We have had a bunch of meetings this week so the list of links is a little shorter. Regarding the first link…is this a sign of the Silicon Valley bubble? Now they are literally just giving money away. I am only half joking. I think this will be an interesting thing to follow. As the talk of artificial intelligence and robots taking away more jobs the idea of universal basic income is being talked about more. I am not as negative about the coming AI revolution as some. Throughout history jobs have been replaced by cheaper and more efficient means. I believe this will lead to more leisure time and more time for people to work on things they feel are really important. Economically it is impossible for there to be no “jobs” because there has to be an economy which in its most basic form means people have to buy and sell stuff. In order for people to sell stuff someone has to buy stuff and for people to buy stuff they have to have money coming in from somewhere. Universal income is certainly one idea. I do believe that whatever job, career or source of income my 5 year old has when she is 30 has not even been created yet. I think this is exciting.
The picture at the bottom of this post is a snapshot of the markets I took the day my Daughter was born 5 years ago. The iPhone UI has come a long way since then and so have the markets. The Dow is now around 22,000. I guess the market naysayers in 2012 missed a TON of gains.
The Equifax breach was unsettling to many but hopefully not a surprise. I have mentioned before that we feel cyber security is one of the biggest threats to the markets. There will be a much bigger cyber crime in the coming years. It could be Russia, China or little Jimmy in mom and dad’s basement. It could be against an entity or a government. Who knows. But it is likely to derail markets for a period of time. Does this mean it will send the economy and markets into a 2008 plummet. Most likely not even close. But it will scare people and it will initially put major down pressure on markets. As a result, security will get better until the next time an even bigger one happens. While we think it is one of the biggest threats and concerns it is not something we worry about per se. There is no reason to worry because we assume it will happen and when it does we won’t be surprised. As for you personally, continue to stay vigilant in protecting your data and consider doing the things listed at the bottom of our first link.
We haven’t grasped the full scope of Hurricane Harvey and now Florida is bracing for Irma this weekend. Our thoughts go out to everyone in the path of this storm. This week marked another week with more volatility in the US markets as the North Korea crises continues to weigh them down. Emerging Markets, however, have continued their climb.
Last night Equifax announced a cyber security breach with widespread implications. To see if your information may have been comprised, be sure to go to here: https://www.equifaxsecurity2017.com/enroll
A short list for your weekend reading pleasure…
Over the past year, and even more so over the past few months, the doomsday predictions of a major market decline have picked up. While these predictions aren't necessarily new, it seems to be occurring more frequently and that is bothersome. We all know that markets go through cycles. The odds of exiting before a crash and re-entering after is extremely difficult, if not impossible to time. In 2012 many of the same doomsayers were recommending selling stocks and buying gold while some went as far as recommending investors to short the equity markets. That has turned out to be nothing short of a disaster. So much money has been "lost" by listening to this market timing advice.
One of the more recent "alarm bell" is household debt levels and the fact that we've surpassed 2008 levels. One needs to look at the bigger picture to gain a more clear understanding before jumping ship based on this information. While household debt has surpassed 2008 levels, the increase in household net worth far surpasses that. Also, debt per capita has fallen from $53k in 2008 to roughly $48k along with a steady decline of household debt as a percentage of GDP. Even more encouraging is the percentage of 90+ days delinquent debt balances has been steadily declining from 2009, minus student loans. As lending standards have increased, the overall quality of the debt has improved which is much different than 2008. Roughly 13% of first mortgages issued in 2008 were to applicants with sub 620 credit scores, while today that percentage is ~6%. While rising student loan debt is a legitimate concern that needs to be considered, it accounts for less than 10% of the total debt. This is not to say we are out of the woods, but the bigger picture paints a different story. While it's true that a lot of debt was financed at record low interest rates and when rates rise, refinancing will be extremely challenging, this is not an immediate concern.
Don't get me wrong, aside from household debt level concerns, many other risks loom ranging from geo-political, central bank monetary policy, attempting to normalize interest rates and the constant flux in the executive branch of our government. These are all legitimate concerns but are not signs to sell everything you own.
