Saturday, September 30, 2017

Snapshots of Deep Thoughts

One of the few Wall Street firms I respect is McKinsey & Company, which is part think-tank and part strategic consultants.  They have recently published a new strategic study, identifying four "super" trends, which will shape our civilization over the long-term.  They expect these trends are so powerful that "we are in the midst of change 300 times more powerful and 10 times faster than that of the first industrial revolution."

The four super-trends are:

1.  Globalization -- (sorry, Mr. President!  The Principle of Comparative Advantage can only be slowed but not repealed.)
2.  Technology accelerators -- not technology per se but its accelerators -- like Amazon.
3.  Global age wave -- the average age is rising worldwide, and may be impacting productivity.
4.  Increasing Urbanization -- only 3.5% of America's land mass is in cities where almost half of us live -- 46 of the world's 200 cities will be in China by 2025

But, how does that impact the job of financial planners?
1.  Job obsolescence risk -- we must help clients explore and understand the vulnerabilities of their job security.
2.  Changes in investing strategies -- reconsider the holy 60/40 portfolio, Monte Carlo analysis, asset allocation, etc.
3.  A different old age -- our life expectancy has increased ten years since 1960, increasing Social Security obligations and the burden on our "nest eggs."
4.  Behavioral finance is more important -- the 24/7 onslaught of news makes clients too pessimistic - they need coaching as much as expertise.

The Perpetual Life of Alarmists

There has never been a day in my life that some intelligent person was not predicting the "sky is falling" -- the economy is crashing and you should buy gold.  For many years, I just assumed a given percentage of any society is allocated to quacks.  Now, I'm starting to see a common denominator between many of them, i.e., Ayn Rand.

Make no mistake:  I loved reading her books and think I have read everything she ever wrote.  I was taken by the need of each individual to stand up for his/her beliefs.  However, she also wrote extensively of how central government is never to be trusted, as you would expect from any Russian refugee like her.  Sinister black helicopters hover everywhere in her world.  I never accepted that vision, as it assumed the central government was more competent than anything I had ever experienced.  Apparently, many of her followers did accept that.

As a Russian refugee, her economic sympathies naturally lay with the Austrian School, that any government action merely clogs the gears of free enterprise.  So, if the central government is evil and is significantly involved in the economy, I guess it should not be surprising that Rand disciples always believe the sky really is falling.

The latest in a long line of doomsayers is Doug Casey, who describes himself as an anarcho-capitalist or someone who advocates extreme self-reliance, unfettered capitalism, and abolishment of almost the entire government.  He has long embraced gold and recently embraced bitcoin and other crypto-currencies, which are free from governmental manipulation.  He makes his living selling books about the coming collapse of western civilization, revealing a deep belief in both Austrian economics and in Ayn Rand.

He also has long advocated that Americans unleash themselves from America, by investing assets overseas and having multiple passports.  I have long distrusted anybody practicing in this area of finance.  Run -- from anybody recommending "asset protection trusts" from any island-nation!  There is something sleazy to selling passports in exotic places.  Last week, I was offered a valid passport from the island-nation of Saint Lucia for $145 thousand.

Oddly, his belief in "Black Swans" sounds more like a disciple of Keynesian economics (see Minsky's Moment) than Austrian economics.  But, he remains true to Rand's belief that the government of the greatest country in history exists for the sole purpose of repressing its people.

If you like Casey's alarmism, then buy his books.  If you believe Casey's alarmrism, especially in the foreseeable short-term future, then run for your life!

Friday, September 29, 2017

Salesmen & Sales Tools

Some years ago, a friend said to me:  "My stockbroker says I have a 92.4% probability of achieving my financial goals, so what can you do for me?  He was referring to a favorite sales tool of stockbrokers, i.e., a Monte Carlo Analysis.

I told him:  " Absolutely nothing, if you really believe that some canned program on a stockbroker's laptop can analyse all the unknowables of the worldwide stock markets over the next fifty years and do it accurately enough to give you that probability within a tenth of a percentage point."  We talked more, and he eventually became a client.

