tag:blogger.com,1999:blog-14662284070055006952024-03-13T06:53:35.500-07:00Mind Over MarketThe financial markets and the economy are powerful forces that shape our lives every day. The least we can do is try to understand them so we can better manage our lives and assets more effectively.Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.comBlogger194125tag:blogger.com,1999:blog-1466228407005500695.post-88164107001295463112023-06-05T13:12:00.002-07:002023-06-05T13:15:19.789-07:00GFG Australia gains financing to acquire GFG US wire rod assets<p></p><h2 style="font-family: Helvetica; text-align: left;"><span style="font-size: large;">InfraBuild, the Australian steel and recycling unit of London-based GFG Alliance, has secured a $350 million loan to acquire US-based wire rod steel businesses from its parent company.</span></h2><span style="font-size: medium;"><span style="font-family: Helvetica;">Jefferies LLC acted as sole arranger on a senior secured asset-backed term loan by funds and accounts managed by BlackRock and Silver Point Finance, GFG stated Monday May 29</span></span><br /><span style="font-family: Helvetica; font-size: medium;"><o:p></o:p></span><p></p><p style="font-family: Helvetica; font-size: 18px;"><span style="font-size: 13.5pt;">The success of funding "exceeded expectations" in terms of total funds raised, an industry source familiar with Liberty Steel's US operations told Fastmarkets Thursday June 1.<br /><br />There is no immediate impact on Liberty Steel's wire rod businesses in the US, as those business "have already been an operating part of the group and this just formalizes that," the source added.</span><span style="font-size: 13.5pt;"><br /></span></p><p style="font-family: Helvetica; font-size: 18px;"><span style="font-size: 13.5pt;">InfraBuild said it will continue to explore various additional financing alternatives that can be used together with the proceeds of the asset-backed term loan, “to further drive its growth and potential acquisition of steel assets in the US.”</span></p><p style="font-family: Helvetica; font-size: 18px;"><span style="font-size: 13.5pt;">The businesses to be acquired currently operate under GFG’s Liberty Steel USA and include the following:</span></p><p style="font-family: Helvetica; font-size: 18px;"></p><ul style="text-align: left;"><li><span style="font-family: arial; font-size: medium;">An electric arc furnace, rolling mill and wire mill in Peoria, Illinois (formerly Keystone Consolidated Industries, now Liberty Steel & Wire);</span></li></ul><ul style="text-align: left;"><li><span style="font-family: arial; font-size: medium;">Wire mesh manufacturing sites in Upper Sandusky and Warren, Ohio, as well as Las Cruces, New Mexico (Liberty Steel Engineered Wire Products);</span></li></ul><ul style="text-align: left;"><li><span style="font-family: arial; font-size: medium;">Johnstown Wire Technologies in Johnstown, Pennsylvania, and Solon, Ohio;</span></li></ul><ul style="text-align: left;"><li><span style="font-family: arial; font-size: medium;">Liberty Steel Georgetown, in Georgetown, South Carolina.</span></li></ul><span style="font-size: 13.5pt;">InfraBuild owns recycling facilities in LaPlace, Louisiana, and Tampa, Florida.</span><span style="font-size: 13.5pt;"><br /></span><p></p><p style="font-family: Helvetica; font-size: 18px;"><span style="font-size: 13.5pt;">InfraBuild's acquisition of Liberty USA assets follows an in-principle agreement Liberty Steel Group reached with its main creditors last November to restructure its global debt, excluding that relating to Liberty’s European steel business.</span></p><p style="font-family: Helvetica; font-size: 18px;"><span style="font-size: 13.5pt;">The main creditors in the agreement are Greensill Capital Ltd in the United Kingdom and Greensill Bank AG and Credit Suisse Asset Management Ltd in Switzerland. <br /><br />The successful funding of the acquisition of Liberty Steel's wire rod business helps to complete "the unwinding of some obligations as a result of the terms of the failure of Greensill," the US steel industry source said.<br /><br />Greensill lent funds to companies by buying up invoices in advance and it collapsed in March 2021 after credit insurers backed away the from the company over concerns about its exposure to GFG Alliance.<br /><br />After Greensill failed, Credit Suisse launched an effort to recover $10 billion in funds trapped in Greensill Capital.<o:p></o:p></span></p><p style="font-family: Helvetica; font-size: 18px;"><span style="font-size: 13.5pt;">Repayment to creditors under an agreement reached last year is to be made through a combination of lump-sum, schedule and bullet repayments, according to Liberty Steel Group.<br /><br />InfraBuild's purchase of the US businesses can provide funds to Liberty Steel Group that can be used for the initial lump-sum payment to its creditors, according to the industry source.<br /><br />The negotiations that led to the agreement were launched after Liberty Steel Group reached an agreement June 13, 2022, with its largest creditor, Greensill Bank, to pause all enforcement actions regarding debt facilities relating to its European steel businesses.<br /><br />GFG Alliance is the parent company of Liberty Steel Group, Europe's fourth-largest steelmaker, with a combined annual rolling capacity of 10 million tonnes per year. Its European operations employ 14,000 people across seven steelworks and five service centers.</span></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><span face="Arial, sans-serif" style="background-color: white; font-size: 8.5pt;"><o:p> </o:p></span></p>Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-65990759990619339432021-05-16T13:36:00.004-07:002021-05-17T05:49:53.608-07:00Cathie Wood: The Big Risk Is Deflation, Not Inflation<p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><span style="font-size: large;"><i>The big risk ahead over the next five years is deflation, not inflation, and it will benefit investments in innovation strategies, according to Cathie Wood, founder and chief executive officer of Ark Invest.</i></span></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><span></span></p><p class="MsoNormal" style="margin: 0in;"><br /></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Robert England</p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><br /></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Innovator companies, who share prices have tumbled 30-35% from their heights earlier this year, are likely to return 25-30% in each of the next five years from their current levels, Wood is predicting.</p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><br /></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“In terms of the recent behavior of value stocks, especially those we believe are in harm’s way, compared to the severe draw down of innovation stocks, I like the set up very much,” Wood said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">While the current situation is reminiscent of the runup in prices from 2006 to 2008, the bond market is signaling that may not be the case, Wood said. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Instead of 10-year Treasury yields rising sharply higher as it did during the 2008 financial crisis, the bond market “has settled down” following a sharply higher move in yields earlier in the year on inflation fears and the potential impact of sharply higher taxes on capital gains.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Wood offered her views on potential market winners and losers in a period of deflation in her <a href="https://www.youtube.com/watch?v=OkZaoJgt4ZE" target="_blank">monthly webcast for May.</a></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><b>Good Deflation<o:p></o:p></b></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Treasury yields are not moving higher because the bond market is now seeing three sources of deflation, according to Wood.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"> <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">First, bond market investors see what Wood called “good deflation” coming from innovation that spurs an economic boom. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Wood cited several examples of good deflation she expects from innovation strategies. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Advances in DNA sequencing can lead to lower health care costs, Wood said, impacting prices in 20% of the economy, potentially bringing deflation to the health care sector, where costs have risen steadily over time. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“For every cumulative doubling in the number of whole human genome sequences . . . health care costs decline 40%.”<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“We are only in the early days of cumulative doubling” of DNA sequencing, she added, with continuous improvements and cost savings ahead.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Advances in battery pack capabilities is another example of good deflation, Wood said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“For every cumulative doubling of capacity in battery packs for electric vehicles, costs drop 28%,” she said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Wood foresees potential deflation from a decline in artificial intelligence training costs, which she said are expected to drop between 37% and 50% a year.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“Artificial intelligence is going to permeate every sector, every industry, every company.” <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><b>Bad Deflation<o:p></o:p></b></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">The good deflation from innovator strategies will spur the “bad deflation” from the creative destruction of companies that failed to innovate, Wood said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“Roughly 50% of S&P 500 is at risk by this creative destruction,” Wood said. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“Those companies that spent the last 20 years catering to short-term investors, who wanted their profits and they wanted them now, companies that were leveraging up to buy back shares and not investing enough in innovation,” Wood said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">These companies did not take seriously the threat innovation posed to their businesses, she said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">The potential commercialization of electric vehicles was seen as being a decade away in 2014 when Ark Investment was launched, Woods recalled. At the time, however, she viewed it already underway. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“Now we see auto manufacturers are scrambling and I would even say scrambling for dear life,” Woods said. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"> <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">As demand for autonomous electric vehicles takes up, it will “put a big dent in oil demand.” <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">The two sectors that have done best this year — energy stocks and financials — will see big impacts from creative destruction, according to Wood.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">In the financial services sector, growth in assets held in digital wallets is moving a pace that is “faster than anyone could have believed,” Wood said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">China showed the way with WeChat Pay and now Alipay, Wood said. In the last five years, however, Square’s Cash App and Venmo are moving so quickly that their user bases have rapidly scaled up to a level higher than JP Morgan’s customer base, she noted.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“The digital wallet evolution or revolution has gone viral,” Wood said. “So financial services buyers beware.”<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"> <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><b>Commodity Prices<o:p></o:p></b></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">The third source of deflation will come from falling commodity prices that will take place as early as the end of this year, maybe next year, Wood said. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“We believe that there is a lot of double and triple ordering taking place right now,” she said. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">"I think supply chain management systems are getting better so maybe it won’t be as bad as it has been historically.”<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Wood expects inventories to build to a level well above demand sometime next year and the unwinding of them will cause an unwinding of commodity prices.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">She cited the soaring “break-out” all-time high in the price of copper from its range for 15 to 20 years as an example that commodity prices that are vulnerable to a correction. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Wood acknowledged her investing strategy based on future deflation comes with risks.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“If we are wrong . . . then we will be perhaps uniquely wrong,” Wood said. <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">Even so, the reward can be greater.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“At these times, if you do take a stand differentiated from the crowd – for a good reason and not just to be a contrarian – the payoffs can be enormous.”<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">“We do think the bull market has broadened out and we look forward to innovation rejoining the party once again.” <o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;">In April Ark Innovation Fund invested $246 million in Coinbase shares when company went public on the Nasdaq. At the same time, Ark sold some of its Tesla stock, even after saying in March that she thought Tesla shares could hit $3,000 by 2025.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in;"><o:p> </o:p></p>Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-50944696908553599762021-05-05T08:06:00.005-07:002021-05-16T13:59:39.779-07:00Truck Shortages Hit US Steel Shipments<p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in 0in 0.0001pt;"><span style="font-size: medium;"><i>A shortage of truck drivers and flat-bed trucks is delaying steel shipments at critical points in the supply chain and further driving up shipping costs and lead times, Fastmarkets has learned.