We believe the best strategy is to maintain a proper cash reserve (6-8 months of expenses) and a separate low risk investment portfolio for any money needed within the next year or so. This could help keep your mind at ease and help eliminate panic moments when market gets volatile. Investors should be reviewing their risk level and comparing it to their portfolios to make sure they align with one another. If equity markets continue to churn higher over the next six months, rebalancing and adjusting ones portfolio is adviseable. It is important to remember those making bold predictions typically have their own agendas and rarely does that align with a long term investors. If we can keep you globally allocated through any turmoil we believe you will lose far less than trying to time getting in and out of the markets.
Our thoughts and prayers go out to the Houston area as they continue to make it through the flooding. I bunch of links this week and the first one leads me to make a short commentary. This guy (and he isn't alone) is day trading the VIX. As @ReformedBroker put it "It won't be long now" referencing the end of the up market cycle. This may not be a sign of a bubble but it could be a sign of the market peak. Please let me know when you hear that a friend of a friend is making tons of money day trading. Once we hear from 3 of you we recommend running and hiding with your portfolios.
Did you watch the eclipse? It didn’t get as dark in the DC area as I thought but it was still kind of neat. Only a few links this week.
More articles than usual this week but I wanted to include the last two in response to the report of record levels of household debt. Much of the “reporting” on this was click bait in my opinion and of the opinion of the authors of two great rebuttals.
We rarely get into politics except for general discussions around the effect politics are having on the markets. But after this week’s statements from the President it is hard to ignore that the executive branch of our government is in shambles. CEOs from the President’s advisory board and career politicians on both sides of the aisle were quick to ridicule the comments and make their feelings know that they vehemently disagreed with Trump. Thus the silver lining in an otherwise extremely sad week in our history. If nothing else it seems at least there is a coming together of sorts between people who otherwise can’t agree on much else.
You are gonna start hearing a lot about the ten year anniversary of the start of the Great Recession. It was August 2008 when the first signs of trouble really began. Not many foresaw how the next year and a half would unfold. It was a defining period in our careers. We learned lessons on how to help guide clients psychologically through the worst period of their investing lives. I truly believe we saved our clients vast amounts of money. Not because we could find “safe” investments during this period (everyone’s accounts declined)but because we were able to keep clients from making poor decisions and kept them focused on the longer term. Staying invested during that period took trust, patience and faith. Our clients did a great job. Ultimately, we all made it through. The next major market decline is unlikely to be as bad but is inevitable. While we don’t look forward to it we are ready.
Enjoy this week’s links…
“I would never have imagined spending money on things I could easily do myself but now I’m more than happy to buy time if it allows me to focus on things I care about”
Re: the above link…
Matt’s notes here: I can't recall when I became this way but it was around the time we had our daughter.
I highlight a lot of notes while reading. I try to make the time to actually review it each quarter. Here are some of the hand picked ones I thought you may find useful from last quarter.
May 18, 2017 at 05:55AM The "Back-Door" Roth Conversion | Independent Thought
Just remember that funds invested in Roth 401(k)s are still subject to required minimum distributions at age 70 ½. So be sure to roll those funds over to a Roth IRA before you reach that age.
May 25, 2017 at 08:12AM No? or Yes, Yes? | Meb Faber Research - Stock Market and Investing Blog
Indeed, so many people have jumped on the passive index bandwagon that there are now more indexes than stocks!
