CHINA: YEAR OF THE SCAPEGOAT 2015?!

scapegoat

It is a mistake to place sole rationale and therefore sole resolution in headlines like: China Fears Slam Stocks. China Data Hits Markets. China to Blame. Occupying the 8th position in the Chinese Zodiac, the Goat (or Sheep) symbolizes such character traits as creativity, intelligence, dependability, and calmness. Half-way through the Chinese New Year that began in mid-February, investors are steered to solely focus on Beijing’s corruption, lack of control, manipulation, and extreme volatility.

There is no doubt that China is HUGE in terms of the mood of her populous, politics, internal objectives, economy, and massive historical demand for Western luxury goods and infrastructure inputs like Copper, Iron Ore, and Concrete. It is disturbing to read stories of the Chinese government arresting and detaining traders to “resolve” its stock market problem. An extremely tense Pacific will become further inflamed as China celebrates the 70th anniversary of the defeat of Japan in WWII. A parade of 12,000 troops, 200 aircraft and dozens of tanks and missiles are expected to march down Beijing’s central Avenue of Eternal Peace and through Tiananmen Square on Sept. 3 — the day after the Japanese army surrendered to Allied forces in 1945. Still, global stock market turmoil, plummeting currencies, crashing commodities, and economic instability are problems not entirely “Made in China.”

The Maestro (I admit the pic is my cMaestroopy.) of the real orchestrated manipulation that impacts us today dates back many Lunar
cycles and from the United States. With complete humility, I will note there is no crystal ball at my shop. However, the source of the 2015 pullback is potentially deeper, more problematic, and more painful than simply laying blame on the recent Chinese stock market rout and slowing manufacturing data. The U.S. Federal Reserve as directed by Greenspan to Bernanke, and now Yellen, have led the world’s most powerful central banks into the most manipulated (no matter how well intended) and experimental monetary phase of our lifetimes.

The lack of control, manipulation, and volatility your investments are experiencing is most likely not China-centric so do not ignore the plethora of other concerns, risks, and opportunity sets. 

Unconventional tactics were used to counter the late 90’s Asian currency crisis, hedge fund blowups, and Y2K cash build-out. The bursting of the dot-com bubble in 2000 kicked off massive interest rate cuts via the Effective Fed Funds from 6.5% to 1% (2000-2003) with a repeated playbook during the 2008-09 Financial Crisis. When interest rate options ran dry, Fed Chair Bernanke revealed experiments like Operation Twist and a series of so-called Quantitative Easings (QE). The Fed balance sheet has skyrocketed from $600 billion to $4.5 trillion! Perhaps the counter-factuals would have been worse–the unwind from unconventional to normalcy represents an unknown larger than China.

Throw away advice lines like “normal pullback,” “another buy the dip opportunity,” or “healthy return to volatility” are less useful for concerned families no matter what happens this fall. 

Zero interest rates plus QE1, QE2, and QE3 created a massive misallocation of capital that has affected everything from rental properties, fracking, high yield bonds, share-buybacks and dividend payments, the US dollar, and stock market valuations. These trends have been on a tear so perhaps the recent weakness is the painful process of deflating back to reality–you or your trusted advisor should not completely discount this possibility.

So what is useful?

An emphasis on market-timing, outguessing economic releases, or using gut feel to manage portfolios is foolhardy for most of us. There are tremendously positive innovations in medicine, technology, and consumer goods worthy of your hard-earned investments. You still need to identify and navigate the right investing paths, know your portfolio’s return and risks trade-offs, and plan for the future with foundations based on your family’s realities.    

  •  Real communication and proactive, goals-based wealth advice: Watch out for canned, standardized, and biased steering.
  • Implementation should include a combination of core strategic investments, tactical satellite investments, and a relentless focus on client-centric management of risks, taxes, and fees: Watch out for mass produced, standardized, and advice that comes too quick and easy.
  • Special attention should be paid to the more controllable aspects of planning, spending, saving, and an extra margin of safety: YOU are the best qualified and most accountable for this part.