If you want to confuse a client, just throw a few graphs and a bunch of technical jargon at them.

One problem with Monte Carlo Analysis is that it assumes all outcomes have a normal distribution, which means it assumes an equal number of positive outcomes and of negative outcomes.  It also assumes that outcomes are random, ignoring the fact that the stock market tends to be random in the short run, cyclical in the mid-term, and trending in the long run.

Another problem with Monte Carlo Analysis is that it ignores the correlation between market events.  An example would be a general quickening of market gains when interest rates are lowered and the reverse when interest rates are raised.  There are numerous other correlations that are ignored.  The stockbroker-salesman would have you believe that none of those correlations affects the probability of achieving your financial goals.

The biggest problem is that Monte Carlo Analysis ignores the sequencing of outcomes.  If the stock market crashes early in your retirement, it is very likely your nest egg will never recover.  As the brilliant technical analyst Jim Otar explains it:  "It only takes a little push of small, adverse events to turn a "median" portfolio into an 'unlucky' one, however, it takes a whole lot of large, favorable events to turn a "median" portfolio into a 'lucky' one."

I love Monte Carlo, one of the world's greatest places, but I hate Monte Carlo Analysis.  You should too!

Thursday, September 28, 2017

Clash of Rights

Colin Kaepernick was a quarterback for the San Francisco 49ers football team last year when he decided to remain seated or "take a knee" during the national anthem.  I condemned that action by a wealthy player, whose only experience with uniforms was the sports-type.  However, at no point have I questioned his right to free speech  -- but is no place safe from serious subjects?  Is there no place I can go where that I can be free of every quack's opinion?  That's the purpose of the public square, whether newspapers, television, or dirt in front of the courthouse.  Do your demonstrating there!

You cannot demonstrate in the middle of the street for safety reasons.  Likewise, you cannot scream "fire" in a crowded theater for the same reason, but a demonstrator can follow you into a public restroom and stand outside the stall to convince you they are victimized.  That is their right, sorry about your privacy.  Some sports stadiums are publicly-owned and some are privately-owned.  All are subject to the right to free speech of anybody feeling aggrieved for any thing.  Even churches are subject to demonstrations.  What about those crazy Baptists from Kansas who demonstrate at the funerals of our fallen heroes?  Does their right to free speech override the wishes of the dead soldier's family.  Unfortunately, yes.  Does their right to free speech override my enjoyment -- at all times and in all places?

What is wrong with enjoying a simple sporting event, or must we wait until absolutely no American is feeling aggrieved or victimized . . . about anything?  Football is one of my guilty pleasures.  Is it wrong to enjoy it without a painful reminder that my country is racist?

I will defend to the death your right to free speech  . . . but not everywhere.  

Wednesday, September 27, 2017

The Duty to Discard

I have settled estates and administered many trusts, as well as doing the estate planning for maybe a thousand people, but I will now add a new rule to estate planning - the Duty to Discard.  It is indeed a duty of each person.

No parent wants their children to fight among themselves, much less over minor possessions.  However, some of the kids will become angry with other siblings over who gets things like Mom's favorite clock or Dad's favorite shotgun.  There are ways to prevent this.

Every possession is not a priceless treasure.

No parent wants the child's pain of losing a parent to be greater than necessary.  Yet, aren't you making it more difficult if your children have to decide whether to keep Dad's old military uniform or Mom's photo album of her trip to California . . . or whether to discard those items.  If kept, they will just remain in a storage unit for the life of the child, when a grandchild must decide what to keep or discard. 

Also, do you want to add guilt to the grief your children feel?  If discarding your old uniform suggests the child will think less often about you, does that mean they will never think about you without the uniform?  Of course not, every kid walks around with a thousand memories in their head.  They don't need the myriad trinkets collected over a lifetime to remember you.  They will never forget you, regardless of the trinkets.

Every possession is not a priceless heirloom.

When I do your estate planning, I will ask about your plan to discard unnecessary possessions.  It is my duty to ask.  It is your duty to make it easier for your kids, not tougher.  Losing a parent is hard enough without all these unnecessary complications!