May 25, 2017 at 08:18AM No? or Yes, Yes? | Meb Faber Research - Stock Market and Investing Blog
It’s basic fiscal Darwinism – when some groups are charging 0% and you’re charging 0.9%, you’re not going to survive. (Note to financial advisors: this fee destruction is referencing pure asset management. We’ve said for a long time if you offer additional value added services you can we worth that 1% and your weight in gold, but the value is not in the asset management side…)
May 27, 2017 at 06:31AM Weekend Reading for Financial Planners (May 27-28) 2017
Providers stepping into the void include Global Guardian and Black Umbrella, which offer support for everything from crafting emergency/safety plans for high-net-worth individuals, to offering emergency evacuation and real-time security response teams. WorldClinic provides a similar solution specifically for virtual medical support. For those who don’t quite have the financial wherewithal to build their own solutions, there are also offerings like Vivos Underground or Survival Condo, which provides massive underground shelters that people can buy access to. For most, spending any dollar amount – much less substantial dollar amounts for custom emergency preparedness services and solutions – may seem extreme; but for many of the ultra-HNW, the idea of such “extreme” emergency preparedness is simply another form of insurance, a way of dealing with a low-probability (but potentially high-impact) contingency that hopefully will still never actually manifest.
May 30, 2017 at 08:17AM Buying Happiness & Well-Being With Cash-On-Hand Reserves
Except a recent research study by Ruberton, Gladstone, and Lyubomirsky finds that maintaining a healthy level of cash-on-hand (or at least in a checking or savings account) appears to improve our feelings of financial well-being and life satisfaction. And the relationship holds up even after controlling for income, spending, and other investments, as well as age and employment status. In other words, no matter how much total wealth and income we have, we’re just not as happy unless it’s also accompanied by a healthy pile of cash (or at least, a sizable and readily available bank account).
June 3, 2017 at 06:31AM Avoiding the Big Drawdown: Downside Protection Investment Strategies - Alpha Architect
Trying to perfectly time the market is a waste of time.
There you go. You no longer need to read this classic academic paper in which Ivo Welch and Amit Goyal assess market timing variables.
June 5, 2017 at 08:15AM Thinking Through a Change an Asset Allocation
Any sort of diversification is going to look foolish from time-to-time and it’s even harder to stick with at market extremes when certain investment styles or asset classes are doing particularly well. How many advisors do you think have been asked questions about Bitcoin in recent weeks after the run-up we’ve seen in cryptocurrencies?
June 6, 2017 at 08:24AM Ratcheting The Safe Withdrawal Rate For Income Upside
Yet the reality is that in the overwhelming majority of scenarios, returns are not so bad as to necessitate a 4% initial withdrawal rate in the first place. In fact, by applying the 4% rule, over 2/3rds of the time the retiree finishes with more than double their wealth at the beginning of retirement, on top of a lifetime of (4% rule) spending! Half the time, wealth is nearly tripled by the end retirement, as retirees fail to spend their upside!
Yet the caveat of the 4% rule is that in reality, the overwhelming majority of historical scenarios do not necessitate a 4% rule, or anything close, and come out with a significant excess of unspent wealth at the end. As noted earlier, the average initial withdrawal rate that would have worked was over 6%. And by withdrawing only 4%, and allowing the portfolio to compound higher, the reality is that the 4% rule actually has a remarkably high probability of leaving over a significant amount of remaining wealth by the end of the 30-year time horizon
Notably, then, while some have raised the question of whether the 4% rule is “too high” given today’s low return environment (even though the reality is that 4% rule was created for low-return environments, as average returns would allow a nearly 6.5% withdrawal rate!), the alternative criticism raised by some like Bill Sharpe is that the 4% rule is highly “inefficient” because it actually has such a high probability of excess wealth. After all, the data does show that most of the time, following a 4% rule just leaves over many multiples of a retiree’s starting principal left over, revealing (at least in retrospect) that most retirees actually could spend far more, either initially or by increasing spending along the way.
Accordingly, a simple way to establish a new, higher income floor is simply to commit that spending will only be increased (above and beyond annual inflation adjustments) once the account balance grows 50% about its initial amount. So for a retiree with $100,000, there’s no extra spending increase until the account value is over $150,000. For a retiree starting with $1,000,000, the target is $1.5M.
