Man Plans, and God Laughs.

Der mentsh trakht un got lakht.  — Yiddish proverb

Winston Churchill believed that he had limited time. His father, Lord Randolph Churchill, had died just shy of his 46th birthday. Sir Winston lived into his 91st year, smoking cigars and drinking multiple glasses of whisky and soda, champagne and wine every day. Similarly, my father lived into his 91st year after having smoked for about 65 of those years. His sister, my beloved Aunt, died at the age of 61 from emphysema, never having smoked in her life. You just do not know what cards you’ve been dealt until the dealer turns them over. How do you handle the uncertainty? Plan, while making an effort to live now.

People are, on average, living longer. It can be a blessing, but it is a risk too. Coping with it may require changes in your savings and spending rates, your investment policy, what you insure against as you age and the habits that affect your health. So it makes sense to plan and to adapt. We can talk about those things if you would like. Feel free to get in touch; it’s what I do, but right here, right now, I would like to talk about embracing the things you would like to do while you are able to do them.

While it makes sense to plan as if your outcome is going to be similar to Sir Winston’s or my father’s, hedge by living life to the fullest in case you don’t have their genes or their luck. You probably don’t want to emulate their habits, but total risk aversion in your personal life may not be all that fulfilling either. I’m not opposed to risk; I took up mountain biking in my fifties and I still ski the steepest bumpiest runs that I can. And, at the extreme, I get Grandpa’s take on snorting heroin in Little Miss Sunshine, though copying him would be a bridge too far…at least for me. Continue reading

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Does/Should the Fed Care About the Stock Market?

Once upon a time, in another millennium, I worked at the Federal Reserve Bank of New York. It was during the reign of Chairman Volcker, first of his name. One thing I did was prepare statistical packages for the officers to use in the run-up to the FOMC meeting. The tables and charts covered inflation measures, the non-financial economy, interest rates and exchange rates.  Perhaps it was a simpler time or just a different time, but the stock market was barely, if ever, mentioned during my tenure. From the reign of Maestro Greenspan down through the present day, it has become an article of faith among stock market commentators that the Fed reacts to the equity market. Is this true? Should it be true?

The Fed’s objectives were established by Congress in The Federal Reserve Act in 1977. They are maximum employment, stable prices, and moderate long-term interest rates. This is called the “Dual Mandate”. It focuses on the real (non-financial) economy.

FedMandate

Source: Federal Reserve Bank of Chicago as of 6/12/19

  • Stable prices has been defined as a core inflation rate of around 2%. Inflation means changes in the overall price level of goods and services. Asset price inflation, or the perceived overvaluation of financial markets, is not a policy target.
  • Maximum employment is defined as getting to an unemployment rate that will not cause inflation to accelerate. Unemployment, beyond that amount, results from the economy running below its capacity. The current unemployment rate, despite being below the Fed’s estimate of the appropriate rate, is not a cause for concern. Inflation is below its target too.
  • Moderate long-term interest rates get no attention as a policy target. Perhaps because they should result if the first two goals are fulfilled.

Note that the stock market doesn’t get a mention, not even a footnote. Continue reading

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Collecting Is Not Investing

When I was 17, on the cusp of driving age, I had dinner at a friend’s house. I remember this particular dinner because of the question his dad asked me. This friend’s family was wealthier than most of those I knew. They lived in a large house. The father was head of a family business. Dinner was cooked and served by a domestic, pretty swanky for our neighborhood. The dad, who had a high opinion of his business acumen, asked me if I had the money to buy the car of our choice, any car, what would it be?

I said that I would buy a Ferrari. He countered by saying that he would buy a Rolls Royce, because if you could buy any car you wanted such a high priced vehicle should be looked upon as an investment. He was certain that a Rolls would be the better investment.  I picked the Ferrari because it was cool, much cooler than a fusty Rolls ex, perhaps, John Lennon’s.

LennonPhantomVI

Continue reading

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Procrastination Has Its Price

April is the cruelest month, keeping me inside doing taxes while I stare jealously at my friends’ Strava feeds detailing their adventures and the miles they’ve ridden. April is also the month that many inflict cruelty upon their future selves by funding their IRAs a full fifteen and a half months later than they could have.

Exhibit one, a text from someone I advise:

IRAtext

This is typical. Many fund their IRAs at the last minute. You don’t give it a lot of thought until it’s almost (or in the case above) too late. So, being curious about what might be lost by funding at the last minute, I decided to figure it out. Continue reading

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Jeopardy and Understanding Your Goals

On April 9, 2019 James Holzhauer broke the figurative bank on Jeopardy by winning $110,914 in one day. The previous one day record was $77,000. James did it by going after high value clues first, by seeking out the Daily Doubles, by betting heavily when he found them and by not guessing at clues he didn’t know. By executing this strategy flawlessly James froze out his opponents with a commanding lead before Final Jeopardy.

The next night Laura found herself in a position to challenge James. She hit upon the last Daily Double, giving her the chance to prevent a runaway and to position herself to potentially take the lead. She did not use the opportunity properly. Laura either didn’t fully understand her goal or the risk she faced.   Below are the contestants’ scores and the points remaining on the board at that juncture:

JeopardyScore041019 Continue reading

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Finance Is a Language

He walked quietly into the lecture room, tall, thin and pale. His suit hung loosely off his frame. He spoke softly: “This is 15.439, Problems in Finance. There is a list of 50 problems for this course. If we do all the problems, we will average 2.27 problems per class. The materials are in Graphic Arts. I see no reason why we shouldn’t begin. Problem one, Richard Gluck.”