</i></span></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in 0in 0.0001pt;"><span style="font-size: medium;"><o:p></o:p></span></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">Fastmarkets AMM</p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">April 7, 2021</p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://1.bp.blogspot.com/-bE8tctyV6ZQ/YJK0FAv2TNI/AAAAAAAAAdU/yNmRuYhnIX800FZ-I81jNL_4V8UmwpGZACLcBGAsYHQ/s2048/IMG_1500.jpeg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1536" data-original-width="2048" height="399" src="https://1.bp.blogspot.com/-bE8tctyV6ZQ/YJK0FAv2TNI/AAAAAAAAAdU/yNmRuYhnIX800FZ-I81jNL_4V8UmwpGZACLcBGAsYHQ/w533-h399/IMG_1500.jpeg" width="533" /></a></div><br /><p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><br /></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">By Robert England</p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><span style="font-size: 11pt;"><br /></span></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><span style="font-size: 11pt;">In March, there were 84 loads that need to be shipped for every available truck, up from 22 loads for every truck in March 2020, according to DAT Freight & Analytics.</span></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">"Demand for the entire flat-bed market, of which steel is a huge piece, has been surging for six weeks and is approaching record highs," Avery Vise, vice president of trucking at FTR Transportation Intelligence, told Fastmarkets.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">Steel products, such as beams and coils, are shipped via flat-bed trucks due to their heavy weight, as well as their size and shape, which require special handling precautions, according to R+L Global Logistics.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">"It's terrible right now. A lot of shipping guys say it's the worst they've ever seen," a southern distributor said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">Flat-bed truck shipping is comprised of two major markets - industrial and home construction, according to Vise. Heavy machinery, mostly headed for the Permian Oil Basin, is the third largest segment of goods shipped by flat-bed trucks.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">Another sign of the capacity squeeze is the sharply rising shipping volumes for available flat-bed trucks. Volumes shipped by flat-bed trucks are 3.5 times higher than pre-pandemic volume levels and near a record high, according to Vise.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">The capacity squeeze has also driven up freight costs. Shipping rates without fuel surcharges were 33% higher in March than a year earlier, Vice said. The average cost for a flat-bed shipment last week was $2.44 per mile, excluding fuel, and $2.80 per mile with diesel included.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">Freight costs are rising at a time when steel prices are reaching record highs. Fastmarkets’ daily steel hot-rolled coil index, fob mill US was calculated at $66.22 per hundredweight ($1,324.40 per short ton) on Tuesday April 6, down by 0.65% from $66.65 per cwt on Monday April 5, but up by 0.62% from $65.81 per cwt one week earlier. The index hit an all-time high of $66.73 per cwt on April 1.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">Regional dynamics<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">A Northeast distributor said he found it difficult to get shipments into his region. "Shipments from one mill that used to take a day or two now take three or four days," he said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">At the same time, the distributor said, freight charges from one mill have increased from $3 per cwt to $4 per cwt, not including the fuel surcharge.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">A Northeastern fabricator also reported that it was difficult to get trucks into the region during the winter, but said that trucks were becoming more available now that the winter weather has passed.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">A Mid-Atlantic distributor said that trucks are scarcer in the Northeast because there are more deliveries going into New York and New England than leaving, which means the truckers are "dead heading their shipments" and will only get paid for going one direction instead of the round trip.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">A West Coast distributor also reported delayed arrival of shipments.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">"You can't just pick up the phone and a truck will be there the same day. Now it takes a couple of days or even three days," he said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">"A lot of drivers got out of the business because of [the economic slump caused by] Covid-19, particularly in the steel business and in flat-bed shipping," the West Coast distributor said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">While truckers were leaving the workforce, new ones were unable to enter it, according to Vise. During the pandemic, potential truckers were unable to obtain appointments for a learner's permit to become licensed, Vise said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">As a result, the number of payroll jobs for long-distance truckers fell 5% in March compared to pre-pandemic levels, according to FTL.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">The sudden drop in truck drivers combined with a sudden surge in demand and rising prices has delivered "a perfect storm" for shippers, Vise said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">A distributor in the Midwest said low pay was a contributing factor to the lack truck drivers.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">"Mills are not paying enough to get drivers. They should be paying more," the midwestern distributor said. "Look at what steel costs. The mills are selling steel for a lot more. They've got the margins to pay more."<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">With produce season arriving, truck drivers may switch to carrying produce instead of steel since produce shippers typically pay more, the distributor said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">But there are positive signs too. "As I look down the road, I don't think we're going to be at this peak level [of truck shortages] for a long time]," Vise said. For one thing, demand for flat-bed trucks from the residential construction sector is expected to ease, leaving more trucks for shipping steel.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;">"While the truck shortage will not quickly ease, for shippers, the worst is probably behind them," Vise said.<o:p></o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p><p class="MsoNormal" style="font-family: Calibri, sans-serif; font-size: 11pt; margin: 0in 0in 0.0001pt;"><o:p> </o:p></p>Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-85520013668620778922019-12-20T12:46:00.003-08:002021-05-16T13:52:36.646-07:00Early “Catastrophic” Blackstone Deal Led to Schwarzman’s Passion for Preserving Capital<h4 style="text-align: center;">