Thus, for instance, the “rule” might be that any time the account balance is up 50% over the original value, spending is increased by 10% (over and above any ongoing inflation adjustments), but such spending bumps can only occur once every 3 years at most (to avoid having spending ratchet too high too quickly).
June 8, 2017 at 08:23AM The questions we hear all the time
The questions we hear all the time goes back to that uncertainty issue: What’s the Federal Reserve going to do? How many rate hikes this year? Where’s the Dow going to be in 12 months? What’s your favorite stock pick?
All those questions are things that you as an investor simply are not going to be able to answer with any degree of accuracy—it’s really a crapshoot. And so, rather than guessing, wasting a whole lot of psychological emotion and energy on it, why not just recognize—and, again, it’s with great humility—recognize what we do know and what we can’t know—and try to adjust accordingly. This leads quite naturally to a portfolio that is balanced and robust enough to withstand the regular market turmoil.
Over the past 20 years, how many market booms and busts have we seen? There was the dot-com boom and bust; the 2008–2009 financial crisis. There have been several 20% pullbacks over the past few years. That is simply the normal state of affairs for U.S. markets. Investors must understand that volatility is part of investing; if you learn that truth about markets, it won’t surprise you when it finally arrives and it shouldn’t disrupt your sleep too much
June 9, 2017 at 05:40AM QOTD: The Financial Pain Equation
Acknowledge, allow and accept. This advice will help you to endure the inevitable pain caused by the next bear market. Experts in the centuries-old practice of meditation have a formula for suffering.
S = P x R. The amount of suffering you experience is equal to the actual Pain (P) times the mind’s Resistance (R) to the pain. So, S = P x R. The idea is to stop resisting the pain to lessen it. Since anything that is multiplied by zero equals zero, you see where this is going.
The quicker you realize market corrections and bear markets are not “bugs” in the financial system, the happier you will be. Acceptance of these facts is critical to creating your own form of Advil for financial pain, without the ulcer inducing side effects. - Anthony Isola (Ritholtz Wealth Management)
June 27, 2017 at 08:22AM This is Your Nightmare Scenario
Morgan Housel said, “Every past market crash looks like an opportunity, but every future market crash looks like a risk.”
Just got back from 10 days in the Outer Banks with the family. Probably the coolest temps I can remember for a July. I don’t think it got above 85 the whole time. There were even a few days with only a high of 75 or so. Enjoy this week's links.
Lately, I've been reading more about the impact of automation and AI (Artificial Intelligence) and the potential destruction it will have on jobs and the global economy. Elon Musk has been very outspoken on this topic and his comments this past week seem to have set off alarm bells and now some are predicting doomsday scenarios of high unemployment, economic contraction and stock market crashes. Naturally, this sounds scary and while it could happen, history is always a good barometer check.
It is important to remember that innovation and automation are nothing new, it is the pace and level which matters. A good example would be the introduction of self-serve gas pumps. Prior to the 70's, gas station attendants were the norm. Once self-serve pumps caught on, many thousands of jobs were eliminated. This did not take place overnight and gave many time to find a new avenue. Obviously this hurt the attendants but on the flip side many benefited as jobs were created to manufacture, sell and install the self-serve pumps! This in turn led to lower gas prices which put more money in the consumers pocket. At the same time, gas station owners benefited as their overhead decreased which allowed them to expand operations.
While this is only one example, it's an important one as automation helps increase overall standards of living and leads to an increase in productivity which leads to greater prosperity. According to an estimate done by the United Nations, poverty was reduced more in the past 50 years than in the previous 500! The idea of automation/artificial intelligence is to increase efficiency and reduce costs. Think about it, 3-D printers are already starting to help build cars and homes and over time the costs will continue to decline.
