Sniffed Links - Scale

We talk a lot about how important technology is to our business. It’s our largest expense. I’d put our efficiency, processes and workflows up against any firm our size. This is mostly due to the way we use the technology we have. Since the very beginning (when we had very few clients) we built out our processes as if we had hundreds of clients. We were scaling before scaling was a thing. I thought a little more about it this week and I think if this were 1995 we would probably need at least 10 people to do what our technology does. That would mean higher costs to clients. Or, we’d have to cut our client base in half. Something would have to give. Luckily, its 2018 and financial technology is booming. Because of the competition the vendors we use are always improving.

Enjoy this week’s links…

Why Spending Rates Matter More Than Savings Rates

When Earning $1 Million A Year Isn’t Enough To Retire Early - Financial Samurai

Bitcoin crash: This man lost his savings when cryptocurrencies plunged

Sniffed Links - Immune

Good synopsis in the first link about why the US stock market has been relatively immune to news. We have talked about the market’s resiliency for quite a while now. It’s hard to fathom that next week will mark the 10 year anniversary of Lehman Brother’s bankruptcy. The S&P proceeded to lose over 50% of its value over the next 18 months. It dropped to around 750 points and as I write this the S&P is at about 2900 points. Ten years can seem both like a long time frame and a short time frame. When the next sustained downturn occurs I’m sure we will use examples of the depths of the 2008/2009 plunge to show it could always be worse.

Why Doesn’t The Stock Market Care About the News?

Trump Tackles Retirement: What It Means for Your 401(k)

White House: No Pay Raise for Federal Employees in 2019

Pay Raise Still Possible in 2019 Despite Call for Freeze

Market Commentary - September 2018

What is an Inverted Yield Curve and why is it in the financial news lately? In short, an inverted yield curve occurs when long-term debt (10 Year Treasury) has a lower yield than short-term debt (2 Year Treasury) of the same credit quality. 

Typically, banks borrow short term and lend money out long term and the interest rate spread (difference) compensates banks for the risk assocaited with lending. When a bank generates less income on their assets (long duration loans) than their liabilities (short-term deposits), the incentive for new loans starts to dwindle and can cause a disruption in the money supply.

Add to the equation the Federal Reserve is attempting to unwind their balance sheet and tighten monetary policy after 7 years of near zero interest rates and the "conundrum" becomes more complicated. Since the low rates have directly inflated certain asset classes, the unwind is expected to be slow which won't help push up long term rates.

The slow down of interest rates on long term bonds indicates there is a concern for long term economic growth. That in itself isn't a cause for alarm but, as mentioned above, when this occurs at the same time the Federal Reserve is raising short-term rates, the gap between short term rates and long term rates continues to shrink. The closer it gets to inverting, the louder the alarm bells get.

The last seven recessions dating back to the 1960's have occurred when short-term rates have exceeded long term-rates. It is important to remember that recessions are not based off one data point and that each recession is unique in its own way but this is still something that should be monitored closely. The Federal Reserve has limited control over long term rates as because those are shaped by inflationary expectations. The Federal Resererve uses their power to influence short term/overnight lending rates. The yield curve inverts when the Federal Reserve believes inflation is headed higher but bond investors are expecting the opposite. 

What is a bit different this time is the national debt is over $20 trillion and the Fed's balance sheet sits a tad over $4.5 trillion while, at the same time, interest rates still remain low. None of these existed when the Great Recession took hold in 2008 and left the Federal Reserve with plenty of ammunition to step in and help. That is no longer a luxury and has some worried as to what will happen in the next downturn when these mechanisms won't be available. The wild card here is economic growth. Obviously we don't know what it will be in the coming quarters but an economic slow down in the face of an inverting yield curve is not a desired outcome and could wreak havoc on financial markets. While GDP growth and productivity have been improving lately, we need to see this for a few more quarters before declaring any sort of victory.

Sniffed Links - Free Steak

After almost 16 years in the industry I find it hard to believe “sales contests” still exist. In an era where a standardized Fiduciary Rule is imminent it is still a common practice for companies to offer sales contests for certain products. Yes these conflicts of interests are disclosed somewhere in the paperwork their clients sign but this is still crazy. If the SEC fixes this then they should also stop the steak dinners wholesalers do for advisors on a regular basis. Free steak and free wine is a conflict of interest.

