Hedge fund manager Seth Klarman is well-respected among professional investors for his great record and solid insights about the markets and investing. He doesn’t do many public appearance, because he doesn’t need to. This web site recently obtained Klarman’s current letter to his investors and summarized is in an article. It’s good reading for any investor, full of insights and entertaining comments.
This lack of understanding is a concern given that the Fed is taking the economy into uncharted territory with unprecedented stimulus. “As experienced travelers who watch the markets and the Fed with considerable skepticism (and occasional amusement), we can assure you that the Fed’s itinerary is bound to be exceptional, each stop more exciting than the one before,” Seth Klarman wrote, sounding a common theme among professional market watchers. “Weather can suddenly turn foul, the navigation faulty, and the deckhands hard to understand. In short, the Fed captain and crew are proficient in theory but lack real world experience. This is an adventure into unexplored terrain, to parts unknown; the Fed has no map, because no one has ever been here before. Most such journeys end badly.”
While the mainstream media is loaded with flattering articles of the Fed’s brilliance in quantitative easing and its stimulus program, the real beneficiaries of such a policy are the largest banks. Here Seth Klarman notes they have placed the economy at great risk without achieving much reward. “Before 2009, the Fed had never bought a single mortgage bond in its nearly 100-year history,” Seth Klarman writes of the key component of the Fed’s policy that took risky assets off the bank’s balance sheets. “By 2013, the Fed was by far the largest holder of those bonds, holding over $4 trillion and counting. For that hefty sum, GDP was apparently raised as little as 25 basis points in the aggregate. In other words, the policy has been a near-total failure. Bernanke is left arguing that some action was better than none. QE in effect, had become Wall Street’s new ‘too big to fail’ policy.”
It’s always worth listening to Howard Marks of Oaktree Capital. Most investors don’t know about him, because he manages bond funds for institutional investors, not mutual funds. He started doing some media appearance in the last year after deciding to take his company public. Take a look at this interview done in English for a German web site. Marks gives some good tips on investment strategy and process and his current view of the markets.
Let’s think about a pendulum: It swings from too rich to too cheap, but it never swings halfway and stops. And it never swings halfway and goes back to where it came from. As stocks do better, more people jump on board. From 1960 to the late nineties everybody thought that owning stocks was the way to get rich with no risk. Stocks, which had always gone up 10% a year on average, went up 20% on average in the nineties. Then, from 2000 to 2012 with the burst of the dot-com bubble and later the financial crisis, people fell out of love with stocks, causing them to get too cheap. Now people are in the process of falling in love again. And every year that stocks do well wins a few more converts until eventually the last person jumps on board. And that’s the top of the upswing. But I don’t think that craze is back now. That’s a reason for optimism, because that means more affection can develop.
You might have heard about Bitcoin, the digital currency or crypto-currency. It’s made a splash in some circles and generated a lot of media attention. I don’t recommend it because, among other things, it doesn’t have the store of value components of a desirable currency. But it is associated with a lot of interesting stories. One of the more interesting is this one from Newsweek.com profiling the man who apparently developed or invented Bitcoin. He says he hasn’t had anything to do with the currency for a while (though he is believed to own about $400 million worth) and doesn’t fit the profile of someone we’d expect to be involved in it.
Bitcoin is a currency that lives in the world of computer code and can be sent anywhere in the world without racking up bank or exchange fees, and is then stored on a cellphone or hard drive until used again. Because the currency resides in code, it can also be lost when a hard drive crashes, or stolen if someone else accesses the keys to the code.
“The whole reason geeks get excited about Bitcoin is that it is the most efficient way to do financial transactions,” says Bitcoin’s chief scientist, Gavin Andresen, 47. He acknowledges that Bitcoin’s ease of use can also lead to easy theft and that it is safest when stored in a safe-deposit box or on a hard drive that’s not connected to the Internet. “For anyone who’s tried to wire money overseas, you can see how much easier an international Bitcoin transaction is. It’s just as easy as sending an email.”
Even so, Bitcoin is vulnerable to massive theft, fraud and scandal, which has seen the price of Bitcoins whipsaw from more than $1,200 each last year to as little as $130 in late February.