Of course this still means there could be a lot of change ahead. Pricewaterhouse Coopers predicts that 38% of American jobs are at risk of automation by the early 2030s. This is alarming and makes one question how the global economy can absorb it. Obviously if we woke up tomorrow and 15 million workers were displaced, that would be terrifying and have devastating consequences. The threat we face in the next ten to twenty years is real, and judging by Mr. Musk's comments, every single job is in jeopardy. I won't go that far but many jobs that we once that would never be replaceable, will be. Most agree that the transportation and fast food industry are likely to be first on the chopping block. Automation doesn't require health insurance, 401(k), bonuses or a job change like humans do, just a tune up every now and again. It is important to remember that innovation will also help create new jobs that did not exist prior, it's not a zero sum game.
Some argue that automation will hurt developed countries (i.e. United States) the most as they they have the highest wage earners who will be the first to be replaced, while lower developed countries suffer less as their wages are already low and many countries won't have the upfront capital needed to invest in automation. The jury is still out but trying to make an investment decision based on this is not wise. There will be governmental regulation and other things to deal with before we truly know how this shakes out.
While it won't be all fun and games, there is a lot to be excited about as we head into the future.
I'm heading on vacation tomorrow so there may not be links next week. We'll see. If not you can expect a double dose the following week.
Light on links this week. I didn’t read any less so I guess there was just less I enjoyed.
Regarding the last link...Big stock down this week on these idiots doing videos of themselves hitting their “friends” with golf carts. First off, these aren’t golfers. They may have clubs and play once in a while but they are not golfers. Barstool Sports seems to be promoting this stupidity which isn’t surprising.
Sniffed Links - Suits and Ties
Happy Third Quarter. Enjoy this week’s links.
If we aren't going to pay teachers enough let's at least give them a decent retirement plan…Even A CFA® Can’t Make Sense of Teachers 403(b)s
Commentary on the last link…I haven’t worn a full suit to work in about 8 years. I love putting on a nice suit as much as anyone but wearing one everyday for the first 7 years of my career wore me out. I have a monthly reminder to grab a tie out of my closet and tie it just so I don’t forget how to do it.
Many of our recent market commentary pieces have addressed market resiliency and ability to break record highs in the face of political uncertainty in D.C. Although some volatility has returned we are still seeing a less volatile year than we are used to. I read broadly when it comes to the markets. There have been improvements in the global economy and I remain optimistic on the markets. In my opinion, however, there are there are two major risks that could spook the current uptrend.it
One of the risks I still think about relates to the world’s central banks. I worry how equity and bond markets will react when asset purchases taper and central banks attempt to unwind their balance sheets. While the Federal Reserve has begun to slowly raise rates, the real test will come when they hike multiple times in a calendar year. Many other central banks have not yet tested the waters with rate hikes and have even pledged to keep their rates lower longer.
We all know after the 2008 financial crisis, central banks aggressively intervened to keep the global economy afloat. They helped drive interest rates to near zero (negative in some countries) and embarked on a nearly decade long asset purchasing spree. Many pundits claim markets are near all time highs solely because of central bank intervention and while there may be some validity to this claim, pinpointing how much is nearly impossible. Total assets of major central banks are four times what they were in 2007. In 2016, the Swiss Central bank held over $127 billion francs in equities (equates to $132,030,362,050 U.S. dollars) and held more shares in facebook than Mark Zuckerberg. My concern is whether central banks have over stayed their welcome and backed themselves into a corner with no exit strategy. While economic growth has picked up, the question is will it continue fast enough to offset central bank stimulus dependence. No one knows for sure but if economic growth continues to accelerate, things could work themselves out and limit the amount of volatility.
My second concern lies with the record levels of debt on corporate balance sheets. With interest rates near zero for a decade, plenty of corporations took advantage and borrowed aggressively. On the surface, this isn't necessarily a bad thing because if an investment grade corporation can borrow for below 4%, then they almost have to do it. They can invest this capital and aim for higher returns, innovation and growth which is what stockholders want.
Some of this capital, however, was used to increase dividends or participate in stock buy back programs. Can these companies still show growth when rates start to rise? Over $2 trillion of loans come due in the next five years and a majority could need to be refinanced at arguably higher rates. Will credit markets have enough liquidity to absorb this? I’m not as worried about solid investment grade companies. In my opinion the bigger risk lies with the amount of outstanding debt for non-investment grade corporations who must borrow at higher rates and thus have a smaller margin for error.
