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HURRICANES, ENERGY PRICES AND INFLATION

October 01, 2017
Summary Points:
  • The cost in lives and the physical destruction from hurricanes Harvey, Irma and Maria have made 2017 a year for the record books for the people of Texas, Florida and the Caribbean. Our deepest sympathies go out to everyone affected.
  • Beyond the direct human and physical losses, such disasters also have an impact on key markets like oil and gasoline. Given the importance of the energy sector to the economy, it is natural to speculate how this will all play out in terms of growth and inflation.
  • With property losses in the tens of billions of dollars, there will be a meaningful spike in construction activity in the affected areas. The big question is whether at today’s low unemployment rate enough labor resources can be marshalled to complete the recovery work quickly.
  • The recent spike of August CPI to .4%, the highest since January, has prompted some to forecast a general up trend in inflation. While the energy sector has been disrupted, recent price action is likely to be temporary and reversed over the next several months. When inflation accelerates from its generally benign state, it will be from an expanding economy and higher wages.

HOW DO ACTIVE MANAGERS ADD VALUE TO THE INVESTMENT PROCESS?

September 01, 2017
Summary Points:
  • The debate about active versus passive investing is often carried out on a superficial statistical level where the focus is on who has earned higher returns lately. A more fundamental question should be how it is possible for active managers to add value.
  • There are only three broad avenues to added value: 1) having superior information; 2) seasoned judgment and analyzing public information with better models or technology, and; 3) managing investments with lower costs.
  • A fourth element of trading success comes from taking advantage of other participants in the marketplace who either fall prey to emotional mistakes or are forced into trades because of liquidity concerns. This is again judgment in the form of relative trading skill, which may or may not be repeatable in all environments.
  • When evaluating whether an active manager has a good chance of outperforming in the future it is critical to find the sources of past added value. It may never be possible to conclusively separate skill versus luck, but by doing a deep dive into past attribution and not relying solely on return numbers, investors improve their odds of associating with managers who have the best chance of long-term success.

THE MYSTERY OF WAGES UNRAVELED

August 01, 2017
Summary Points:
  • There is a mystery as to why wages appear to be growing more slowly than past recoveries given that unemployment is so low. Part of the answer lies in the composition of the official measures. The reported statistic gives the growth in the total wage pool. As the mix of workers changes either because of the economic cycle or demographic events like the retirement of peak earning baby boomers, the calculated average ebbs and flows in sometimes unintuitive ways.
  • The official wage numbers offer some insights into the state of the economy, but they need to be considered in conjunction with other data points like total employment and the demographic composition of the labor force.
  • Today’s real wage growth at roughly 2.5% per year is often cited as a disappointing statistic, but when combined with a growing, younger labor force it provides reinforcement for the belief that our consumer-oriented economy is on a steady upward path.
  • Someday there will be the next recession and another bear market in stocks. We just don’t know when they will occur. There are pundits who have been calling for both on a regular basis since 2011, and they have been very wrong. Given the strong labor market and rising real wages, the Fed is probably wise to be raising policy interest rates and planning to shrink its balance sheet.

UNRAVELING THE VIX MYSTERY, PART 2

July 01, 2017
Summary Points:
  • VIX, defined and described in last month’s Offit Capital Commentary, continues to be at historically low levels, but with a large spread between spot and forward values.
  • There are multiple ways to express an opinion in the volatility market. Professionals and retail investors alike can access S&P 500 options, VIX futures and a wide assortment of exchange traded notes (ETNs) that allow one to go long or short volatility. Each of these is connected back to the stock market through a web of professional arbitrageurs.
  • Basic option time decay allows option writers to earn the time premium on average. This truism plus quieter than average markets has encouraged more and more money to come into the short volatility space. This has lowered the price of S&P 500 options and suppressed spot VIX. It has also increased the risk of a snap back should these positions all try to reverse at the same time.
  • Long periods of quiet markets do not in themselves forecast a sudden jump in market volatility. What they do, however, is cause investors to diminish or eliminate their fear of market reversals. Writing options or trying to profit by being short volatility futures or ETNs is analogous to picking up nickels and dimes in front of steamrollers. Investors should never forget that there are always steamrollers someplace on the street and the aggressive investor will likely meet one when volatility spikes.