Forbes annual billionaire list always includes some good biographies and profiles of the honorees. An interesting one this year is this profile of Alexander Vik. It’s not flattering to Vik. It basically accuses Vik of scamming his way to a billion dollar fortune by taking advantage of the great manias of the last few decades, including of course internet stocks and financial derivatives. It’s worth reading as a guide to conducting due diligence before placing your money in someone else’s care.
It’s a story that’s never fully been told. The secretive Vik hasn’t granted an interview about his business dealings in more than seven years and rebuffed several attempts to contact him for this story. But his 35-year track record reveals a lucky streak that borders on the miraculous. “Alex was a super risk taker, and sometimes these guys can worm out of things,” says Stephen Greenberg, a former general counsel at one of Vik’s insurance companies, who later clashed with his boss in court. “Everything he did was so complicated with so many companies. Trying to get to the bottom of anything would get people very frustrated.”
With a tendency to operate through offshore companies, Vik has bought and sold everything from insurance companies to penny stocks and even once tried to break up French media giant Vivendi. His biggest ventures and bets ultimately failed, yet Vik almost always seemed to come out on top, emerging unscathed and often richer, even as those who invested alongside him were burned.
One reason I’ve greatly reduced the time spent listening to the financial cable channels is that guests and hosts make a lot of statements that aren’t backed by or even are contradicted by data. Consider arguments about what influences stock prices. On any day you’ll find a range of people who say stock prices follow earnings, or interest rates, or GDP, or a range of other numbers. None of them are accurate, except over the very long term. Consider this excellent post. It compares all these and other data points to stock returns over different periods. Then, it offers some observations from the data, none of which you’re likely to hear in the financial media.
You can’t just blindly follow any single market or economic indicator and assume the future will follow the same path.
Yet knowing what has happened in the past can prepare you for future periods of over and underperformance in stocks and bonds.
The following table shows the average dividend yield, company earnings growth and performance of the S&P 500 by decade along with economic growth, inflation, average interest rates and the 10 year treasury returns
PIMCO’s leader has been increasingly gloomy and negative the last few years in his monthly essays. At least, it’s seemed that way to me. This month’s edition is a bit different. He still sees a range of problems out there and believes the Fed shouldn’t be keeping interest rates artificially low. Yet, he says that for the moment at least, these artificially low rates don’t mean we’re doomed to earn artificially low returns from all investment assets the next few years. It’s hard not to note that this change in tone occurs soon after his co-CIO, Mohammed El-Erian, left his role at PIMCO and has moved on.
It’s at this point where the metaphorical allusion and theoretical foundation of our concentric circles turn into strategy and potential alpha generation. If the center holds, if global central bankers can convince investors that their abnormal policies can recreate a semblance of the old normal economy, then risk assets at the outer edges of our circle will have higher future returns than otherwise. Presumably, the trickle-down wealth effect of appreciating assets will then lead to respectable growth rates and a reduction in unemployment worldwide. That of course is the presumption, the convincing of which will rely increasingly on what St. Louis Fed President James Bullard recently described as “ qualitative forward guidance” a shift from recent quantitative guidance that focused on unemployment rate thresholds that now are about to be breached. Not just in the U.S. but in the U.K., the new talk is centered on “quality,” not “quantity.” Will the “falcons” hear their master’s message?
PIMCO falcons are now turning and turning in the widening gyre with the following assumption: All financial assets are artificially priced if only because the policy rate at the center is artificially low. Historical models of fed funds and other global overnight yields suggest as much as a 2% artificially low yield, even when U.S. tapering is concluded. Importantly, however, these artificial pricings do not lead to the conclusion of current asset “mis”-pricings. As long as artificially low policy rates persist, then artificially high-priced risk assets are not necessarily mispriced. Low returning, yes, but mispriced? Not necessarily.
I’ve linked in the past to similar web pages in the past and referred to similar research in Retirement Watch. The video focuses on health and risks to your life and health. But the point applies to many other areas. The bottom line is that most people make decisions without looking at good data and they make assumptions that aren’t valid. Government officials do it, too, when making regulatory decisions. The video answers the questions: What’s the #1 killer of women? Kids? Americans overall?