Summer break had just ended. It was the first day of class. I hadn’t looked at the question or done the reading, much less bought the two foot high stack of articles from Graphic Arts. And this was Fischer freaking Black, co-creator of the Black-Scholes model, who had just picked me out of the sixty five or so people in that room to answer the first question in his class.

I scanned the question, something about the Capital Asset Pricing Model. One detail that sticks was a sub-question asking whether interest rates could go negative.* I answered as best I could. My classmate Steve, sitting next to me, raised his hand and backed me up. (I’m grateful to this day.) The arguments raged back and forth. I was losing. Fischer called for a vote. Nine for. He didn’t bother counting the nos. He just wrote “lots” on the board. Fischer allowed for a bit more debate. Then he summed up the problem and gave his view. Finally, he crossed off the 9, putting a 10 in its place. I’ve never been so relieved in my life. Continue reading

Posted in Asset Allocation, Bonds, Economics, Finance, Investing | 2 Comments

Hitting ‘Em Where They Ain’t

 “Keep your eye on the ball and hit ‘em where they ain’t” 

                                                                                         — Wee Willie Keeler

It was at an “ideas” dinner that I was introduced to Mike. Someone from the host firm grabbed me and said: “You should meet Mike, he’s doing the same thing you are”. That thing was building a track record in global bond investing as a precursor to creating a business in the asset class. What I remember from our conversation was how Mike framed the problem. Our common yardstick, the FTSE World Government Bond Index, was dominated by three markets: the US, Japan and Germany. Mike thought that getting those three markets right was the key to his performance. I listened, nodded politely, but walked away feeling that I just did not agree with his view of the problem. I preferred to seek opportunities in niche markets, misperceived situations and mispriced securities.

Consistently timing large bond markets is nearly impossible. Most market commentators have been calling for higher rates every year for the last decade. Their batting average has been a lot lower than Wee Willie’s. Willie’s lifetime average of .341 places him 14th on the all time list. Pretty good for a guy who made a living shooting the gaps, bunting and dinking balls over the infielders.

Indexing large efficient markets like the S&P 500 or the US government bond market has been an efficient way to access their returns. Paying premium prices in attempts to beat them has proven to be a waste. Investments that can add to your returns versus your strategic allocation are likely to be found in niches that do not scale, in securities that should be unaffected but fall in sympathy with those that should, or in situations where prices overcompensate for risk.

There are such niches. They are hard to find and evaluate. Worse, they are often buried in portfolios of filler. In Portfolio Management: Cooking With Hamburger Helper, I talked about the fact that equity portfolio managers typically have a handful of high conviction ideas and that those ideas have been proven to do well. The rest of their portfolios were Hamburger Helper. This holds in asset classes like global bonds too.

In the global bond world, the major markets are beta, standard exposures that can be accessed simply and cheaply. I spent my time on other things like buying unrated Iraq bonds post US invasion, because US involvement meant I was overcompensated at the price I paid. I bought Mexican T-bills during the Asia crisis; their yields had risen to 35% and I was pretty sure that Mexico wasn’t in Asia. I bought Israeli bonds and hedged them into US dollars with mispriced shekel currency forwards for a significant, yet low risk, yield boost. All of these things involved mispricing, misperception or niche markets. All were buried in my larger portfolio; they helped performance at the margin, but didn’t dominate. I had to consider overall portfolio risk. My investors did fine, but they paid my employer for a large ribeye while receiving a just a taste.

In my opinion, the way to square this circle is to maintain a strategic allocation in low cost strategies while reserving a portion of your portfolio, if you’re inclined, for strategies or individual investments that have the potential to add excess value.  Some managers can provide such strategies, but don’t be fooled; they cannot offer them across a well diversified portfolio. Do not pay luxury tax for a buffet size helping of filler leavened with an amuse bouche portion of investments with the potential to add value.

 

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Portfolio Management: Cooking With Hamburger Helper

“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
― John Maynard Keynes, The General Theory of Employment, Interest, and Money

Betty Crocker introduced Hamburger Helper in 1971. You took chopped meat and added it to the eponymous mixture of macaroni* and spices. In essence, you took the good stuff, the ground round, and added filler to stretch out the meal. Much of active management works the same way.

170px-ProdPack-Hamburger-Helper-CheeseMac-Small Continue reading

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Missing the Forest for the Trees

There is a tendency among market commentators to seize upon a data point and declare that hellfire and brimstone are about to come raining down. They blow things out of proportion. They see fire when they should be on the lookout for ice. A recent example is auto loan delinquencies. This looks bad:

Auto90+

Here’s a typical reaction, by which I mean, one completely lacking in perspective:

  • The number of auto loans at least 90 days late exceeded 7 million at the end of 2019 hitting the highest level in decades.

An old boss of mine would have told them to stop hyperventilating.

Of course auto loan delinquencies are growing and hitting the highest number in decades. Population grows. Loans grow. Delinquencies grow. We need some context here. Continue reading

Posted in Consumer Credit, Credit | Tagged , | 1 Comment

Heads Up, I’m Now “The Market Cyclist”

I am now The Market Cyclist.  This blog will continue to feature posts on markets and investing. Afterall, Market is in the title (and markets do have cycles). I anticipate adding personal finance related content and other, non-finance related, content. The change comes because my role has expanded beyond investing. As an advisor, I help people in many aspects of their financial lives.

Like anyone who moves I’ll want you to have my new address. It is:  themarketcyclist.com The old URL,  globalinvestmentstrategy.wordpress.com,  will redirect to the new one, so no worries there.

I would like to thank everyone who has followed me or visited this blog over the last several years. I hope you come along for the ride.

FarmersDaughterStart

Waiting for the start of The Farmer’s Daughter Gravel Grinder  in 2017.

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