UNRAVELING THE VIX MYSTERY, PART 1

June 01, 2017
Summary Points:
  • VIX is the most widely followed indicator of stock market volatility, being based on the prices paid for S&P 500 Index puts and calls traded at the Chicago Board Options Exchange (CBOE). When writers of options demand high premiums to sell, and buyers are willing to pay up, VIX reflects this by increasing. Conversely, cheaper options produce lower values of VIX. Last month saw spot VIX drop below 10 twice, the lowest levels observed in over 10 years.
  • VIX is not like most government statistics, which look backwards and capture events that have already happened. VIX is determined on a moment to moment basis by buyers and sellers of S&P 500 options, which can be highly variable.
  • Spot VIX has very little predictive power for the direction of stock market changes in the short run. Time and again, history shows that VIX reacts to market moves. It does not predict them.
  • Investors should recognize spot VIX on any given day is of limited utility in guiding their decisions. A better indicator is forward VIX, which reflects opinions about time horizons and portfolio insurance choices more relevant to most long-term investors.
  • Traders can and do regularly influence measured VIX, and such trades may be more reflective of fund flows than they are fundamental volatility in the stock market. Next month we shall explore more deeply how trading in volatility based futures, options and exchange traded products may be distorting spot VIX and creating systemic forces in the stock market.

EQUITY MARKET VALUATIONS: A DEEPER LOOK

May 01, 2017
Summary Points:
  • Market commentators have for some time looked at the P/E ratio of broad U.S. large cap stock indexes like the S&P 500 and suggested that today’s near-record levels represent a severely overvalued market and a risk of a major correction.
  • Market averages by definition consist of potentially divergent sectors. Most of the times the differences are small and evolve gradually. The shock to the energy sector that began in 2015 was neither small nor gradual and it may have warped our impressions of the market as a whole.
  • Excluding the 7% energy sector recently from the S&P 500 Index creates a less dramatic picture of the general market. Stock market valuations have risen in the last few years, but the average stock is likely not as expensive as the total index would make it appear.
  • Index distortions can also come from specific stocks. If Amazon, which has a trailing twelve months P/E ratio of 183 and a weight in the S&P 500 of 1.6%, had an “average” valuation, the P/E ratio of the entire index would be another .3 points lower. The lesson is that these numbers can move around a lot and nobody should obsess over where the recorded index is today versus historical values that may have very little comparability.

SHOULD EQUITY INVESTORS FEAR HIGHER INTEREST RATES?

April 01, 2017
Summary Points:
  • The Federal Reserve pursued a zero interest rate policy beginning immediately after the financial crisis in 2008 until December 2015, when it started inching up policy rates. Since then there have been three rate hikes, totaling 75 basis points, with the Fed guiding the market that it expects further hikes this year and next.
  • Traditional wisdom says that equity bull markets don’t die of old age but are usually killed off by an aggressive Federal Reserve raising policy interest rates. Since December 2015 the S&P 500 is up over 13%, running counter to that traditional thinking.
  • Given current low interest rates, modest private leverage and inflation, and healthy but not stretched labor and stock markets, the course of rate hikes over the next year or two may not be terribly restrictive to the economy, corporate earnings or stock prices.
  • It is in fact possible that these policy rate increases will help the consumer side of the economy as savers earn more interest income which then gets recycled as additional spending. This force is particularly important today with an increasing number of baby boomers retiring and depending on such income to support their consumption.
  • There are always many factors that stock market investors should watch carefully, but rising interest rates today doesn’t seem to be near the top of the worry list.

GOVERNMENT DEBT: THE FORGOTTEN TOPIC

March 01, 2017
Summary Points:
  • The U.S federal debt over the last 15 years has grown steadily to a level relative to GDP not seen since the end of World War II. Near-zero interest rates have hidden much of the potential pain of this mounting problem.
  • Mandated entitlement programs, including Social Security and Medicare, will explode spending obligations in the future as more of the baby boomer generation move into retirement. Currently there is no plan to pay for these added expenditures.
  • The Congressional Budget Office projects that the ratio of debt to GDP will rise rapidly over the next 30 years. With that increase the percentage of federal spending devoted to interest on that debt will grow from 6% today to over 20% in 2046. There will likely be problems long before then.
  • Debt crises typically deteriorate quickly. Markets sense the inability or unwillingness to pay. Credit ratings tumble. The cost of new borrowing skyrockets. It is far better to address the debt problem now than to wait for a future critical moment that could threaten the stability of the entire world’s economy.