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<p style="text-align: left;"><span style="font-size: medium;"><span style="font-family: Calibri, sans-serif;"><i>W</i></span><i style="font-family: Calibri, sans-serif; font-weight: normal;">e tend to remember and apply best those life-changing lessons that were painfully learned. For Stephen A. Schwarzman, chairman, CEO and co-founder of The Blackstone Group, one of those early painful lessons was the importance of establishing and following a rigorous process for assessing all the risks before making an investment.</i></span></p><div class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in 0in 0.0001pt;">By Robert Stowe England</div><div class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in 0in 0.0001pt;"><br /></div><div class="MsoNormal" style="font-family: Calibri, sans-serif; margin: 0in 0in 0.0001pt;">“We go from the premise that our first job, sort of like a doctor, is do no harm – and in the financial business that means don’t lose money,” Schwarzman said November 6 at a Reuters Newsmaker event for his new book <i>What It Takes: Lessons in the Pursuit of Excellence</i>. He was interviewed at the Thomson Reuters building in New York before invited guests by Reuters editor-at-large Sir Harold Evans. Schwarzman in his book cited “don’t lose money” as the number one rule at Blackstone, acknowledging that saying that out loud sometimes prompts smirks. <o:p></o:p></div>
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Since before the September 17 release of the book, Schwarzman has granted a number of high-profile interviews with prominent media outlets and venues besides Reuters. The <i>Wall Street Journal</i> was first out of the gate with a feature titled “Stephen Schwarzman’s Lifelong Audacity.” Next the Economic Club of Washington, D.C. sponsored a live interview of Schwarzman by David Rubinstein, whose eponymous show on Bloomberg features peer-to-peer interviews and who is also co-founder and co-executive chairman of The Carlyle Group, a private equity firm. <o:p></o:p></div>
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On the day the book was released Schwarzman was the featured guest on CNBC’s early morning talk show Squawk Box. Schwarzman has also been interviewed live at high-profile events sponsored by the <i>New York Times</i> and the <i>Washington Post</i>. <o:p></o:p></div>
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Blackstone’s chairman, in his conversation with Sir Harold Evans, tied his passionate aversion to losing money, especially capital, in part, to losses from the firm’s third investment: a $330 million leveraged buyout in 1989 of Edgcomb Metals Company, a Tulsa steel distributor. The price per share was $8, four times the $2 share price of a 1986 LBO of Edgcomb by Drexel Burnham Lambert. “Based on our analysis, [it] seemed like a good price,” Schwarzman wrote in his book.<o:p></o:p></div>
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Read more <a href="https://www.ai-cio.com/news/disaster-made-blackstones-schwarzman-today/" target="_blank">here</a>.<br />
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-33052417587852433172019-10-15T04:28:00.001-07:002019-10-15T12:00:19.766-07:00Crypto Index Funds Scramble to Win Over Hesitant Investors<div class="separator" style="clear: both; text-align: center;">
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Hunter Horsley, chief executive officer of Bitwise</div>
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<span style="font-size: large;"><span style="text-align: left;"><i>Entrepreneurs believe that crypto index funds will greatly expand the crypto investor base just as the S&P 500 and the Russell 2000 indexes have done for stocks.</i></span><span style="font-family: "calibri" , sans-serif; text-align: left;"> </span></span></div>
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<span style="font-size: 12pt; white-space: pre-wrap;">As entrepreneurs look to take cryptocurrency mainstream, they’re copying a tried-and-trusted approach from traditional investing: indexing. Index investing is designed to generate returns that are similar to a broad market index. This approach can reduce the risk of picking individual assets which might underperform the broad market. So, in the case of an equity index, instead of picking say Exxon, Apple, Johnson & Johnson, and Ford, for example, you invest in the broad market. </span></div>
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<span style="font-family: "calibri" , sans-serif; font-size: 12pt; vertical-align: baseline; white-space: pre-wrap;">Several new crypto index products have launched recently, offering investors new avenues into the market without some of the risks associated with putting money into single blockchain projects. </span></div>
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<span style="font-size: 12pt; white-space: pre-wrap;">Crypto indexers take their cues from broad stock market index funds, such as those based on the S&P 500 Index. An investor does not have to know every detail about the changing public tastes in the ever-burgeoning soft drink market or the corporate strategy of Coca-Cola or Pepsi -- or any other market or company to invest in the S&P 500 index fund. An investment in an S&P 500 Index fund will give the investor broad market exposure. </span><br />
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The simplicity and ease of investing in stock and bond indexes helped create the enormous $19.4 trillion market represented by U.S. mutual funds and exchange traded-funds (ETFs) tracked by Morningstar. </span><br />
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“We’re trying to be the BlackRock of crypto,” says Hunter Horsley, CEO of San Francisco-based Bitwise Asset Management, which pioneered crypto index investing in 2017. BlackRock is the world’s largest asset manager and also the largest provider of exchange-traded funds through its iShares division. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bitwise has an application before the U.S. Securities and Exchange Commission (SEC) for approval for a bitcoin ETF based on its Bitcoin 10 Private Index Fund, which is available to U.S. accredited investors through financial advisers and requires a $25,000 minimum investment. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Bitwise 10 Private Index Fund soared 45% in the early months following its launch, as the price of Bitcoin rose, bringing in 500 investors. Later it sank and remained low during the crypto winter, then began to regain value over the summer and now has 600 investors. “In crypto it’s always two steps forward, one step back. It’s a tumultuous space,” says Horsley. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Bitwise reports that the fund is up 750% since its start date of January 1, 2017, but declined to reveal the value of all the assets in the fund.