Saturday, September 23, 2017

Who Needs A Financial Advisor Anyway?

I have a wonderful client who lives in a very high-end retirement facility.  During our last meeting, she told me about her many friends who don't have a financial advisor and try to manage their nest egg with certificates of deposit.  They are just trying to reduce their expenses, as any financial advisor would recommend they do.

They see investment management as the sole function of financial advisors.  Why incur the cost of a financial advisor if you're only investing in certificates of deposit?  Fair question, indeed!

A highly-respected industry leader of mutual funds is Vanguard, who has a well-deserved reputation for controlling costs.  They did a recent analysis of the value of financial advisors,  Of course, there is an investment management aspect to it, but that ignores the value brought by asset allocation, asset location, rebalancing, and the all-important behavioral coaching.  Vanguard's analysis showed a 3% average annual improvement in portfolio returns by using an advisor.  My client's friends would be heart-broken to learn they were short-changing their returns by so much each year.

I do take issue with two aspects of Vanguard's analysis.  First, it ignored the value of estate planning.  A seemingly little thing like making sure a person's nest egg is titled properly can add enormous value.  Second, it assumes the reduction of risk has no value -- really?

Nonetheless, the value of their analysis is that it documents that financial advisors do add value.

Friday, September 22, 2017

Amortizing the Cost

In 2009, the economy was plummeting into another economic depression.  At a time when we needed a government hand, Congress achieved perfect impotence and could do nothing.  The only remaining defense was the Fed, which rose to meet the challenge, thankfully.

Libertarians became unhinged at the new "activism" of the Fed.  Of course, nobody was more upset about this than the Fed itself.  How would you like to be the last line of defense against another depression?  The Fed certainly did not ask for that job.

The next few years saw both massive and imaginative measures taken by the Fed.  However, at some point, the Fed had to be "normalized."  In December of 2015, they raised short-term interest rates for the first time in years and then did it again without significant impact on the economy.  Yesterday, they said we should expect another increase in December of this year and several next year.  The stock market just yawned.

More importantly, they said they would begin "shrinking" their balance sheet next month by $10 billion per month, eventually rising to $50 billion.  This is significant.  During the fight against depression, the Fed became the source of funds for market liquidity and for deficit spending.  They did this by buying bonds (primarily government and mortgage bonds) and putting those bonds on their balance sheet -- to the tune of almost $3 TRILLION.  Now, selling bonds by the Fed reduces liquidity, because they are paid by money from the buyers, removing that money from circulation.  Shrinking the balance sheet. by selling off the bonds it owns, could be both tricky and dangerous.

If they sold that huge quantity of bonds suddenly, the bond market would surely crash, causing interest rates to spike.  By selling the bonds slowly, the bond market should be able to absorb it.  Wall Street must have agreed, because the stock market just yawned again.

Saving the economy is not unlike buying a house, which can be done relatively quickly but then take a very long time to pay off.  It has been eight years since the Fed started its recovery operation and is just now starting to amortize the cost.  Be patient . . . and hope that you live long enough to see the balance sheet get back to normal.

Thursday, September 21, 2017

Wrong Class

Recently, I found myself in a class that was primarily stockbrokers.  One of the speakers told the attendees that they had to be more than mere financial advisors.  They must also become financial coaches, he told them.

That jarred me slightly, thinking "doesn't everybody know that?"   Of course, I'm used to the world of Certified Financial Planner (R) professionals -- not stockbrokers.   In addition to our legal obligations to the client as a fiduciary , we are also trained in estate planning, retirement planning, education planning, and tax planning.  We are uniquely qualified to be a "financial coach" to our clients.  A stockbroker is a mere investment salesman.

I have no idea how many times I've given advice on buying new cars or selling old homes.  Estate planning should be a continuous process, which means a continuous flow of advice.  I've helped clients negotiate severance payments, as well as making gifts to children and grandchildren.  A growing area, unfortunately, is advising the children of clients on their education loans.  This year, I even advised a client on funding a university professorship.  That's what you call "financial coaching," not merely selling investments.