TAX RATES AND TAX REVENUES REVISITED

February 01, 2017
Summary Points:
  • As the new administration takes office there is considerable discussion surrounding reshaping U.S. personal and corporate income taxes. This discussion invariably leads to speculation about how any new program will impact tax receipts and the federal deficit.
  • There is no simple relationship between tax rates and revenues collected. Tax rates change incentives to work or invest, but many other features of the tax code are at least as important in determining economic activity and total revenue.
  • Every time there is a discussion of revising the tax code someone trots out the Laffer Curve to support or attack the proposal. The Laffer Curve has been around for over 40 years because it is one of the great generalizations in economics. It lacks, however, enough specificity to be of much use in debating among various tax plan proposals.
  • Whatever ultimately arises as tax reform in the new administration will matter. Early stock market returns suggest considerable optimism that the changes will be supportive to income and investment. It remains to be seen whether what results is as consequential as the Reagan tax reform from 30 years ago or as insignificant as virtually all the changes since.

PAPER MONEY UNDER ATTACK

January 01, 2017
Summary Points:
  • Around the globe, governments are implementing plans to remove the largest denomination notes from general circulation. This is done with the stated objective to curtail corruption and illegal activity. A less public motive is for central banks to try to shrink the liabilities that outstanding currencies represent.
  • At one end of the spectrum such plans merely stop issuing new notes. At the other extreme the retired notes quickly lose their legal tender status. When the latter approach is used in places like India and Venezuela great hardship befalls the poorest segments of society who have few resources but rely heavily on cash for their daily transactions.
  • In the United States the $100 bill is the most widely circulated note by a wide margin, growing more than fourfold in 20 years. Some of this may be due to the grey economy and illegal activity. Many of these bills find their way abroad to meet the cash demands in countries with less reliable currencies.
  • Radical currency exchanges and proposals to move to a cashless society may have reasonable motivations, but they have a darker side as well. Such moves always impact the freedom and anonymity of every citizen. Criminals and terrorists may have to work a little harder to keep their activities secret, but they have the motivation to do so. It is everyone else that pays the cost.

LABOR MARKET METRICS POINT TO ECONOMIC STRENGTH

December 01, 2016
Summary Points:
  • Most discussions of the labor market focus on the unemployment rate. While useful in some dimensions, this statistic suffers from measurement challenges that can mask the true health of the economy. Other labor measures can help our perspective.
  • Workers tend to be the shock absorber for an economy’s bumpy ride. After a long, tough stretch coming out of the 2009 recession, key indicators are now showing strength. Higher voluntary quits show a dynamism that is critical for a robust economy. A bigger share of the economic pie going to labor is another strong positive sign in a consumption-driven economy like ours.
  • Elections are often referendums on the state of the economy. Incumbent parties typically suffer during recessions and prosper during good times. The presidential election this year doesn't fit that pattern, but may reflect nuances between workers who have gained from major advances in our increasingly information-based economy and those who have been left behind.
  • Recent trends in both voluntary quits and labor's share of GDP suggest a stronger economy than is often depicted in the popular press. The Federal Reserve governors know this data well. They give support to the notion that not only will policy rates be raised at this month's Federal Open Market Committee meeting, but that there is room for more raises in 2017.

INVESTING IN INFRASTRUCTURE

November 01, 2016
Summary Points:
  • Most Americans believe that our basic infrastructure is deficient and it is getting worse through time. Surveys by the American Society of Civil Engineers (ASCE) reinforce this.
  • As both presidential candidates have promised a massive ramp up in federal infrastructure spending, investors ask how they can position their portfolios to benefit. The answers are not obvious and are rooted in basic problems of how infrastructure is managed in this country and decision making challenges affecting how resources get spent.
  • A concept arising in political science and economics called the Agency Problem arises whenever one group makes decisions that affect the wellbeing of another group. When politicians control infrastructure decisions, those choices are more likely to be based on political expediency than economic efficiency. This can lead to underinvestment in critical, but less visible areas.
  • Big increases in federal infrastructure spending promised during the campaign may not become post-election reality. Even if they happen they may largely replace local funds and not create many new projects. This will likely leave both the ASCE infrastructure grades and any investors who expect an easy windfall disappointed in the outcome.