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The crypto index fund products are growing in sophistication. For example, you can invest as little as $10 with Circle Invest’s The Market and own a piece of each of the 13 crypto coins traded by Circle, which operates a trading platform where individuals and institutions can buy and trade crypto assets. In theory, this simplifies investing in crypto and diversifies the risk across top-traded assets. A few months after its success with its first index offering, Circle added three new options as part of its </span><a href="https://blog.circle.com/2018/10/04/circle-invest-announces-collections/" style="text-decoration: none;"><span style="background-color: transparent; color: #954f72; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Collections</span></a><span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> of crypto baskets.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The projects tend not to reveal exact numbers of clients investing in their indexes or the amount of money invested. Some do provide hints, however. Circle Invest has reported that 30% of their users have invested in one of their four crypto indexes, but they have not given any hints about the amount of money invested in its indexes.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Index entrepreneurs are undeterred that no crypto asset fund or index fund has secured approval by the SEC. They also seem undaunted by what appear to be relatively small customer ranks at present. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Chris Reinertsen, founder of Cerus, a crypto trading platform, admits that it’s hard to say if the new products and ideas are gaining traction. In spite of renewed enthusiasm among index providers, many investors remain skittish. “The market is still very much in its infancy,” he says.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">These new approaches have potential, according to Reinertsen. “The average investor does not want to deal with all the complications associated with digital. They don’t want to manage keys or set up wallets.” To the extent innovators are successful in making it easier to access and invest in digital assets, “it can be the key that can finally gives crypto some traction.”</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 700; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Inside Crypto Index Design</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Innovators are offering crypto indexes as managed trading strategy software that can buy, hold and rebalance a basket of crypto assets for the investor. This allows investors to purchase market-cap weighted baskets of crypto assets in jurisdictions where the trading of crypto has gained approval. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Typically, money invested in an index fund is parceled out or allocated by the fund managers using a formula based on market cap. Each share’s allocation is calculated from its market cap as a portion of the overall market cap of all the stocks in the index. Over time as price changes increase or decrease, the amount of money invested in each share shifts. To rebalance, the allocations to stocks are adjusted to bring each stock back in line with the allocation formula. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Despite rising optimism in the ranks of the index providers, there is some skepticism about the whole premise of crypto indexes. “Indexing and balancing crypto assets is combining two things that don’t go together,” says Gil Luria, director of research at financial services firm D.A. Davidson.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">With stocks, bonds and real estate, indexing diversifies risk. Rebalancing brings exposures back into balance. Neither of these ideas translates well to technology in general or crypto assets in particular, according to Luria.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Luria believes there are very few crypto assets that have shown any ability to be commercially viable. “If you buy a successful one alongside all the other ones, most of the crypto assets are going to be valueless,” he says. “The increasing value of one or a handful of crypto assets will not be enough to offset that.” </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">But Parul Gujral, CEO of San Francisco-based Snowball Finance , one of the crypto startups, calls crypto indexes “smart investing automation.”</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Snowball mobile app quietly went public July 27 with four crypto index products</span><span style="background-color: white; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. One offers access to the broad crypto market; while two products focus on the top 10 and top 5 crypto assets respectively. The fourth includes 10 crypto assets traded in U.S. dollars.</span><span style="background-color: white; color: #3c4043; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">While residents of 33 U.S. states can invest in Snowball’s indexes, they are not yet available in the remaining 17 states, including New York, Pennsylvania, Illinois, Texas, Wisconsin and Oregon. Gujral declines to say how many investors have signed up so far.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Gujral stresses that Snowball is a SEC-registered investment adviser firm and that its four options are “professionally curated indexes.” He tells Cointelegraph that its options are modeled after other established crypto indexes with at least $10 million in assets under management. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Panda Analytics has a different approach. The New York company’s “software as a fund” tool allows investors to create their own index, according to its founder and CEO Bill Xing. Start-up funding for the project was provided by angel investor Vladimir Jelisavcic, a director and incubator at Panda who co-authored a </span><a href="https://medium.com/@PandaAnalytics/automation-of-digital-currency-portfolios-e02f31acf4ce" style="text-decoration: none;"><span style="background-color: transparent; color: #0563c1; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">blog</span></a><span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> with Xing on the automation of crypto portfolios. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Since going live in March, Panda has attracted 420 users. Clients have accumulated more than $100,000 in assets linked through Panda’s software, according to Xing.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Even with the additional labor of the do-it-yourself approach, Xing claims Panda makes it easier to invest in crypto. “You don’t need to do very much to own and manage your index,” he said. “That’s why it’s appealing to people who don’t want to spend time in the space.”</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Panda clients hold their assets in their own wallets but must transfer them to an exchange to trade. Afterwards the assets are returned to their wallets. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">CoinCube, based in Brooklyn, New York, began the design of its investment platform for index investing as part of the Kickstart Accelerator program in Zug, Switzerland in 2017. Unfortunately, when it rolled out its platform, the trading engine was not built to easily scale up trading volume, says CEO Robert Allen. “We couldn’t onboard users. We couldn’t handle the traders,” he says.