Sorry about you stockbrokers out there!  Maybe, I should be more careful in the classes I attend?

Wednesday, September 20, 2017

Not Accumulating

A well-trained investment advisor has been taught concepts like asset allocation, Modern Portfolio Theory, re-balancing, etc.  Younger advisors tend to view these tools are revealed secrets of the investment gods.  While older advisors respect these tools, especially the time-worn wisdom of the tools, some have become suspicious that these tools work better during the accumulation phase of a person's life than the "decumulation" phase or retired phase.

Investment research has focused on accumulating assets or building a nest egg for retirement, but do those same rules apply when a retiree begins consuming the nest egg for income?  For example, Modern Portfolio Theory shows that returns can be maximized and risk reduced, by investing the portfolio into many different asset classes.  But, why does it make sense to invest any of a retiree's nest egg into small cap growth stocks which never have dividend income for the retiree, instead of large cap value stocks, which is the "happy hunting ground" for dividends?

Another questionable rule-of-thumb is that retirees should be protected from the stock market, but what is their protection from inflation?  Assume a 60/40 portfolio that is 60% stocks and 40% bonds..  Wouldn't it make more sense to spend the bonds first, allowing the stocks to appreciate as long as possible?  I know, I know . . . but what if we had another 2008/9 crash?  Have you noticed the stock market has doubled since then?  Have you noticed that many, many stocks pay higher dividends than bonds?

Just because inflation is not a problem today, we cannot assume it never will be.  With increased life expectancy, shouldn't retirees have as much protection from inflation and that permanent loss of purchasing power it causes, as from the temporary loss of principle during a recession?

For some reason, research into decumulation is mostly from Canada, not the U.S.  Canadian friends tell me they are not as consumed with leaving money for their kids, compared to Americans.  They like to "help your kids with warm hands, not cold ones."

Rules during the accumulation phase of a person's lifetime are fairly well accepted.  That body of knowledge is the conventional wisdom of accumulation.  The conventional wisdom of decumulation is still being developed.  Stay tuned . . . .

Wednesday, September 13, 2017

Suspended Econimation

The past is prologue to the future . . . except when it isn't!

What goes up must come down . . . except when it doesn't!

It has been 14 months since the stock market had a 5% drop, compared to an average of 6-9 months.  It has been 20 months since it had a 10% correction, compared to an average of 12-14 months.  In other words, we are overdue.  So what?

While the economy and the stock market are two different things, they are connected, and the economic data continues to look fine, not great but fine.  Economic recessions are much easier to predict that stock market corrections.  Besides, normal run-of-the-mill recessions are nothing to be feared anyway.  That's when you "buy and hold."

Geopolitical problems can always depress the stock market, but they are usually transitory.  The destruction of the Korean peninsula would not permanently depress the market but would cause a temporary 10% correction or so.

Many of the rules-of-thumb that have helped us navigate the stock market for decades seem less helpful in this environment, and this is important -- we have been in an artificial economy since 2009, suspended from reality by the Fed.  That is not a complaint - the Fed saved us from a depression by their extraordinary efforts.  The "animal spirits" that drive a strong economy cannot surface while we are in "suspended econimation."  The Fed knows this and wants to increase interest rates and shrink its balance sheet.  They have repeatedly stated their intention to do both, only to delay their plans.  President Trump is likewise a dove on interest rates, preferring low rates and a weak dollar.  He will not be pushing the Fed to do what it needs to do and what it wants to do.

The longer we live in a state of suspended econimation, the more difficult the return to economic reality in the future.  In the meantime, investors should just enjoy the ride . . . while always keeping their finger near the SELL button.

Monday, September 11, 2017

Experience Matters!

Freakonomics author, Stephen Dubner, has an excellent podcast, coincidently named Freakomonics, that is quite enjoyable when I exercise.  A  recent podcast interviewed an economics professor from GWU in Washington.  She was a native of Italy, whose accent made it difficult for me to understand her.