REGULATION CHANGES HOW WE INVEST CASH

October 01, 2016
Summary Points:
  • On October 14th new SEC rules on Money Market Funds become effective. These rules were designed to minimize the chance of a market disruption like that in September 2008 when the $65 billion Reserve Primary Money Market Fund broke the $1.00 NAV because of their holdings of bankrupt Lehman Brothers commercial paper.
  • The biggest change in the rules is the division of the industry into three categories: government funds that invest only in highly rated U.S. sovereign debt; retail funds marketed exclusively to individuals, and; institutional funds that have large investors and can hold the short-term debt of companies. The SEC has mandated different pricing and liquidation rules for each category.
  • Money market funds have always had the risk that they would trade at values different than their targeted $1.00 NAV, though it has rarely happened. The new SEC rules mandate that institutional, non-government funds calculate a market determined NAV out to four decimal places. The rules also provide for gates and exit fees should too many people ask for their money at once. Government-only funds can keep their $1.00 constant NAVs.
  • Since many money market investors value highly the constant $1.00 NAV feature, they have been shifting out of institutional funds in favor of government funds in anticipation of the rule changes. Hundreds of billions of assets have moved from commercial paper to shortterm treasuries over the past several quarters.
  • The market impact of these shifts has been large. The spread between short-term treasuries and LIBOR (known as the TED Spread) has widened from 20 basis points to more than 60 reflecting the greater demand for government paper. On the other hand, investors willing to hold non-government paper are seeing higher yields.
  • The lower government yields are costing people who are seeking to avoid the new cumbersome rules. The SEC says it has lowered the risk of a run on the industry but the burden of this policy is on savers and cash managers seeking the greatest safety and simplicity.

SORTING THROUGH THE HYPERBOLE

September 01, 2016
Summary Points:
  • In a world of 24/7 media coverage, most breaking news is of little or no use to the long-term investor. It does however play upon one’s psychology, leading to behaviors much more like that of traders than investors. For the vast majority this shift can be a costly mistake.
  • The world oil markets have been genuinely turbulent over the past three years, though relatively quiet in the last few months. This has not prevented commentators this summer from trying to create more drama by using emotionally charged adjectives in their stories.
  • The world energy market may have finally reached the dull part of the story. Producers with the best technologies in the best geographies are winning resources away from less capable entities. Recent oversupply is being addressed, but historic inventories will have to be worked off before there can be any meaningful move of oil prices back toward the $100 mark. This is the right path but will take time to fully play out.
  • There is always the possibility of geopolitical shocks or an OPEC agreement that could cause oil prices to spike, but the current environment seems inherently less dramatic. Writers trying to raise the level of interest with their hyperbole should be ignored as much as possible, little of what they report is relevant to the long-term investor.

WHAT WILL HAPPEN WHEN EVERYONE WANTS TO INVEST PASSIVELY?

August 01, 2016
Summary Points:
  • The last few years have witnessed an acceleration in the shift of assets from active managers to index mutual funds and ETFs. As this trend continues it is fair to ask how it is impacting opportunities and risks in the stock market.
  • When new money comes into an index product it must be invested according to that fund’s index formula and not on the basis of specific company valuations. This can lead to stock pricing swings that active managers generally believe offer them bigger price inefficiencies to exploit. It also translates into more volatility and tracking error for active managers.
  • Not all investments that are labeled passive are actually so. As funds and ETFs continue to be introduced on narrower indexes, active traders trying to tactically time a sector, cap size or geography use low-cost passive vehicles to express their views. This evolution has further added to overall volatility.
  • If the trend toward passive investing goes too far and creates many more inefficient prices, active managers will exploit this and they will again show superior returns. The activepassive pendulum will likely then swing back. It is difficult to guess in advance where “too far” is.
  • Managing portfolios in this environment raises challenges. Even long-term investors pay attention to volatility. Increasing exposure to a passive core while maintaining high quality active satellites can be a way to improve the risk/reward profile of equity holdings, while preserving the opportunity for superior performance through time.