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">After the platform strained under a big influx of users and investors, according to the CEO, the former chief technology officer left the company. Allen then set out to redesign and rebuild the platform. He learned to code so he could design and rebuild the back end of the platform. He hired a team of software engineers to redesign the front end. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">CoinCube now has 300 to 400 users but only 50 to 100 are paying customers, according to Allen. There are three service levels: tracking (which is free), index investing, and “Centaur mode,” a portfolio management tool and rebalancing that can be set at any interval, from hourly to monthly.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Allen initially catered to everyday retail investors, but now focuses primarily on accredited and institutional clients. The former group had too much tolerance for risky assets. “They buy as many shitcoins as they can in hopes one or two go parabolic and they can cash in on that,” he says, talking about traders with a penchant for buying riskier coins with low value. “Unfortunately, that doesn’t work all the time.” </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Allen wants to build in a multi-asset wallet and to facilitate “atomic swaps,” which allow users and exchanges to trade without leaving a user’s crypto assets sitting on an exchange. “The trade is settled to you. There’s no risk of you being robbed or losing your funds,” he says. Allen’s concern about security is heightened by the fact that a six-figure amount of his own bitcoin was hacked.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Crypto index investing has potential, but caution—as ever in crypto— is in order. There have been some dramatic flops. On July 19, crypto exchange trading powerhouse Coinbase suddenly ditched its Coinbase Bundle index product without explanation. Coinbase’s Bundle mobile app was launched in the fall of 2018 to reach the mass retail market. Investors could invest in a 6-crypto index with as little as $25. </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Eric Conner, founder of ethhub.io, trashed the idea in a </span><a href="https://twitter.com/econoar/status/1045348326978154497" style="text-decoration: none;"><span style="background-color: transparent; color: #1155cc; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">tweet</span></a><span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> when Coinbase first offered it. “The @coinbase bundle seems like a lazy product. Weighting off current market cap makes little sense. Should just let the buyer decide their weights,” he stated. <a href="https://cryptobriefing.com/coinbase-bundle/" target="_blank">Crypto Briefing</a></span><span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> first spotted the vanishing bundle July 4 and tagged a <a href="https://support.coinbase.com/customer/en/portal/articles/2953945-coinbase-bundles-faq" target="_blank">Coinbase FAQ</a> </span><span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">as its source: “Coinbase Bundle purchases have been deprecated, as such all assets purchased in the bundle have been redistributed to their respective individual asset wallets.”</span></div>
<b style="-webkit-text-size-adjust: auto; -webkit-text-stroke-width: 0px; caret-color: rgb(0, 0, 0); color: black; font-family: -webkit-standard; font-style: normal; font-variant-caps: normal; font-weight: normal; letter-spacing: normal; orphans: auto; text-align: start; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; widows: auto; word-spacing: 0px;"><br /></b>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span style="border: none; display: inline-block; height: 693px; overflow: hidden; width: 599px;"><img height="693" src="https://lh6.googleusercontent.com/gd1G-oOv80Y0djUNTMzlzRKaCFerXlYDgpuEDdpwiwrdqMjoZH59RlNuv1QhA5C1TKzYCYWLCTFb3sLqEebU4xS8n2r4zWRH00dZwxHo0gRJDzdTnfu5N_cz3zSPz2si3KeE0QrO" style="margin-left: 0px; margin-top: 0px;" width="599" /></span></span></div>
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<span style="font-size: 12pt; white-space: pre-wrap;">Late last year, the Winklevoss Twins introduced Cryptoverse on the Gemini mobile app. This market-weighted index includes five coins available on the Gemini exchange – Bitcoin, Ethereum, Bitcoin Cash, Litecoin and Zcash. </span><br />
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">On June 26, Bitwise announced </span><a href="https://www.bitwiseinvestments.com/resources/press-releases/bitwise-licenses-new-index-to-amun-to-support-swiss-listed-exchange-traded" style="text-decoration: none;"><span style="background-color: transparent; color: #0563c1; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">a new variation</span></a><span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> on its large cap index to support a new exchange traded product or ETP fund listed on the SIX Swiss Exchange. The same day the Swiss exchange listed the Amun Bitwise Select 10 Large Cap Crypto Index (ticker symbol KEYS). </span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The fact that indexing is moving from the institutional side to the retail side is “a pretty good indicator that it’s starting to mature” as an asset class, says Reinertsen, the Cerus founder. Still, the perpetual issue of high volatility among crypto assets remains an obstacle.</span></div>
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<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“It’s hard for crypto index funds to stay afloat in tumultuous times,” Reinertsen says. “With traditional index funds that’s not something we see.”</span><br />
<span style="background-color: transparent; color: black; font-family: "calibri" , sans-serif; font-size: 12pt; font-style: normal; font-weight: 400; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-19890558386804659122019-06-19T07:13:00.000-07:002019-07-06T10:17:39.868-07:00Rob Arnott: Out-of-Favor Value Stocks Set to Outperform Next Five Years<div class="MsoNormal" style="font-family: "Times New Roman", serif; margin: 0in 0in 0.0001pt;">
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<span style="font-family: "times new roman" , serif;"><span style="font-size: x-large;"><i>A turnaround in the outlook for value would mark a stark change from the recent past. Rob Arnott explains why this is likely in an extended Q&A.</i></span></span><br />
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<span style="font-size: large;">By Robert Stowe England<o:p></o:p></span></div>
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<span style="font-size: large;">Value stocks have been underperforming the market for most of the last 12 years. Their recent performance relative to large market cap benchmarks is well below historic norms. This might lead investors to think they should avoid this sector. <o:p></o:p></span></div>