She discussed how the economic behavior of different generations reflects the experience of each generation.  The older generation worked at one job most of their life, with job security, healthcare, and a reasonable pension.  Younger generations changed jobs frequently, experienced long periods without healthcare, were bombarded by financial drug-dealers offering addictive credit cards, and saddled with educational loans.  The older generation sees economic behavior in black & white terms of what's right & wrong.  They don't understand the economic behavior of younger generations, who likewise don't understand the older generations.  They listen to each other but don't understand.

I thought about the professor's accent.  I knew she must be speaking English, but I swear I understood little.  The language-variable was just too great.  The difference between generations is not an age-variable but an experience-variable.  I did not grow up in Italy and struggle to understand the language.  Likewise, I did not reach adulthood in the boom-times of post WWII and struggle to understand the black & white thinking of the Greatest Generation.

It is not the job of a financial advisor to think in black & white terms of good & bad.  It is never appropriate to be morally judgmental of the younger generations.  Our job is to help each individual client understand him or herself!

Saturday, September 9, 2017

Measuring Costs

Houston's economy is huge.  The GDP of its SMSA is $550 billion.  That is about 3% of our national GDP but accounts for a disproportionate 6.6% of our growth.  It is booming.  Population increased by 824 thousand since 2010.  That increase is bigger than the entire city of Charleston, South Carolina.

Things have changed.

The economic damage of Hurricane Harvey is staggering.  The damage to homes is estimated at $40 billion, with another $5 billion for autos.  As businesses are temporarily out-of-business, there is another $30 billion in costs.  The total could easily exceed $90 billion.

How to think about that loss?  It is estimated that only 15% of Harris County's 1.6 million homes had flood insurance, compared to 50% in New Orleans before Katrina.  In other words, Houston homeowners will have greater out-of-pocket losses.  You can expect many homeowners will simply walk away from homes with the most damage.  It only takes a few deserted, derelict homes in a neighborhood to hold down the market value of all homes in that neighborhood.  You can expect many other homeowners to raid their retirement plans for money to fix up their homes.  You can expect many retirements to be postponed, many vacations to be cancelled, many weddings to be minimized and many more life disappointments.  What are those costs?

Where will that $90 billion come from?  Mostly debt, by homeowners, by government agencies, even by insurance companies.  More debt requires more interest payments.  More interest payments mean less money for other things.  It means less money for hospitals, schools, and bullets.

Plus, $90 billion does not measure the emotional loss of a family's "safe place."  It does not measure the loss of old photo albums or grandma's old wedding dress or a little girl's favorite stuffed bunny.

Oh, did I mention that Florida is even bigger than Houston, and Irma is even bigger than Harvey?

Friday, September 8, 2017

Mourning Dinosaurs

Older people are usually surprised that the right to privacy was not in the Declaration of Independence nor the Bill of Rights -- but millennials don't care.

That "right" was an outgrowth of a 1958 Supreme Court decision, NAACP vs Alabama.  In that case, the state wanted the membership list of the NAACP, including home addresses.  Visions of men wearing white sheets on the front lawn immediately jump into the mind -- millennials don't care.  Just don't be racist, they say.

In a stream of embarrassing incidents, a major credit reporting agency has just announced the leak of sensitive, identifying information for 143 million individual Americans -- millennials don't care.  Just get a LifeLock subscription, they say.

Millennials believe that the old-fashioned longing for a relatively new right is silly, because everybody knows that "privacy is dead."  All the nostalgia for privacy is analogous to mourning the death of dinosaurs.  Just get over it, they say!

But, it is not dead -- the right to privacy continues to breathe weakly.  There is a website called DreamHost, which organized opposition to President Trump.  The Justice Department has filed suit for the names of all people who visited that website.  Would that chill political debate, if the government can identify people for simply reading a website?  How does that affect freedom of speech, or does it matter?  So far, millennials have not paid attention, but they should.

While I'm not old enough to remember dinosaurs, I am old enough to remember privacy and miss it terribly.  Millennials remember neither.