CURRENCY AND THE EQUITY MARKETS: A COMPLICATED PICTURE, PART 2

July 01, 2016
Summary Points:
  • There is no consistent relationship between currency markets and equity valuations. Linkages are different country by country and they change through time. This makes the decision to hedge foreign currency risk a dynamic one depending on these linkages and the costs of executing the currency hedge.
  • The volatility of exchange rates around the Brexit vote demonstrated how currency hedging can produce different results. Stock markets fell around the globe after the vote. Dollar investors who hedged currency were helped somewhat in Europe as the euro fell, but hurt in Japan with the yen rally.
  • As emphasized in last month’s Commentary, those currency hedged investors in European and Japanese stocks both received the local index return on their investments. This is the primary motivation for pursuing a hedged strategy.
  • The relationship between spot and forward exchange rates is not a function of market expectations. Rather it reflects a tight arbitrage dictated by interest rates in the two countries. The opportunity to earn a higher rate of interest translates directly into a weaker forward exchange rate compared to spot rate.
  • The “cost” of hedging currency risk is a function of these interest rate differentials. Because U.S. interest rates are higher than those in Europe and Japan, dollar based stock investors can hedge away currency risk while receiving a small payment. A currency hedger in this case actually gets paid, but that is not enough of a reason to conclude that hedging is a good idea for the portfolio.

CURRENCY AND EQUITY MARKETS: A COMPLICATED PICTURE, PART 1

June 01, 2016
Summary Points:
  • As a general proposition there is little debate that global equity investing improves the diversification and risk adjusted returns of long-term portfolios. Executing against that plan is a tougher challenge and it turns out there are no simple rules of thumb that work for all markets at all times.
  • Any U.S.-based investor wanting to participate 100% in the local return of a foreign index like the Nikkei 225 or the FTSE has to hedge out variations in the dollar exchange rate. The majority of such investors have historically not done that, accepting a return that blends both currency and equity market changes.
  • The natural intuition is to expect a currency-hedged portfolio to be less volatile. This is not always true. A big part of the positioning depends on correlations, on how much volatility the investor is willing to take on, and how much it costs to hedge.
  • The problem with trying to link stocks and currencies is that the data show there is no universal story that applies to all markets at all points in time. Investors need to monitor how currency and equity markets are interacting at the moment and adjust their portfolios accordingly.

PERSONAL SAVINGS: A BLESSING AND A CURSE

May 01, 2016
Summary Points:
  • The current personal savings rate near 5% as measured by the BEA is almost twice the level seen in 2000. This may be a positive for ensuring future capital needs in the country, but it is also viewed as a negative. If consumers would only spend more, GDP growth could accelerate from the tepid pace seen in the last six years.
  • As Baby Boomers age, they are less willing to experience market shocks to their wealth. This has produced a meaningfully higher savings rate at this stage of the cycle than many economists have predicted.
  • The odd truth today is that we are at the highest net worth to income ratio since before the financial crisis, but the savings rate has not fallen as it has in recovery periods in the past. It is roughly twice what some believe is appropriate for this stage of the cycle.
  • The biggest implication from a high savings rate and more risk aversion is a large demand for safe assets like treasuries. Barring a major acceleration in inflation we may expect low interest rates to be the rule for many years to come.

ETFS REVISITED: THE REVOLUTION CONTINUE

April 01, 2016
Summary Points:
  • In 2009 when we last wrote about Exchange Traded Funds (ETFs), the U.S.-based industry had less than $1 trillion in assets. In the six years since, the U.S. ETF industry has doubled to more than $2 trillion and ETF assets are approaching $3 trillion worldwide.
  • Just as indexing with mutual funds has grown in popularity over the past several years, ETFs in their most basic form have equally prospered. Low cost, tax efficiency and tradability throughout the day are among the advantages drawing investors to these products.
  • The success of the basic ETF model has spawned a virtual tsunami of new ETF sponsors and funds, many of which deviate wildly from the original model in terms of tracking accuracy, costs and liquidity. In 2015 an average of three new ETFs were introduced each week.
  • There are critics who believe that rapid flows in and out of ETFs increase volatility and distort the prices of individual securities. Past episodes of extreme market moves are being studied by the SEC and the findings may shape the ETF regulatory agenda.
  • Not all ETFs are created equal. Investors need to scrutinize each offering in terms of expected return, risk, cost and tax impact before making ETFs an active part of their portfolios.