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<span style="font-size: large;">Think again, suggests Rob Arnott, chairman and founder of Research Affiliates of Newport Beach, California. </span><span style="font-size: large;">“When value gets as cheap as it is now in the U.S., historically it has beat growth by 4% a year over the next four to five years,” Arnott says. </span></div>
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<span style="font-size: large;">This projection comes with roughly a 5% uncertainty factor, which means it could be 5 percentage points higher or lower. That would mean “somewhere between zero and 10%,” Arnott says. “Oh, I’ll take that bet. The low end of the spectrum of the range is zero.” <o:p></o:p></span></div>
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<span style="font-size: large;">Emerging market value is even cheaper by historic norms. “The expected outperformance is 8% with 5% uncertainty. I’ll take that risk anytime,” Arnott says.<o:p></o:p></span></div>
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<span style="font-size: large;">A turnaround in the outlook for value would mark a stark change from the recent past. In the last five years, for example, the Russell 2000 Value Index (RUJ) has returned 15%. </span></div>
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<span style="font-size: large;">By comparison the broader Russell 2000 Index (RUT) has returned a much higher 29%. The S&P 500 has returned an impressive 47%.<o:p></o:p></span></div>
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<span style="font-size: large;">In making his case for the outlook for value, Arnott counsels against a common mistake that investors make, relying on recent past performance to make investment decisions.<o:p></o:p></span></div>
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<span style="font-size: large;">“If you buy a mutual fund because it’s performed well – if you haven’t checked whether it did well by dint of having become more expensive, by dint of the valuations multiple story, then chances are you’re buying a newly-overpriced fund. And setting yourself up for the classic buy at the top, sell at the bottom pattern,” says Arnott.<o:p></o:p></span></div>
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<span style="font-size: large;">Arnott’s positive long term outlook for value is based on what he calls the <i>relative valuation </i>of factors within the broader market of equities – factors such as value, growth, quality, momentum, low volatility – as well as changing spreads between factors. <o:p></o:p></span></div>
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<span style="font-size: large;">Relative valuation provides a way to compare current prices to the median historic performance for a given factor, index or spread. “Valuation is a very powerful predictor of future performance for managers and for strategists,” Arnott says. <o:p></o:p></span></div>
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<span style="font-size: large;">An innovator in indexation strategies, Arnott is basing his positive outlook for value on the fact it has gotten increasingly cheaper since 2007 on a relative valuation basis. <o:p></o:p></span></div>
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<span style="font-size: large;">As investment factors like value move toward the low end of their historic range, it makes them an attractive investment to purchase as they are more likely to outperform over the long term as their relative valuation reverts to the factor’s mean historic performance, according to Arnott. <o:p></o:p></span></div>
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<span style="font-size: large;">Arnott cautions investors on getting too focused on when exactly the market will turn. “So this isn’t good for timing. It’s great for gauging forward-looking returns,” he says. <o:p></o:p></span></div>
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<span style="font-size: large;">Taking the plunge into value could also bring some disappointment. It could “hurt in individual years,” he says.</span></div>
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<span style="font-size: large;"><span style="font-family: "times new roman" , serif;">For example, Arnott expected value to move higher after it hit a low in 2015. While it did move up in 2016, the move was short lived. Value returned to underperformance in 2017, 2018, and so far in 2019. <o:p></o:p></span></span></div>
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<span style="font-size: large;">Arnott’s firm introduced the Research Affiliates Fundamental Index (RAFI) in 2005 as an alternative to traditional equity indexes, such the S&P 500 and the Russell 2000. </span></div>
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<span style="font-size: large;">Rather than relying on market capitalization to weight companies in an index, RAFI weighted companies on fundamental measures of size: book value, cash flow, dividends plus buybacks, and adjusted sales. <o:p></o:p></span></div>
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<span style="font-size: large;">According to Research Affiliates’ <a href="https://interactive.researchaffiliates.com/smart-beta#!/strategies" target="_blank">smart beta interactive website</a>, the RAFI fundamental index for the U.S. should provide a net 2.73% excess annual returns over the Standard and Poor's 500 benchmark over the next five years. This outlook comes with a 3.5% tracking error (for uncertainty). That means annual excess returns could range from minus 2.57% to plus 6.23%<o:p></o:p></span></div>
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<span style="font-size: large;">The firm also has an index for value called the RAFI Value Index, as well as similar indexes for quality, low volatility and other factors. <o:p></o:p></span></div>
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<span style="font-size: large;">The RAFI Value Factor strategy selects the top quarter of large companies by fundamentals-to-price ratios and weights stocks by the same four measures used in the fundamental index. <o:p></o:p></span></div>
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<span style="font-size: large;">The firm projects 4.69% average excess returns over the next five years for U.S. RAFI Value Factor. The outlook comes with a tracking error of 5.8%, which means it could range from minus 1.11% to plus 10.49%<o:p></o:p></span></div>
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<span style="font-size: large;">***<o:p></o:p></span></div>
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<span style="font-size: large;">INTERVIEW WITH ROB ARNOTT</span><br />
<span style="font-size: large;">NEW YORK</span><br />
<span style="font-size: large;">JUNE 6, 2019<o:p></o:p></span></div>
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<i><span style="font-size: large;">The text from the transcript of the in-person interview has been shortened and lightly edited for readability and flow.<o:p></o:p></span></i></div>
