Monday, March 30, 2009

Don't Pay the Croupier

David Swensen, the investment manager of the Yale University endowment, provides excellent advice for individual investors (us).  He argues that most individual investors should own index funds (or "passive" funds), because investment costs are such a drag on long-term returns.   

Friday, March 27, 2009

The Blame Game

Very interesting piece in this morning's Wall Street Journal. Basically, it is a discussion on whether the Federal Reserve, under Alan Greenspan, was a primary cause of the housing bubble starting in 2002. I am a firm believer that when managing finances, it is essential to understand monetary policy and the broader topic of monetary economics.

In all, there are six short-pieces by six "economists" (I admit I had only previously heard of one of these gentlemen). Of course, there is no real agreement between any of the six, which adds credence to my point that the economy is incredibly complex and it is impossible to blame one single policy decision for such a broad and unexpected outcome.

I agree more with Mr. Henderson's argument that Greenspan's policies were not a primary cause of the housing bubble. That bubble started in the mid-nineties for many different reasons and eventually became such a monster due to the interactions of even more unrelated events. Mr. Henderson argues that the entrance of Chinese savers and rich oil states into the global monetary system had a much greater effect on increasing global money supply than any actions by Mr. Greenspan. I have been using this argument for many years.

However, I don't agree with Mr. Henderson that we should abolish the Fed. In a perfect world, I would be more likely to agree with him. Alas, we definitely don't live in a perfect world.

Some of the arguments which blame Greenspan's policies include: that the Fed abandoned "sound money", that the Fed's actions artificially lowered adjustable mortgage rates, and, of course, the old "they were just following the rules, so change the rules" argument ( I find this one amusing because all laws relating to actions by the Federal Open Market Committee are murky at best).

This very notion that cause and effect are so hard to determine when looking backwards, when we have "all of the facts", is why we believe that trying to predict the economic future is not likely to work. Whenever you hear "economic forecast" or "market timing", remember that someone is essentially trying to predict the future.

Monday, March 23, 2009

Race to the Bottom (or middle)?

During several recent conversations and e-mails I have had with clients there has been a recurring theme that although we may see some short -term recovery in the US economy due to all of the gov't intervention, we have longer-term problems that may result in lower standards of living here. The idea is that since we have lost much of our manufacturing base, growing economies like China and India will assume the lead in the global economy, with a result being the US getting poorer while these countries get richer.  This is a common theme in the on-going debate about the effects of globalization.  

I do not subscribe to this view.  I think it assumes that global economics is a zero-sum game, meaning if there are winners, there have to be losers.  That has not been true over the last century of economic growth.  As economies enter the global market place, they improve not only their own prosperity, but the prosperity of all global participants.  Trade takes place because it is good for both sides, or else there wouldn't be any.  The countries that have not prospered over the last century (think most of Africa) have not failed because other countries were taking advantage of them, but because they have serious internal governance problems. (This is obviously oversimplification, but I believe the general point)

I am not trying to sugar coat the current situation or the effects of globalization.  There have certainly been losers and there will continue to be more losers.  Unskilled labor in the US and other developed nations will have a hard time maintaining their standards of living.  However, educated labor around the world will likely benefit as globalization expands and innovation continues.  One clear fact is that level of education and standard of living are directly related.

There has been much conversation in this country about growing income inequality, which we have indeed experienced.  However, the cause of the inequality is not greedy corporate executives or their political cronies.  The clear cause if the difference in education levels.  There is more global demand for highly skilled labor than there is supply of these workers.  Thus, they are able to command higher incomes.  Meanwhile, lower skilled labor has difficulty increasing wages.  (Yes, there are more causes, but education seems to be number one.)

We really can't know how the global economy will proceed over the next decade.  The modern economy is incredibly complex and in my opinion impossible to model or forecast.  All economic predictions should be taken with a grain of salt.  What I do know is that every time the end of advancement and prosperity has been predicted, the economy comes roaring back.  Also, whenever we are told that we have conquered the business cycle, we are in trouble.