It is important to remember, however, that corporations are sitting on record levels of cash and many can pay their loans with the cash on their balance sheet. This is one of the major differences between now and 2008.
None of the concerns above should make anyone rush out and sell, but it's something to monitor. Both equity and bond markets always present risks, sometimes more than others, but trying to interpret and time when the risk will play out has been proven to be a losing game most of the time. Having a globally allocated portfolio helps mitigate some of the risks.
Traffic was ridiculously light at the end of this week around the DC/MD/VA area. I assume everyone is taking an long weekend off. When July 4th lands on a Tuesday it leaves Monday as a pointless “work day”. One of the things I remember each year about July 4th is that 3 former US Presidents died on the date (Jefferson, Adams and Monroe) and all three were part of the US revolutionary efforts.
Enjoy the holiday and if yours is a long one then enjoy it even more.
This last link is particularly sad for anyone who is a Skins fan. Like him or not, Portis provided some of the more special moments of the teams playoff run after the death of Sean Taylor. It’s also sad to see that it was the financial industry that seemingly helped bankrupt him. The NFL doesn’t do enough to protect its players physically but they also fail them (along with most pro sports) when it comes to financial education. I’m not the die hard fan I once was (for too many reasons to get into here) but I hope Portis can bounce back. My fear, however, is that he played too hard for too long both on and off the field.
I don’t usually comment on whether I agree or disagree with links we share but I felt compelled to comment on the first one; This is How Big Oil Will Die . I agree with a lot of this except his timeline. Most people I know out in the ‘burbs treat their vehicle as another place for "stuff" and having your stuff handy is very important. And with just one kid we have a lot of stuff we keep in the car. I think It will be a long time before people en masse give up owning cars. The electric care revolution is upon us and is poised to tip in the next several years. While Tesla gets much of the press almost all auto makers are putting energy toward electric and autonomous vehicles. Also, I think we sometimes forget how much oil is used in shipping cargo. It will be a while before container ships run on batteries.
Instead of sharing something I am enjoying this week I’m going with something that left me disappointed and shaking my head…Bonobos. Not the animal. The clothing company. If you aren’t familiar they are a clothing company that could be described as a higher end clothing manufacturer who made a name for themselves in e-commerce and customer service for men’s clothing. Anyway, they announced they were selling to Wal-Mart. I spent about an hour in amazement of the responses on social media from loyal Bonobos customers. They were not happy.
The Fed raised rates this week for the third time since the financial crises. What impact will this have on markets? We shall see. But, it does point to their positivity toward the economy. Couple that with corporate earnings this year and and positive movement of the global markets and you almost have to be positive. Of course there is a lot of talk about the next downturn and it seems this chatter has increased quite a bit lately. You should always be prepared for a downturn but it shouldn’t be something that weighs on your mind. If so then we should look at adjusting your risk level. Enjoy this week’s links.
Stock up on Dry Farm Wines. Natalie and I have been drinking these for about 8 months now and we can attest that the after effects of these wines are minimal to nonexistent. Dry Farm sources pure wines with no additives from all over the world. Oh and the wines are all great. We have had one that we didn’t like.
Sniffed Links - Leftovers
I have three links that don’t directly have anything to do with personal finances or the markets but are interesting nonetheless.
Stock up this week on the HBO show The Leftovers. Whether you like the ending or not this episode was one of the better television show episodes I’ve ever seen. The entire show is really about how people and society deal with tragedy and the lies and truths they tell themselves and others. The finale tied these themes up in a perfect bow.
There are more links this week than usual but there are some real gems. I split them into categories.
Enjoying This Week:
Vans Rata Vulcs. You may even see me wear these in meetings. They are probably in the “gray area” of business casual attire but they are too comfortable for me to not wear these daily. I’ve got gray and blue but may have to queue up a couple more colors.