second graph below is important – this shows ”real” prices (adjusted for inflation).
It has been almost ten years since the bubble peak. In the Case-Shiller release this morning, the National Index was reported as being 7.5% below the bubble peak. However, in real terms, the National index is still about 21% below the bubble peak.
It looks like there isn’t going to be a Social Security COLA in 2016. The upcoming CPI numbers will be used to determine the COLA, and so far they are negative. Neither SS benefits nor the maximum salary for contributions can be reduced if inflation is negative, so there won’t be any changes. That’s also a factor for the many people who have Medicare premiums deducted from their SS benefits. They won’t face premium increases, because the law doesn’t allow SS benefits to be increased due to Medicare premium increases. But it means those who face the Medicare premium surtax and who don’t have Medicare premiums deducted from SS benefits will have their Medicare premiums rise even more to make up for the many people who won’t pay higher premiums.