SEC's Clayton Says Sales Contests Must Die | ThinkAdvisor

Would the Stock Market Crash if Trump was Impeached? - Pragmatic Capitalism

A Surprising Bulwark for the U.S. Economy: The Personal Saving Rate - WSJ

Why Chase is shutting down some customer’s credit cards - Business Insider

Sniffed Links - Longest Bull

The S&P 500 hit an all-time high this week. It is also marking the longest bull market for the index in its history. This is an arguable “fact” however given the several major dips the index has recorded. In early 2016 and earlier this year the market was down well past correction territory. It flirted with what could be consider “bear market territory”. All of this has helped make this not only a very long bull market but also the most distrusted. The financial newsletter industry is a multi-million dollar industry. Most of these sell fear. They have been calling for the end of the bull market for 5+ years. They have been wrong almost every step of the way. Far more money has been lost in the last 5 years on the sidelines than will likely be lost in the next market down turn.

Looking Forward Back: Aging Bull

Performing meaningless rituals boosts our self-control through making us feel more self-disciplined

Four ways to prevent loneliness from wrecking your retirement

Do you flush your contact lenses? Here's why you should stop

Sniffed Links - Private

First link this week is about Elon Musk possibly taking Tesla private. Musk made news when he hinted at the possibility in a tweet. If you are musk there are a lot of positives to this line of thought. Plus he can spend less time arguing with analysts.

Here’s how Elon Musk could take Tesla private

Cities’ Offers for Base Are Secrets Even to Many City Leaders

Trump Administration Mulls a Unilateral Tax Cut for the Rich

Sniffed Links - Bad Blood

Bad Blood is the story of the Theranos scandal and it’s founder, Elizabeth Holmes. With a movie in the works starring Jennifer Lawrence I’m sure you will hear more about it in the future. The book is a must read for any investor. The entire time I was reading the great book I kept asking myself how could so many high profile people be fooled? The list is quite impressive. Henry Kissinger, the Obamas, the Clintons, the Walton (Wal-Mart) family, the Cox (cable) family, Robert Murdoch (News Corp), Bob Kraft (Patriots)…the list goes on and on. As the author points out, the fear of missing out drove most of these investors. They were duped and they let their fears and emotions drive their investment decision.

What you don’t see on the list is many professional investors. Where are the healthcare VCs? Where are the big Silicon Valley early investors? There were few. Why? Because they actually conduct due diligence on their investments. That’s not to say every investment they make works out but they are rarely deceived.

I highly suggest the book but the first link below is a podcast interview with the author.

John Carreyrou On Breaking Open the Theranos Scandal

Almost 70% of millennials regret buying their homes. Here's why

America Is Running Out of Family Caregivers, Just When It Needs Them Most

10 Money Revelations From Being a Parent

Sniffed Links - Savage Snails

I have to add commentary to the first link below and apologize for diverting away from finance in this one. First, I can’t believe how many people die from dogs. Second, who knew freshwater snails were so savage?

Tech stocks (specifically Facebook) got pummeled this week. The NASDAQ took quite a hit. This isn’t extremely alarming as long as you have a diversified portfolio.

There’s No Such Thing as Mosquito Week

Where Work Pays: Occupations & Earnings across the United States | The Hamilton Project

Move to Florida to pay zero state personal tax? Fuggedaboutit!

Could Manage Your Money? Bernstein Analysts Think So

Are fears of rate increases on new LTC Insurance policies overblown?

Sniffed Links - Self-Made

No post next week so enjoy this week’s links. I hope to have the time over the next week to read Bad Blood: Secrets and Lies in a Silicon Valley Startup. The insanity and story behind Theranos still seems underrated. I don’t know why it didn’t catch on as an even bigger story. I’m sure a documentary or movie is in the works.

