The Law of Unintended Consequences (Part 6)

By | 2014-09-09T12:43:43+00:00 September 28th, 2012|Global Market Update|

So what do we do? With interest rates at the zero-bound, and government bonds—the most stable asset class—providing yields that are below inflation, how should investors respond? How do we achieve the yields we need to live without risking the principal we need to live on? Probably the most rational response is to continue to diversify your financial holdings, and consider every asset class. That includes stocks and investment-grade bonds, but it also should include international bonds, high-yield bonds, real estate investment trusts, and [...]

The Law of Unintended Consequences (Part 4)

By | 2017-07-17T12:34:46+00:00 September 27th, 2012|Global Market Update|

So what’s going to happen to the average investor? With rates so low for so long, people have are motivated to find ways to create income from their investment principal. And there are people out there ready to exploit this situation for their personal benefit. Savers are getting flyers addressed “ATTENTION CD OWNERS” promising 5, 6, or 7% returns with principal and interest guaranteed. There’s a lot of ways for scam artists to play this. The interest might apply to just the first $500 [...]

The Law of Unintended Consequences (Part 5)

By | 2014-09-09T12:42:58+00:00 September 26th, 2012|Global Market Update|

And unintended consequences are everywhere. One of the continuing consequences of the bailouts in 2008 and 2009 is a general mistrust of “bankers.” The capital issues at banks like Citi, Bank of America, and Morgan Stanley required a massive equity buy-in by the Treasury in order to maintain their solvency. But the term “banker” became a four-letter word—bankers like Dick Fuld of Lehman or Ken Lewis at Bank of America collected seven-figure bonuses even as their institutions either originated or acquired other banks that [...]

The Law of Unintended Consequences (Part 3)

By | 2014-09-09T12:40:50+00:00 September 25th, 2012|Global Market Update|

How should investors respond to a zero rates world? When the Fed first lowered rates to near zero in late 2008, many investors thought it would be a temporary situation; that short-term rates would rise at least to the inflation rate when the economy recovered. But rates have been here nearly four years now, and the Fed has made it clear that they will remain here for a considerable period. The extended outlook for extremely low rates has also affected yields on long-term bonds. [...]

The Law of Unintended Consequences (Part 2)

By | 2014-09-09T12:39:59+00:00 September 24th, 2012|Global Market Update|

Are there limits to the Fed’s effectiveness? As the Fed continues to provide monetary accommodation, it’s reasonable to inquire whether it will work. After all, low interest rates aren’t a boon for everyone. When short-term rates are below the inflation rate, savers lose purchasing power as prices rise. In effect, savers are subsidizing borrowers. So how do low rates help? In the short run, low interest rates help the housing sector as they make periodic mortgage payments cheaper. They also make it easier for [...]

The Law of Unintended Consequences (Part 1)

By | 2014-09-09T12:39:29+00:00 September 21st, 2012|Global Market Update|

Are low interest rates a free lunch? On its face, it sure looks like it. Low interest rates reduce government interest expense, make it cheaper to borrow, and stimulate the economy. They especially prop up the housing sector, which goes a long way towards recapitalizing the banks. And ultra-low short rates allow the banks to borrow short and lend long, boosting their net interest income. What’s not to like? But ultra-easy monetary policy will have unexpected second and third-order effects. For example, low rates [...]

The SWAT Team

By | 2014-09-09T12:39:03+00:00 September 20th, 2012|Global Market Update|

The US economy needs a turnaround. How do we get there? When consultants look at an ailing business, they do a SWOT analysis: strengths, weaknesses, opportunities, and threats. If you can seize the opportunities, playing to your strengths—avoiding weaknesses and be mindful of the threats out there, often you can spin straw into gold and create growth where previously there was only stagnation. So what would SWOT analysis say about America? Clearly, we are strong in design and innovation. The iPhone 5 and latest [...]

Risky Business

By | 2014-09-09T12:38:35+00:00 September 19th, 2012|Global Market Update|

What is risk-parity investing? Risk-parity investing looks at a portfolio’s variability--and the cause of that volatility—and says: maybe we can do better. It focuses on the allocation of risk rather than the allocation of capital. It uses borrowing to do this, but it asserts that when asset allocations are either levered up or levered down to the same risk level, an optimum combination can achieve higher returns per unit of risk and be more resistant to market downturns than a traditional portfolio. The performance [...]

Evil Twins?

By | 2017-07-17T12:34:46+00:00 September 18th, 2012|Global Market Update|

Some people don’t know when to quit. The Winklevoss twins were Harvard students along with Mark Zuckerberg in 2003. They hired him (with no pay and with no contract) to do some work on a website initially called “Harvard Connection,” and later, “ConnectU.” At its height, the site had fifteen thousand users at two hundred colleges. In a Federal lawsuit, the twins claimed that Zuckerberg stole their ideas when he started Facebook. Eventually, they settled their suit for $20 million in cash and $10 [...]

Open Door Policy

By | 2014-09-09T12:37:26+00:00 September 16th, 2012|Global Market Update|

The Fed just approved an open-ended balance sheet expansion. In its announcement on Thursday, the Federal Reserve set the scene for continued monetary accommodation. They publicized their intention to purchase $40 billion of Mortgage Backed Securities per month. That’s on top of $30 billion they’re already buying, which now should absorb 75-80% of new mortgage production. And they didn’t set an end date. Until unemployment falls, this new policy could be in place for a long, long time. Naturally, with the Fed supporting the [...]