One of the things that baffles me about people is how they completely misunderstand risk. Lots of my friends panic about things that have no real chance of killing them, but ignore the things that will. This can lead us to make irrational decisions, and sometimes irrational policy. What really will kill us? Watch and learn.
More Americans aren’t financially prepared for retirement. I’m sure that doesn’t come as surprising news to you. But it’s the conclusion from two reports that are updated annually. The Center for Retirement Research at Boston University publishes its National Retirement Risk Index, and the Employee Benefits Research Institute publishes its Retirement Readiness Rating. You can read a summary of both reports here.
The good news is none of that affects your status for retirement. The reports are based on projections and use data of average household wealth and similar factors. As always, I urge people to avoid averages, ballpark estimates, and rules of thumb. Focus on your own goals, income, and assets. You’ll probably find that you’re better off than the averages and the hypothetical families profiled in such studies.
Do the math: According to an EBRI survey conducted last year, 66% of workers have saved less than $50,000 for their retirement. And 28% have saved less than $1,000. Good luck with that.
The most alarming news, though, is in the fine print. Even these bleak numbers are based on the most rosy financial scenarios. EBRI assumed no changes in Social Security or Medicare. It also assumed wacky financial returns: It estimated people would earn about 8% above inflation each year on their stocks and about 2% above inflation on their bonds — net of fees!
Many people who want to control their weight seek low-fat or no-fat versions of traditional products. Of course, it doesn’t follow that you can eat as much nonfat food as you want, because it still has calories. Here’s a more sophisticated criticism of no-fat foods. A Harvard Professor’s study indicates that low-fat dairy foods don’t help to control weight and that the full fat versions are a better aid to weight control. It’s another example of how conventional wisdom and things that seem obvious might not be accurate. It’s also another validation of the thesis of Daniel Kahneman’s Thinking Fast, and Slow, that people’s instinct or quick decisions, the gut decisions, often aren’t the best decisions.
The idea that all fats are bad emerged in the 1950s and 1960s when saturated fat was linked to high cholesterol and increased heart disease risk, Willett said. When saturated fat is reduced in products or in people’s diets, it is often replaced with sugar or carbohydrates, negating any potential weight loss benefit.
Willett theorizes that full-fat dairy may help control weight because it promotes more of a feeling of satiety than low-fat. Another possibility is that the fatty acids in full-fat dairy may help with weight regulation.
The turmoil in Ukraine surprised many people over the last few weeks, but not everyone. George Friedman of Stratfor.com issued this article, adapted from his 2009 book, that forecast pretty much what’s happened in Ukraine. More importantly, he believes this is just the beginning. He thinks Russia believes that to be secure it must expand its borders to close to what they were for the old Soviet Union. That means it must take over or establish arrangements with several other countries, including parts of Germany. Don’t think Europe’s only problems are economic.
For most of the second half of the 20th century, the Soviet Union controlled Eurasia — from central Germany to the Pacific, as far south as the Caucasus and the Hindu Kush. When the Soviet Union collapsed, its western frontier moved east nearly 1,000 miles, from the West German border to the Russian border with Belarus. Russian power has now retreated farther east than it has been in centuries. During the Cold War it had moved farther west than ever before. In the coming decades, Russian power will settle somewhere between those two lines.
After the Soviet Union dissolved at the end of the 20th century, foreign powers moved in to take advantage of Russia’s economy, creating an era of chaos and poverty. Most significantly, Ukraine moved into an alignment with the United States and away from Russia — this was a breaking point in Russian history.
The Orange Revolution in Ukraine, from December 2004 to January 2005, was the moment when the post-Cold War world genuinely ended for Russia. The Russians saw the events in Ukraine as an attempt by the United States to draw Ukraine into NATO and thereby set the stage for Russian disintegration. Quite frankly, there was some truth to the Russian perception.
If the West had succeeded in dominating Ukraine, Russia would have become indefensible. The southern border with Belarus, as well as the southwestern frontier of Russia, would have been wide open.