Wednesday, March 18, 2009

Remain Calm

A couple of quick articles from the Personal Finance section of this mornings Wall Street Journal:

Have We Hit the Market Bottom? Should You Care?  We have seen very strong returns over the past six trading days. This may be a signal that we have seen the bottom of the stock market, or it could just be a short-term rally, with worse days ahead.  We agree with Mr. Arends that timing the bottom is virtually impossible and trying is likely to cause more harm than good.  We continue to believe that long-term money currently invested in stocks will see significant appreciation over the next 5 years or more.  

The Do's and Don'ts of Saving for Retirement in a Down Market.  In this article the author surveys several financial planners about how people should act during this turbulent time.  The message is stay calm, stay in touch with your advisor and invest according to long term plans.  Sounds allot like what we have been saying.

Friday, March 13, 2009

Where do We Go From Here?

Over the past week we have been working on an audio/slide presentation (update 5/15 - the presentation no longer contains audio commentary, it caused too many problems) to help our clients understand our current thoughts about where the economy and financial markets may be headed over the next few years.

In order to view the presentation, you will need to have Adobe Acrobat Reader 9.1.

Please note that the presentation will take a few minutes to load before it starts playing, and it lasts about 20 minutes. Let us know if you have trouble viewing the presentation and please provide feedback, both positive and negative.

Thursday, March 12, 2009

The Power of Consumers

Interesting article in this morning's Wall Street Journal by Amar Bhide, in which he discusses how consumer behavior helps move the economy forward.  I listened to a very interesting talk with Mr. Bhide in which he discussed the ideas in his book The Venturesome Economy.  He is a strong believer in the power of innovation in economic growth, an opinion that I agree with strongly.  I haven't read the book yet, but it is on my list.  

Tuesday, March 10, 2009

Lessons From the Past

Yesterday, Christina Romer, the chair of the President's Council of Economic Advisors, gave an interesting speech at the Brookings Institution.  The crux of the speech was to compare what happened during the Great Depression to what is happening now.  This is clearly something that has been on most people's minds as our economy has worsened over the past six months.  Mrs. Romer's basic thesis is that during the early years of the Depression, 1930 -1932, the US government failed to take the steps necessary to change the course of the economy, in particular there was not deficit spending or any monetary expansion.  Interestingly for me, I just finished reading the book Lords of Finance, which traces the history of monetary policy from WWI through the Depression.  The book ultimately comes to the same conclusion as Mrs. Romer. During the early years of the depression, the government insisted on running a balanced budget and the Federal Reserve was more concerned with maintaining the gold standard than providing liquidity to a falling economy.  It was only after both of these policies were reversed, starting in 1933, that the economy began to recover.  

We are currently working on a video presentation that looks more closely at what we can learn from past periods in economic history.  It will hopefully be posted here tomorrow.  

Sunday, March 8, 2009

Laughter is the Best Medicine

I stole this link from Professor Greg Mankiw's blog.  We have to remember to keep our sense of humor.

Friday, March 6, 2009

Concurring Opinions II

Evensky & Katz is a well-known and very successful investment advisor. They are successful in part because of the way they educate and communicate with clients, and we aspire to the same. In this piece, Harold Evensky provides his thoughts on the current market cycle. Many of his views are similar to those of Bond & Co., and he does an excellent job of presenting the same data which has influenced our philosophy and response to the current financial and economic crisis.

Please note that Harold and I do not agree about everything (what a surprise). I don't advocate any of the first four "Hedging Alternatives" he lists at the end of the article. We could certainly execute all four options, but we seriously doubt that they have any cost/benefit advantages. We have employed Option 5, which we advocate only after having a serious discussion about risk tolerance.

Sunday, March 1, 2009

Concurring Opinions

This post by Real Time Economics does an excellent job of summarizing Warren Buffett's just published annual letter to shareholders. My opinions are quite similar to Mr. Buffett's:

  • We both believe that last year's events have many culprits, both in and out of the government.
  • We also both believe that massive government response was necessary, but will most likely result in a surge in inflation. We know for a fact that owning cash during periods if rapid inflation growth can be disastrous.
  • Finally, both Mr. Buffett and I think that the unprecedented prosperity of the last hundred years has not come to an end. We have seen much worse economic crises over this hundred year period, and yet the parade of real progress in living standards keeps marching forward.