The Deep Freeze: Below Zero Interest Rates

March 01, 2016
Summary Points:
  • Japan, Switzerland, and several other European countries are living with negative interest rates that can extend out years for the safest assets. This is a result of policies to encourage lending and spur these economies combined with a mountain of liquid assets seeking a safe haven.
  • The biggest policy motive behind negative policy rates is to forcibly encourage commercial banks to work harder to put their deposits to work in the form of new loans.
  • Right now, commercial banks are most directly affected by the negative policy rates. For the most part they have not tried to pass them along to depositors, which could be problematic for all involved.
  • The history with negative rates has been too short to assess their effectiveness in boosting economies. It is clear that they have severely disrupted the markets for risk-free assets to the disadvantage of savers around the globe.
  • Investors building portfolios of risk assets are challenged to evaluate companies in a world of negative interest rates as the basic models do not work. In all likelihood as economies grow and inflation returns, negative rates will disappear. Until that happens investors should find relative value in owning stocks that have a strong, dependable stream of income versus negative risk-free rates.

Infrastructure, the Gax Tax and Politics

February 01, 2016
Summary Points:
  • There is wide agreement that the basic infrastructure in the United States, including roads, bridges, airports and rail systems, is in need of improvement. Finding the funds for these long-term projects has been the issue.
  • With today’s low gasoline prices, some people think a solution would be to modestly raise the federal fuel tax. This would generate more revenue for the Highway Trust Fund while still leaving America’s drivers far better off in terms of total cost than they were two years ago.
  • Digging into the details of the Highway Trust Fund specifically and the budget process generally suggests several reasons why the federal fuel tax has not been raised since 1993, and was not part of the 5-year Fixing America’s Surface Transportation (FAST) Act passed by Congress and signed by the president late last year.
  • The FAST Act creates more certainty for states to plan major infrastructure projects but does very little to address the budget side of the equation. Any attempt to take advantage of current low gasoline prices to rationalize federal gas taxes and secure future funding has little chance of success in the midst of the election season of 2016.

Housing and the Pace of Economic Recovery

January 01, 2016
Summary Points:
  • It has frequently been reported over the past several years that the U.S. economy is recovering more slowly from the last recession than from any other since the Great Depression of the 1930’s. The housing market has been responsible for much of this story.
  • A big part of the problem is that the excesses in housing before the crisis were more extreme than any other sector of the economy. Purging those excesses and recovering is a big job.
  • Housing is very much a momentum driven sector. Home sales, even without rapidly rising prices, lead to more activity. Modest adjustments to federal mortgage loan limits and a tweak to the tax code could help spur housing activity without leading to a repeat of the previous extremes.
  • The auto sector has bounced back to pre-crisis levels. If housing had performed similarly, nobody would be complaining about a slow recovery or fretting about the Federal Reserve raising interest rates by tiny amounts.

What to Expect From the Next Phase in Fed Policy

December 01, 2015
Summary Points:
  • All eyes will be focused on the Federal Reserve at its pivotal December Open Market Committee meeting. The odds are high that it will raise rates and begin a new policy phase, ending more than seven years of near zero interest rates.
  • The Fed is often credited with too much influence in these macroeconomic/market discussions. The real drivers of the economy are natural market forces and demographics that operate largely independently of central bank policy.
  • Watch the labor market, demographics, the value of the dollar, and the commodity cycle for the fundamental forces shaping the economy.
  • Too much time and energy is frequently spent trying to guess short-term policy shifts. Long-term investors should focus on bigger natural market forces, which in the United States would seem to point toward a reasonable environment for risk assets, though accompanied by periodic bouts of volatility.

The Return of Volatility

November 01, 2015
Summary Points
  • The third quarter of 2015 marked a return to volatility in many markets that had not been seen since the second half of 2011. Equity market investors wondered if it was the start of the first bear market and global recession since the financial crisis in 2008-2009.
  • Equity market volatility, as measured by the VIX index, more than tripled in August as the market experienced some of its worst draw downs. As dramatic as this move was, the peak volatility never came close to the extremes of 2008. Similar jumps have occurred in 1998, 2001, 2002, 2010, and 2011.
  • At moments of heightened anxiety, VIX climbs to levels between 40 and 50. The market’s concerns often eventually pass and VIX settles back below 20. But when events turn really ugly as they did in 1987 and 2008, the stock market can tumble further and VIX can spike much higher. Today’s VIX at any level is not a great predictor of what the market will eventually do.
  • Psychology tells us that fear of losses can push us to sell positions at exactly the wrong time. Successful investing involves thoughtfully buying stocks, but just as importantly it requires not selling at volatile moments and locking in current mark-to-market losses.

