Still No Volatility

The weekly market update is posted and includes the following; Depending on your view, the jobs data has either been in a groove or in a rut. Unemployment clearly is low but wages (along with some other economic indicators) have not recovered like in previous recoveries. Stephanie Pomboy from Macro Mavens is particularly worried about wages as well as a rise in credit delinquencies. Consumers are certainly getting by but aren’t prospering. This is a similar story to what has been happening in other developed countries but strangely the data and demographics are worse but the yields are lower. The eurozone unemployment reported a 9.1% (best since 2009) but while the US ten year yields 2.26%, the German bund yields 0.46%, the French OAT yields 0.74%, Spain 1.48% and Italy 2.02%. Please click through to read the entire update. Neat lodge in Mount Rainier National Park From the Skyline Trail in Mount Rainier National Park with a spaceship hovering over it. On the Switchback Trail to Klahhane Ridge in Olympic National...

James Montier Is Still Bearish

James Montier from Grantham, Mayo van Otterloo was interviewed in Barron’s over the weekend. Montier seems to always be bearish, certainly almost always bearish. The obvious criticism of a perma bear is that they are wrong the vast majority of the time. I believe the utility to a smart perma bear is that they can articulate the prevailing bear base quite eloquently. There is always a bear case (there’s always a bull case) and taking the time to understand it can minimize the odds of getting blindsided. These days, Montier appears to be concerned about valuations and the heavy hand that central banks have played in the markets in recent years. He believes mean reversion is coming soon while his boss, Jeremy Grantham thinks it could take 20 years. He also unloads on passive investing saying that with valuations so high it isn’t investing it is speculating. When asked how investors should approach markets today Montier said; You build a robust portfolio that can survive lots of different outcomes—a world where Jeremy is right and it takes 20 years for mean reversion to happen, or one where I’m right and the markets revert considerably faster. This could mean anything from being very active to allocating across many asset classes (more than just equities and bonds) to a combo of both. I would also add avoiding, or at least being underweight, obviously risky parts of the market. Montier appears to think that applies to domestic equities, GMO favors emerging market equities with a smaller allocation to foreign developed and no domestic per the article. I view the obvious risk now...

VIX Below 9?

The weekly Market Update is posted and includes the following; The Barron’s Striking Price column made a sort of tail wagging the dog argument about VIX-related exchange traded products causing a distortion in the market. The concern is that a large single day spike in the VIX (more specifically the futures that the funds use) could cause a repositioning on the funds’ part that would cause an “acceleration event” that pushes prices down even more and volatility higher. We would never underestimate the market’s ability to panic and while the scenario is of course plausible, it is not obvious that something that has never happened before be so easily predicted by one random article. The next panic will likely be caused by something else. Please click through to read the entire update. Diablo Lake in North Cascades National Park The Seattle skyline from West Seattle Neat apartment building in...

There’s A Storm A Comin’

Bloomberg interviewed Alicia Munnell from the Boston College Center for Retirement Research. She of course has come to be a thought leader for what ails the Social Security system. Shockingly it boils down to three things; cutting benefits, raising the cap one way or another or some combo of both. I’ve framed it numerous times by saying that something will have to give. Included in there is what I will bluntly call nonsense about replacement rates as in how much of someone’s income Social Security is intended to replace. There was talk in the interview about replacement rate dropping from 36% to 27% over some long period of time. It’s nonsense for a long list of reasons including people making well above the cap won’t get anywhere near that sort of replacement rate, replacing X% of your income focuses on the wrong thing, income versus spending. Many people plan to have their mortgage paid off by the time they retire, someone who is retired is less likely to save for retirement. Another point missed by replacement rates is people who live below their means. Social Security wants people to know how much their benefit will be, they send it to us every year. What’s your benefit (and what’s your partner’s benefit if applicable)? I’ve disclosed before that my FRA is $2800 (today’s dollars) starting in 2033 (I would note I hope to still be working past that age but it might be difficult to attract clients when I am 80). If my wife takes her spousal benefit at 65 in 2037 she would get $1200. That adds up to...

Markets Continue To Melt (higher!)

Macro   The Bank of Japan (the central bank) left rates on hold at -0.1% and also revised its timetable for achieving 2% inflation to 2020. There is a quote that goes something like “inflation is the easiest thing in the world to create, except when you need it.” Before the financial crisis, the only concern was that of inflation. The crisis was a deflationary event that fortunately did not create a deflationary debt spiral but global GDP has not really gotten going, for developed countries anyway, and countries are struggling to get inflation to levels that would go with healthy growth. The Great Depression from almost 90 years ago cast a pall over the country for decades and that appears to be a possibility with the Financial Crisis. One difference (there are many) is that developed countries have demographics working against them, moreso Japan and Europe. If there is always a bull market somewhere, and we believe in that saying, finding it may become a little harder to do. Domestic equity markets mostly moved higher last week except for the Dow Jones Industrial Average which fell 0.27%. The S&P 500 gained 0.53%, the NASDAQ added 1.16% and the Russell 2000 was up 0.48%. The yield curve flattened some last week as the Ten Year US Treasury Yield fell to 2.23% as the previous week’s dovish sentiment from Janet Yellen was echoed by ECB president Mario Draghi. If you’ve been following this report lately you know that we watch the impact that the slope of the curve has on style and sure enough as the curve flattened growth outperformed...