This is a stock market blog about portfolio management,foreign stocks, exchange traded funds and the occasional musing about my firefighting experiences. The point here is to share process

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 Park


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 as being in long term interest rates. I don’t know when or if rates will go meaningfully higher but rates have been well below the modern normal range for many years and any sort of comeuppance will devastate anyone who is unprepared. There are many ways to get decent yield without taking interest rate risk.

I give a little weight to the equity risk that Montier discusses because it is easier for most investors to understand that equities have bear markets, we just had one ten years ago but it’s been 36 years since there was a true bond bear market, there have only been a few blips along the way and there will be investors who will not understand how much bonds can go down…if it ever happens.

Montier also offers the following;

A sensible portfolio today has a sizable amount of dry powder: T-bills, bonds, TIPS [Treasury inflation-protected securities]. You have to say: “Look, I know cash is giving me a lousy return, but it has an option value that comes in when there are dislocations in markets.”


This is a difficult concept for many investors, but there is tremendous value in cash and cash proxies in terms of opportunity and defensive properties. The push back on opportunity is being emotionally capable of buying when others are fearful. Even only doing it every so often will help a portfolio.

Finally, I’m not as down on indexing as Montier. The idea of indexing being investing without price discovery (a quote from Jesse Felder) rings mostly true but it can still work using the time horizon that Montier himself cites (30-40 years) even if a top is nigh. In reality, very few people truly invest passively, they use indexed products in an active strategy.

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 Seattle


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 more than our fixed monthly expenses including the mortgage on a house we moved into in 2012 that we’ve been paying extra on and should be paid off in four years.


We also bought the other house on our road earlier this year and have been renting it out on Airbnb with a lot of bookings (better lucky than good). It should be paid off when I am 64 and if we stick with it and continue average $1000-$1500, that plus our Social Security for monthly living would mean the portfolio could be for medical expenses and traveling.

The gist of the article was that SS benefits must be cut in 2034 to 77% of what people are now told they will get. For us that means a drop from $4000 starting in 2037 to $3080. That is clearly a big haircut, if that is what happens, but we have 20 years to plan for it. We all do, more if you’re younger.


Steve Mnuchin was quoted in Barron’s over the weekend as having said “this has been a great eight years for rich people in New York, in California, but for the average American, they haven’t seen wage increases.” Wages of course have stagnated at the macro level but anyone planning thoughtfully could have been living even a little below their means, saving at least enough to get a 401k match and also benefited from the 162% rise in the S&P 500 over the last eight years (per Google Finance), just like the wealthy people in California and New York. Yes there can always be unfortunate life circumstance that can get in the way of such a generalization.


There is a terrible lack of savings in the US, we all know this. I saw one version of this misery where something like 1/3 of the population doesn’t have $500 in their checking account. There’s a victim mentality embedded in how the country views this as a whole. I don’t know how this plays out (people hitting retirement age with no savings and a Social Security System that has to reduce benefits is the baseline), maybe something good happens but if the outcome is bad, I don’t want to be a victim and anyone else not wanting to be a victim needs to be ready for bad news from Social Security. If you’re prepared for a bad outcome and there is a good outcome, no harm no foul, you’re better off. Not so the other way.

Markets Continue To Melt (higher!)




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 value as it usually does (steepening tends to be better for value).


Barron’s cited good ole fashioned earnings as contributing to the melt up in US equities. They note that second quarter earnings are on pace to grow by 10% getting a boost from the decline in the US dollar. The idea of course is that companies that sell abroad benefit by selling products in a currency that is inflating against the greenback. A few years ago, earnings faced major headwinds as the dollar rallied. There always has been, and will be, a pendulum effect as the dollar is weak for a time (much of the previous decade), strong for a time (much of the current decade) and now maybe weak again for a time, at least this year.


Uruguay has legalized the sale of recreational marijuana through pharmacies under government supervision. Some media accounts are referring to this as an experiment on the part of the socially liberal country. All things cannabis is a burgeoning investment theme with companies listing on global markets, an ETF trading in Canada and increasing analyst coverage of the space. As we have written before about ESG, more and more advisory clients will become interested in the space both for reasons of personal use and any potential investment merits. We won’t weigh in on whether this becomes a profitable investment theme, but there is likely to be more companies and investment products targeted to the space and probably worthwhile for advisors to learn about even if only to tell clients not suitable for them in an informed manner.


ETF News


JP Morgan filed for several hedge fund replication strategies it will bring to market in the ETF wrapper. Recently AdvisorShares hosted a call with Doug Kass and Dennis Gartman and one interesting point made by Kass (although there many interesting points of course) is that hedge funds don’t hedge anymore, too many of them are long only. There are quite a few ETF and traditional mutual fund replicators tracking various strategies and while several are quite large (more than $1 billion in AUM) they seem as a group to struggle to gain mass. The long only comment from Kass captures the problem of mismatched expectation. A true hedge fund probably isn’t looking to gain 100% when the stock market is up 20% and more importantly, a true hedge fund probably isn’t looking to correlate too closely to the equity market.


Interesting Reads


Some GOT analysis (you’re on your own for spoilers); Game of Thrones season 7: The Hound’s redemption arc is turning him into an essential character;


Death is such an essential part of the Game of Thrones universe that it’s easy to become numb to it unless it happens to a favorite character or in particularly awesome fashion. But the Hound’s recognition that the poor father and daughter he abandoned to their certain deaths in season four deserved better, while a small concession, is one of the most dramatic perspective shifts the show has executed.



A good story about a great tennis player as Wimbledon Finalist Roger Federer Spends $13.5m To Open 81 Schools In Malawi;


With 15 programs running in Switzerland, Malawi, Botswana, Namibia, South Africa, Zambia and Zimbabwe already, The Roger Feder foundation has set the goal of changing the lives of one million children by 2018.



We are in Washington State this week to check out Rainier, Olympic and North Cascades National Parks, go to a couple of Red Sox games (in town to play the Mariners) and see some family. All the park-looking pictures above are from Mount Rainier; one of the entrance from the west, two from Skyline Trail and two from Comet Falls Trail. The dog is Pips. Long time readers know the story but my wife has worked in animal rescue for many years. Pips is a cattle dog and they can be difficult to adopt as was the case with Pips, actually impossible to adopt. He needs to be a working dog not a pet. Joellyn found Conservation Canines which does animal research (they track animal population by scat and use dogs to find the scat) through the University of Washington (actually located in Eatonville). We brought Pips up from Prescott in 2011 and he immediately became their star. When we visited on Friday, one of the workers actually said that he’s created a lot of awareness for the organization (he’s been on multiple magazine/newspaper covers), he’s really done a lot for them. Like many cattle dogs, he has bonded to just one person, the director of the organization, but when they brought him out to us to say hello he got very excited, he clearly recognized us and that surprised everyone. It did become overwhelming for him, he just laid down and started working that bone in the picture and that was about it but seeing him again was awesome.


Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg,, Reuters, Barrons,,, Bespoke Investment Group, CME Group, Metro UK, VOX