Sunday, September 3, 2017

Loser-Of-The-Week Award

So, there was a 26-year-old refugee from Bangladesh living outside London with his parents.  Problem #1 is that he is a 26-year-old man without a girlfriend and living with his parents.

On the morning of August 25th, he suddenly decides he will attack the guards at Windsor Castle, because they work for the Queen.
Problem #2 is that he never heard of the "5-P Rule" of Prior Planning Prevents Poor Performance.

Then, he uses his GPS to drive to Windsor Castle but instead went to a restaurant named Windsor Castle, before finally stumbling across Buckingham Castle - wrong castle.
Problem #3 is that he was an Uber driver.

He drives his car up to the gate and remains in the car while he tries to use a 4-foot-long sword to stab the guards.
Problem #4 is there is no room to wield such a long sword inside a car, instead of using his car as the weapon.

He is currently in custody.
Problem #5 is that he is now a burden on the taxpayers.

Saturday, September 2, 2017

Viva La Macron

France is such a wonderful country.  Unfortunately, their economy is not as wonderful.  Unemployment in the U.S. is only 4.4%.  Germany's unemployment is about the same, but unemployment in France is a staggering 9.5%.  GDP growth is slower in France than Greece right now.  What is retarding the economy of such a wonderful country?

One new statistic illustrates the problem.  The percentage of workers with "temporary" employment is 16.2%, compared to only 6% across the Channel in England.  In France, regular employees are treated like spoiled brats, who cannot be denied.  Who wants to hire workers like that?  Temporary workers bring far fewer problems.

Whereas most capitalistic countries believe "the business of business is business,: France seems to believe the business of business is the care & feeding of its employees.  There are about 150 thousand legal cases filed each year for "unlawful dismissal."  Regular employees are lifetime employees.  A common joke among French businessmen is that is far easier to divorce your wife than to fire your employee.

Labor unions have been strangling the economy for decades, further evidence that there is no good intention that cannot be corrupted.  Unions take to the streets in protest over every perceived slight and have run several French presidents out of office.

Four months ago, youthful Emmanuel Macron became president.  The level of optimism was palpable.  Since then, his public support has plummeted, as he has tried to equalize regular employees and temporary employees.  Unions are already threatening more crippling strikes, some starting next week.

What is he trying to do?  First, he wants to make it legal for small businesses to negotiate with local non-unionized workers, instead of "negotiating" with the national labor union.  How does a small shop negotiate with a national labor union?  Imagine not being able to hire local workers who come in and apply for jobs!  Second, he wants to put caps on the amount of court-ordered fines awarded during layoffs.  Apparently any caps are unreasonable.  Layoffs occur when businesses are struggling.  Punitive fines of unknown amounts only make it worse.

Even if Macron is successful in making these modest changes in France's labor laws, he will have barely begun, but I wish him well.  He is honestly trying to "Make France Great Again!"

In America, unions have done a great deal of good.  Let's keep it that way!

Happy Labor Day!

Friday, September 1, 2017

Out, Out . . . Damn Spot!

Let's see . . . personal income rose more that expected at 0.4% in July, and spending rose a healthy 0.3%.  Inflation rose only 0.1% in July, well below anything worrisome.  Estimates of GDP growth in the second quarter (Q2) was revised higher from 2.6% to a whopping 3%.  There has never been so many jobs available - 6,160,000.  Now, what are you so worried about??

Without tax reform, the economy will continue to sputter along just fine.  It would actually grow with tax reform.  Without infrastructure improvement, the economy will continue to sputter along in the short run but gradually slow in the long run.  Without Obamacare repair, the economy will suffer, as that healthcare program is permitted to fail.

But, it is so much fun to worry.  Shakespeare wrote in Macbeth about free-floating anxieties, as Lady Macbeth wandered around the palace rubbing her hands, muttering "out, damned spot," as she obsessed about a non-existent spot of blood on her hand.  Maybe, she was just a 21st century investor who was still suffering post-traumatic stress from the global financial crisis of 2008/9?