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com

Twitter | @MichaelHakerem

Advertisements

Investing is Easy, Right?

emotional_cycle_of_investing

Just actively buy low and sell high, or passively buy cheaper index funds. Oh, or just hire a computer to unemotionally model a portfolio on your behalf. The real world is routinely a little more complicated and no easy glide-path exists in life or investing. Still, I offer a simple asset allocation framework at the end.

Keep a full toolkit and diversify your resources,
methods, and judgments.

Decision-making has become a lot more confusing for pros and novices due to unprecedented global Central Bank manipulations, the euro zone experiment, and the overwhelming amount of information, opinions, and recommended investing strategies. Whether a fiduciary advisor or self-directed individual investor, active or passively inclined, please focus on risk management. Also, it helps to seek trusted mentors who will challenge your portfolio strategies and convictions.

End of Days?

It has been over 2,300 days since the S&P 500 bottomed in March 2009: The average bull runs lasts about 1,240 days. The last stock market correction in the U.S. began in August 2011, when the U.S. Congress fought over the U.S. debt ceiling and federal budget, causing Standard & Poor’s to downgrade the sovereign debt of the United States. However, remember the 1987-2000 bull run lasted nearly 4,500 days.

Days Don’t Mean Much. How About Valuation?

Trailing S&P Price-to-Earnings is about 20X; however, the popularly used Cyclically Adjusted PE Ratio (CAPE Ratio or Shiller Ratio) is 26.5X. Courtesy of the superb resources of Karl Case and Robert Shiller.

Data on Investor Skills

The excellent Dalbar organization tracks actual returns earned by investors by analyzing mutual fund purchases and redemptions. Per the statistics, the average stock fund investor underperformed the S&P 500 by a gap of 8.19% in 2014 and an average annual deficit of 4.66% over the previous 20 years. The average bond fund investor underperformed the Barclays Aggregate Bond Index by 4.81% in 2014 and an average annual deficit of 5.40% over the previous 20 years.

In 30 years of monthly investor returns, Dalbar found that equity investors underperformed the S&P 500 to the greatest extent in October, 2008. In this month, equity investors lost 24.21% compared to an S&P loss of 16.80% for a net underperformance of 7.41 percentage points. The next greatest underperformance occurred in March, 2000, when the S&P surged 9.78% but investors took home only 3.72% for an underperformance of 6.06%.

It’s really hard to invest throughout the emotional cycle shown in the opening chart. Bad investor decisions come at the most critical points; whether in the face of severe market declines or when the equity market surges.

 Simple Asset Allocation Framework

Ark: This core and stable vessel is built to last, to withstand storms, to leave mostly untweaked in times of stress–emotional or market related. This majority of my portfolio should be untethered to a reliance on any one central bank, one asset class, one direction of interest-rates, or my ability to outguess new bulls or bear markets. This is not to say that significant shifts in underlying investments simply stay put forever or that damage will not occur. More importantly, this reliable piece of my asset allocation remains steadfast in its character traits. Perhaps this is a good place for your passive investments.

Speedboat: This satellite and more aggressive watercraft is built for quick maneuvers, possibly fun and entertaining, and an opportunity to impress myself (or teach humility). This smaller allocation should demonstrate my most active portfolio management, style, and security selection skills. Rockin’ and Rollin’, these investments better take advantage of great ideas, dislocated markets, and short-term behavioral mistakes made by my fellow investors. These vehicles provide an opportunity to earn much greater returns than those generated by the more passive portion of the portfolio.

Tight Bathing Suit: I wholeheartedly pay attention to risk management. Famous investor, Warren Buffett is credited with the following quote, “You never know who’s swimming naked until the tide goes out.” A rising tide of asset prices like we have lived through since 2009 can make a lot of people and investments appear intelligent. Over my twenty-year career, many of my most important lessons occurred when I realized just how dumb I could be. You worked hard to actively build wealth so avoid getting caught showing your assets at the wrong time! Perhaps this is a good place to use unemotional computer-drive risk analysis to monitor and evaluate your strategies, risks, and security selection.

I welcome your thoughts in the comments section below. 

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. He has directly managed over $5 billion in growth and retirement assets, and his proactive advice has influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email l Michael@empoweredportfolios.com
Twitter | @MichaelHakerem