Tactical investing news, views and resources for financial advisors
In Friday’s On My Radar, Steve links to a great interview of David Swensen, Yale’s CIO, by former Goldman co-chairman and former Treasury Secretary, Robert Rubin.
Take a few minutes and watch the interview. It’s worth it. Add Swensen to the list of famed investors predicting low single-digit forward returns. He shares some sage advice on portfolio management and diversification.
Click the photo for the full interview.
In Friday’s On My Radar, Steve Blumenthal wrote, “Last Monday, the VIX broke below 10 to close at 9.77, the lowest level in more than a decade. There are only three other days the index has closed at lower levels, all of them in December 1993. Investors are complacent to risk. They shouldn’t be.”
Investment consulting firm 720Global also recently wrote about market volatility in The Unseen, “Volatility: A Misleading Measure of Risk.”
As investors, we are negligent if we follow the Fed’s lead into this complacent stupor. By prodding economic growth with unproductive debt and reigniting asset bubbles, the central banks have simply done more of what created the spasms of 2008 in the first place. Despite the markets calm façade and historically low perception of risk, the vast chasm that lies between perceived risk and reality is troublesome.
READ MOREI personally believe that recessions can be forecast in advance. While no indicator is perfect, there are a few processes that have had a high correct signal rate in the past.
The reason that getting in front of recession is important is that it is during recessions that all the bad corrections tend to happen. Bad as in -40% bad.
The other problem with recessions is that they are only known in hindsight. It takes two quarters of negative GDP growth for the chief recession czars at the National Bureau of Economic Research to tell us when the recession actually started.
Following are three of my favorite leading “recession watch” indicator charts:
Here is how you read this chart:
Here is how you read the chart:
Here is how you read the chart:
Conclusion: Low current risk of a U.S. recession. Low current risk of a global recession.
U.S. stocks have worked well since the 2008/09 financial crisis. Modern Portfolio Theory – broad asset class diversification has not. But I didn’t know it was this challenging. I was somewhat surprised to see this from Bloomberg:
Endowments were hampered by investments in non-U.S. equities, which declined 7.8 percent, energy and natural resources, which lost 7.5 percent, and commodities and managed futures, which were down 7.7 percent.
Wealthier schools’ performance was dragged down by their larger allocations to riskier alternatives such as hedge funds. Hedge funds were among the worst performers for endowments of all sizes, with a 4.0 percent loss.
Endowments with more than $1 billion declined 1.9 percent, the same as the average. The blue line tracks the performance. Reflected are negative returns for 2016 and negative overall returns from 2007 – 2016:
More from Bloomberg: Endowments were hampered by investments in non-U.S. equities, which declined 7.8 percent, energy and natural resources, which lost 7.5 percent, and commodities and managed futures, which were down 7.7 percent.
It causes one to think – who needs diversification anymore? We likely need it most when the risk feels the least (like today) and need it least when the risk feels the most (like early 2000 and 2008/09).
Things just don’t smell right to me. It feels like it is 1999 all over again. This time we are witnessing a massive shift into low-fee passive (non-managed) index products. Active money managers are taking it on the chin.
However, like all that money that raced to technology funds at the market peak in the late 1990’s. The -75% tech wreck followed. That same bad behavioral trend is alive and well today. Stay risk minded. It took 15 years and a 300% recovery gain to overcome that loss and get back to even. Just saying…
Monitoring inflation is critical since turning points in inflation often determine turning points in the financial markets.
Source: Ned Davis Research (includes disclosure)
Rising inflation is bad for bond investors and generally bad for stocks but is bonds I worry about most today.
I hate making predictions.
I got the tech wreck and sub-prime right, but was far too early on those predictions. Importantly, the predictions below could most certainly be wrong. We live in a highly complex world. We can measure instability, we can score up risk but we can’t precisely know timing.The clear risk to me today is in the bond market.
Naturally, because there’s a presidential election this year, every news cycle is very noisy. It’s critical, however, that we maintain our focus on monitoring and assessing important financial news and managing potential risk. Such is the case regarding the financial condition of Deutsche Bank (DB). DB is one of the largest financial institutions on the planet. And, right now, it may be one of today’s great systemic risks. Think Bear Stearns, Lehman Brothers…
Due to super-sized leverage (like gigantic beer steins at Oktoberfest) and significant counterparty risk, a stumble at DB will ripple through the world’s financial system and would cause great harm. Read more in this week’s On My Radar.
READ MOREWhen you borrow from tomorrow to spend today, that leveraged spending is good for growth. At some point, you reach an end to just how much debt you can take on. Reinhart and Rogoff suggest that threshold, based on hundreds of years of study, is 90% debt-to-GDP. At some point, you cross a line. Take a look at the chart below.
I believe we are in a low growth, deflationary-pressured world until we solve and reorganize the debt mess. A global debt jubilee? We have a serious problem to solve and there is little motivation at this point to get started. The markets may just force that hand.
READ MORE
Michael F. Sciortino, Sr. Executive Vice President, Managing Director, Head of Distribution, CMG
“I never worry about action, but only about inaction.” – Winston Churchill
Yes, inaction is the greatest risk of all. What might this be costing your clients financially and emotionally to postpone action on implementing a plan for their long term financial security? Early on in my career I had a sales manager who used to say, “There’s never a wrong time to do the right thing. Believing anything else is a risk.” Moving forward toward the achievement of goals requires change, perceived by some as risk. Sure change can be disruptive. You have to change anyway.
This desire to change requires a disciplined commitment and determination to follow through while resisting the temptation to return to old outdated and ineffective strategies. As advisors, we have to ask ourselves, will my client be better off 10 years from now taking action or not taking action? Many fortunes have been amassed over the long term by taking smart calculated risks.
Michael Hee
Managing Director, Investment Research
CMG
In my previous post we discussed “What is Risk.” As a follow-up, we will begin to explore how to measure risk. When considering investment options, analyzing performance statistics without consideration of risk does not provide a view of the complete picture.
One of the most common measurements of risk is standard deviation, which statistically measures how observations are dispersed around a central tendency. From an investment perspective, standard deviation measures how performance may be dispersed about an expected return.
For example, from January 1, 2007 through December 31, 2013, the annualized return of the S&P 500 TR Index was +6.13%. As a comparison, the return of the Barclays Aggregate Bond TR Index (Agg Bond) was +4.91%. However, the standard deviation of the S&P 500 Index was 16.91% compared to 3.44% for the Agg Bond. From an average return perspective, not much difference, however the potential dispersion is significant.