The New Tax Form Is Postcard-Size, but More Complicated Than Ever

Jamie Dimon Is Not Messing Around

Kylie Jenner, 20, may soon be the world's youngest self-made billionaire

Here's Why The Outrage Over Kylie's "Self-Made" Forbes Cover Matters

Sniffed Links - It Begins

We have addressed the “trade war” enough in other posts so we are taking a much needed break from it. I guess you could call today the “start” of the trade war in a way. It isn’t going away anytime soon so we will have plenty of time in the weeks ahead.

Nonetheless, here are some good reads…

Some Considerations For Investing Globally

What's killing Big American Beer?

What does it mean to be a NASA astronaut in the celebrity space age of Elon Musk and Richard Branson?

Market Commentary - July 2018

As expected, trade war talks have equity and bond markets on edge, especially European and Emerging Markets. Tensions continue to escalate as do the retaliatory threats coming from all sides, specifically between U.S. and China. Last month President Trump asked his administration to compose a list of $200 billion in China goods for levies and would add another $200 billion if China retaliates. This is in addition to the $50 billion already imposed. While these numbers are large, no one knows how much of this is posturing and how much will actually take effect. China has begun to retaliate and President Xi said the country will not back down from engaging in a trade war. The headlines sound frightening and all the dooms-dayers were definitely all over this latest fodder. 

Many of the every day goods we use (cell phones, computers, TV's, clothes etc.) are imported from China and certain tariffs would increase prices which would be passed on to the U.S. consumer and in turn could lead to an economic slow down. Now the good news is as of this writing the updated list does not include cell phones or televisions, but if things continue to escalate, they could be added. Considering current deficit levels and rising rates, an unexpected economic slow down would be less than ideal. Unfortunately this "trade war" situation doesn't have a set timetable, so we may experience more anguish before obtaining any type of resolution. The markets hate uncertainty but even worse it hates uncertainty with no time table. 

As an industry, manufacturing makes up 11.6% of U.S. GDP and has become a smaller segment as other industries have picked up the slack. While this limits the number of new manufacturing jobs being created in the U.S., it leads to cheaper goods and leaves consumers with more money in their pockets to spend on other things. It should not be a shock that the U.S. runs trade deficits with most countries as labor costs and standards of living in the U.S. tend to be higher than most, so an influx of manufacturing jobs to the U.S. seems highly unlikely and corporations would look to outsource manufacturing labor to another country with cheap labor costs as opposed to bringing those jobs here. It is important to remember that publicly traded companies are focused on protecting profits, growing the bottom line and answering to shareholders. So unless the U.S. is ready to embark in a trade war with every country, they don't appear to have much leverage here. Also, who will take the jobs even if they were moved to the US? Limiting immigration won't help fill the jobs and at 4% unemployment people are already working. The only way to lure them away would be higher pay which brings us back full circle to either higher costs or sending the jobs to another country. 

The reality is much of this could just be "tough talk" and amount to little, but it's important to remember that threats to global markets always exist. They just feel worse when it is politically driven because it adds emotions to the mix and the one thing that doesn't mix well with investing is emotion.

Sniffed Links - 110 Years

General Electric stock was removed from the Dow Jones Industrial Average (“the DOW”) this week. This marks the first time in 110 years the ticker symbol GE will not be included in the index. This comes after losing 50% of its value last year and another 25% this year. How did this happen. Basically while other companies were increasing their cash reserves GE was building up massive debt. This is an example of why buying individual stocks doesn’t work out well for the average investor. As diversified a company as GE is one would think it would be a “safe” bet compared to other stocks. Not the case.

Just a couple links this week…

Why to Keep Your Inflation Anxiety in Check

GE Kicked Out Of The Dow

Sniffed Links - Alternate Universe

The Trump meeting with Kim Jong Un was something my mind could not quite grasp. Is it a good thing? Bad thing? It was certainly odd, weird, confusing and even a bit surreal. Throw in Dennis Rodman and the whole thing makes me wonder if we are living in a computer simulation. It’s too strange.

The optimist in me thinks maybe Trump played this well. Kim Jong Un just wants to be acknowledged and “respected” on the world wide stage so maybe Trump played to that desire. The pessimist in me thinks there is no way these two can maintain a healthy relationship.

Social Security Is Still Pretty Secure

Amazon Considers Offering Home Insurance

Is the U.S. Due For a Recession?