Chinese Currency Management: A Study in Contradictions and Challenges

October 01, 2015
Summary Points
  • On August 11, 2015 China shocked the world by breaking away from its long held policy of fixing its currency tightly against the U.S. dollar. They simultaneously devalued the yuan 2% and announced they would allow the exchange rate to float within a narrow band around the new target rate.
  • Bears immediately proclaimed that this was official China capitulating in their losing battle against declining exports and a slower pace of overall economic growth. Those more positive on China saw it as a logical move that set the stage for further currency policy liberalization and the eventual inclusion of the yuan by the IMF in the roster of official reserve currencies.
  • One thing that is undebatable is that the sudden shift in policy caught global financial and commodity markets off guard, triggering equity market declines and a spike in volatility unlike that seen for many years. Discussions about what this means for the future continue many weeks after the trigger event.
  • China is now metaphorically standing with one foot on a dock and the other on a boat, trying to operate somewhere between rigidly fixed and market-determined floating rates. There is no perfect system for exchange rate determination, but where they are now presents challenges that may confound both Chinese officials and market observers trying to figure out where this policy is ultimately leading.

The Productivity Puzzle

September 01, 2015
Summary Points
  • Frequent commentary over the past several years has suggested that the rate of growth in U.S. worker productivity has slowed dramatically from the period after World War II. This has been attributed to factors as diverse as the aging baby boomers dominating the workforce to the claim that we as a society are running out of creative new ideas.
  • For those who have watched the explosion in internet technology, computer capacity and telecommunications, the notion that our workers are no more productive than they were a decade ago strains the imagination.
  • A look at one specific industry, auto and truck manufacturing, suggests a very different story from the aggregate picture often referenced. Reconciling these differences points to some potential measurement issues that could be clouding our conclusions.
  • Measurement problems are never a completely satisfactory explanation to economic questions, but in this case before we give up on the future of the U.S. economy, we better be certain our traditional tools are capturing all of the activity that society values.

Official Active Management of Stock Markets

August 01, 2015

Overconcern About Bond Market Liquidity

July 01, 2015

The End of Zero Interest Rates; Maybe Not So Soon

June 01, 2015

October 2009 Commentary

May 01, 2015

ETFs Revisited

May 01, 2015

Market Volatility: Risk or Opportunity?

April 01, 2015

Inflation Measures: What the Fed Watches

March 01, 2015

Asset Allocation in 2015: Diversification Still Matters

February 01, 2015

What is Money?

January 01, 2015

Eyes on the Currency Market

December 01, 2014

Uncertainty and Market Volatility: the Case of Ebola

November 01, 2014

Hedge Funds: A Compensation Structure or Investment Strategy?

October 01, 2014

Global Forces at Work in the U.S. Treasury Market

September 01, 2014

The Changing Muni Bond Market

August 01, 2014

The Dynamic U.S. Oil and Gas Equation

July 01, 2014

Why Are Current Interest Rates So Low?

June 01, 2014

Are the Equity Markets Rigged?

May 01, 2014

Innovation in T-Notes

April 01, 2014

Tune Out the Noise

March 01, 2014

Stock Indexes Are a Portfolio Decision

February 01, 2014

Interest Rates Revisited

January 01, 2014

Bitcoins, Are They Really a Currency?

December 01, 2013

Uncertainty, Volatility and Rationality

November 01, 2013

The Cost of Protecting Your Equities

October 01, 2013

Bernanke-Speak and the Labor Market

September 01, 2013

Detroit Bankruptcy Opens a New Chapter in Municipal Bond Investing

August 01, 2013

A Changing Market Dynamic Is Impacting Volatility

July 01, 2013

The Many Nuances Around Inflation

June 01, 2013

Can One Predict Market Stress?

May 01, 2013

Market Bubbles

April 01, 2013

Real GDP and Stock Market Returns

March 01, 2013

Gold Revisited

February 01, 2013

The Mystery of the Shrinking U.S. Labor Force

January 01, 2013

Negative Real Interest Rates & the Allure of Equities

December 01, 2012

Housing and the U.S. Economy

November 01, 2012

How Big an Issue Is LIBOR Manipulation?

October 01, 2012

The Importance of Dividends in Today's Environment

September 01, 2012

China in Perspective

August 01, 2012

The Only Perfect Hedge Is in an English Garden

July 01, 2012

A New Source of Demand for U.S. Treasuries

June 01, 2012

Passive vs. Active Investing—A Discussion Without Theology

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Natural Gas—A Story of Technology

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