Sniffed Links - Go Caps

Congrats to the Washington Capitals and congrats to all their hardcore fans. You deserve this. Let’s hope their win also opens the door for the other DC teams to finally break through.

Short list of links this week but two links that provide some evidence to two trends we have noticed. At first glance it may not seem like these two things are connected. There is a long way to go in getting women equally paid as their male counterparts. But for many households the wage gap between husband and wife has been declining for some time.

Birth rates keep falling for U.S. women

Married Millennials Are Keeping Separate Bank Accounts

Sniffed Links - Service

I think it is safe to say we are well past the economic recovery phase at this point. Wages are up and there is no shortage of jobs. Lately, I have been wondering if the economy is at a point where it is “over recovered”. I have been reading stories of small businesses and franchises struggling with finding quality employees. The problem stems from their inability to fire underperforming employees because of the lack of prospective new employees. Some small business are even reporting employee pay increases despite low quality employee work. They are having to increase pay just to retain “bad” employees!

This information is somewhat anecdotal but is interesting nonetheless. For one thing it has created an environment similar to the UK where it is very hard to be terminated. Is this a good thing or a bad thing? I guess it depends on your perspective.

Have you noticed a decline in customer service at small businesses?

Getting a Flood of G.D.P.R.-Related Privacy Policy Updates?

When Early Retirement Turns Into a Total Bore - The New York Times

Buying Into the Electric Vehicle Future? Maybe Try Leasing It - Bloomberg

How Your Daily Routine Can Turn Into Your Biggest Enemy

Market Commentary - June 2018

Much has been written about the negative impacts of rising rates on the markets. Let’s look at some positives...

Currently, global pensions assets total about $41.3 Trillion and many of the largest pensions hold 25% to 50% in bonds and cash. With interest rates at record low levels for the last decade, pension plans felt the pain as a large portion of their portfolios were yielding minimal returns. On average, pension funds may benefit as every 1% increase in interest rates equates to 12% to 14% decrease in plan liabilities. While it's true they have benefited from equity market gains over the past decade, returns on a diversified portfolio have been weighed down by the low returns on bonds/cash and the underperformance of commodities, European and Emerging market equities vs. a pure U.S. equity portfolio.

Retirees also benefit as rates on savings accounts, money markets & CD's increase. It seems like forever ago, but CD's were yielding approximately 4% in 2008. This is significantly higher than what we saw from 2010 to 2017. Retirees will earn more interest which in turn aids cash flow and helps to provide some protection against future inflation.

In addition, a decade of low interest rates forced long term care insurers to significantly increase premiums. It is estimated that every 1% decline in rates lead to a 10-15% increase in premiums. With rates increasing, long term care premiums will hopefully remain steady and that helps retirees who are a majority of long term care insurance policy holders.

Real estate could also see a benefit as the prospect of higher sustained rates may compel some to make a home purchase sooner rather than later which in turn could increase demand and prices.

Lastly, while this may sound counter intuitive, rising interest rates can be beneficial in preventing an economy from over heating. Higher interest rates tend to reduce speculation as the cost of borrowing dampens the potential gain.

Many argue, myself included, that the federal reserve waited too long to increase rates. Now it seems they are set for 3-4 annual hikes over the coming years. While there will be bumps in the road, the path to normalization is long overdue. If earnings and economic growth continue to chug along, things might not be as bad as many thought. The truth is, no one knows how this will all play out and it's important to remember that volatility is normal, and the lack of volatility in 2017 was abnormal. While volatility isn't necessarily fun, it is normal and part of what makes markets what they are.

YTD 2018 Highlights

I highlight a lot of notes while reading. I try to make the time to actually review them each quarter. Here are a few of the hand picked ones I thought you may find useful from the last two quarters. Included is the link to the full article

Why You Should Be Working Less

If you’re constantly working you never have time to think and reflect. In a knowledge-based economy we need that time to collect our thoughts and work through difficult decisions.


Buffett’s Annual Letter – Some Key Takeaways

It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”


For Two Months, I Got My News From Print Newspapers. Here’s What I Learned.

Just about every problem we battle in understanding the news today — and every one we will battle tomorrow — is exacerbated by plugging into the social-media herd. The built-in incentives on Twitter and Facebook reward speed over depth, hot takes over facts and seasoned propagandists over well-meaning analyzers of news.

You don’t have to read a print newspaper to get a better relationship with the news. But, for goodness’ sake, please stop getting your news mainly from Twitter and Facebook. In the long run, you and everyone else will be better off.


‘Blockchain’ is a meaningless term

There are countless blockchain explainers in text, audio, and video around the web. Almost all of them are wrong because they start from a false premise. There is no universal definition of a blockchain, and there is widespread disagreement over which qualities are essential in order to call something a blockchain.


Sniffed Links - Gas

Oil prices are spiking a bit this week. If prices at the pump increase into the travel season it will be interesting to see if consumers change their travel plans. Oil prices are still no where near what they were several years ago. I think the savings at the pump over the last few years has been an afterthought when evaluating the continued economic strength. Remember the $600 “tax stimulus” from President Bush? That was pocket change compared to what drivers have saved since 2015. I also think states missed an opportunity on fuel taxation. They could have really helped themselves out by levying a little more in fuel taxes. I will be traveling next week so no links.

SEC Launches Additional Investor Protection Search Tool

Two Seasonal Cycles Colliding Suggest A Possibly Volatile Period Ahead

No, Higher Rates Won’t Kill 2018 Home Buying

Real Estate Stocks Are on Sale but No One Is Buying

Sniffed Links - Steady

The Federal Reserve kept rates unchanged this week. It wasn’t a surprise. It will be a surprise if they don’t raise them in June and at least one more time this year. June’s Fed meeting may be met with some volatility in the markets. This week’s links are all over the place. Sometimes you may wonder what some things we share have to do with the markets. Reading broadly is important if we want to think deeply and thinking deeply is important to understanding trends and correlations.

Does Sell in May Really Work? Crossing Wall Street

How Lyme disease became the first epidemic of climate change | Aeon Essays

Subprime Carmageddon: Specialized Lenders Begin to Collapse | Wolf Street

A Fast-Food Problem: Where Have All the Teenagers Gone? - The New York Times

Market Commentary - May 2018

The 10 year U.S. Treasury is a debt obligation issued by the United States Government and is important because it's the benchmark that guides other rates, mainly auto and mortgage. The last time the 10 year treasury crossed 3% was during the "taper tantrum" of 2013 when yields spiked from 1.8% to 3% in about a six month period. Both bond and equity markets experienced extreme volatility which led the Federal Reserve to shift course and keep rates lower leading yields to drop sharply and remain relatively low until this year. 

Historically the yield on the 10 year U.S. Treasury has been well north of 4% but has experienced 3% or lower since mid 2011 leaving investors nervous of how things will play out. There are legitimate reasons to be concerned.  The total debt to total equity ratio is at its highest level since 1999 and corporate debt is at its highest level relative to U.S. GDP since the financial crisis. Also, the amount of debt that needs to be refinanced in the next five years hit a record level of $2 trillion ($734 billion of this comes due in 2020 & 2021). In addition, the pace of stock buybacks could slow in the face of higher rates and consumers typically have less disposable cash in the face of higher mortgage, auto and credit card rates. If cash alternatives (i.e. CDs and Government Bonds) start earning attractive yields, investors could sell a portion of their bonds and equities to reduce risk. You can see why some are starting to sound alarm bells.

It is important to remember that markets are not shaped by one or two data points, it is a culmination of many and while the 10 year treasury does deserve attention, so do others. Corporate earnings have been very strong as we are in the midst of one of the most impressive earnings seasons since 2008. Of the companies that have reported earnings in 2018, ~80% have exceeded analyst expectations, which is above the long-term average of 64%. In addition, corporate profits are expected to be the highest since 2011 and cash on U.S. corporate balance sheets are at their highest level. Despite high amounts of debt, corporations seem to be in better financial shape today. Also, the U.S. unemployment rate is currently at 4.1%, which is 50% lower than where it was in 2012 and wage growth has steadily increased the last 6 months. 

In my opinion the most important aspect with rates is the pace at which they increase. If rates spike faster than anticipated along with som other economic event (i.e. political unrest, trade war), then it is anyones guess as to how things will shake out.