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<b><span style="font-size: large;">Q: You launched the Research Affiliates Fundamental Index in 2005 and at the time the idea was somewhat controversial. You and your co-authors found that historically weighting the stocks for an index using fundamentals, such as book value, earnings, revenue, sales, and dividends, earned annual excess returns of 1.97 percentage points over the S&P 500 or 2.15 percentage points over a reference portfolio of 1,000 stocks. Could you recount some of the initial response?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: It is funny how the publication [of that original article titled <a href="https://www.researchaffiliates.com/documents/FAJ_Mar_Apr_2005_Fundamental_Indexation.pdf" target="_blank">“Fundamental Indexation”</a> in the March/April 2005 issue of <i>Financial Analysts Journal </i>co-written with Jason Hsu and Philip Moore ] was controversial on so many stupid levels. How dare he use the word index? Last time I looked at the Oxford Unabridged, I don’t remember seeing cap weight as part of the definition of the word index. And how dare he write an article about something he is offering as a live product. Well, when the paper was submitted and accepted, it wasn’t yet a live strategy. And, so what anyway, because if it’s a good idea, what can’t you both publish it and run it? <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Since 2007 investors who have put money into Research Affiliates Fundamental Indexes have not earned the excess returns cited in the research published in 2005. How do you explain its performance since then? <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: What’s been fun is that everyone knows RAFI’s got a deep value tilt. So relative to the market, a period of time when value has been getting crushed for 12 years now, it’s just shocking, we’ve actually eked out a small edge over the market against that headwind. When you compare us against the Russell Value [Index], for example, the outperformance is just tremendous. So that’s been fun.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: You’re saying the Russell Value Index has underperformed the broader market since 2007? <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Right. And RAFI is in line with the market in the U.S. and is well ahead of the market outside the U.S. even though value has been decimated in U.S., international and emerging markets. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: There have been many times in the last five years when I thought value would turn and be on the upswing – but each time it has not materialized.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: I thought [the value cycle would turn] at the end of 2015, when value went into free fall. Once it turned in late January of 2016, I thought OK. Finally, value will get its day in the sun. Well that lasted all of one year. And then in 2017, 2018 and into 2019 – growth, growth, growth. So it’s been fascinating to watch. <o:p></o:p></span></div>
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<span style="font-size: large;">As for the asset flows into the fundamental index, obviously the growth slows when you’ve got a headwind. But we’re still seeing inflows. So that’s very reassuring to see. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: How much in total assets is under management using RAFI indexes licensed by Research Affiliates? <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: It was $170 billion last tally. And, that’s up modestly from a couple of years ago and sharply from three to five years ago.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: In the past how long has value been out of favor before it bounced back and began to beat broad market averages? <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Usually it’s a little bit like a stock market cycle, peak to trough to peak, tends to go 5 to 8 years. But there are exceptions. From 1986 to 2000 there was a 14 year span of value underperforming. Not every year. But peak to trough, it was 14 years.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Then it entered an upcycle? <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes. And the recovery from 2000 to 2007 earned back the entire shortfall, with ample room to spare. Value reached a new high in cumulative relative performance. So we’ve given up a lot of ground in the last 12 years. But what’s interesting is that’s in the context of value getting cheaper relative to growth. The <i>valuation </i>spread [between value and growth] has widened. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: What are the implications for investors when they are choosing asset managers in a climate like today when the spread has widened between value and growth? <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: We’ve written a couple of papers about the topic of how people choose asset managers. One was last fall in the <i>Journal of Portfolio Management</i>, “The Folly of Hiring Winners and Firing Losers.” And in that paper, we pointed out that if a manager is underperforming, you need to draw a distinction. Has their strategy become cheaper [relative to historic norms]? In that case, it is a buy, not a sell. Or, has it become cheaper net of any valuation change? If it has, they have underperformed, in which case, you should probably get rid of them. Valuation is a very powerful predictor of future performance for managers and for strategists. <o:p></o:p></span></div>
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<b><span style="font-size: large;">A: When you talk about valuation, what do you mean?<o:p></o:p></span></b></div>
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<span style="font-size: large;">Q: When a strategy gets cheaper relative to the market or is expensive relative to the market, it will have a natural premium or discount. Such <i>valuations </i>use a price-to-earnings ratio, dividend yields, price to book, whatever you like. [The valuation of] value [as a strategy] always changes [over time]. Quality is always expensive. Momentum is always expensive. The question is – is it cheaper or more expensive than normal? <o:p></o:p></span></div>
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<span style="font-size: large;">So value has a normal spread between growth and value [based on historic norms]. When value gets cheaper than that, value is usually positioned to perform very well. That’s where we are now, especially in emerging markets, where the spread is unbelievable. And if the spread is narrower than historic norms, you’re probably not going to benefit by having a value bias. <o:p></o:p></span></div>
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<span style="font-size: large;">So we go back to 2007, the spread between growth and value in terms of valuation was the tightest it had been in 30 years. We hadn’t done this research back then. So I can’t lay claim to having made this as a prediction. But, with the spread between growth and value at a historically narrow spread, what a great time (2007) to abandon value. <o:p></o:p></span></div>
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<span style="font-size: large;">Our <a href="https://interactive.researchaffiliates.com/smart-beta#!/strategies" target="_blank">smart beta interactive website tool</a> actually dives into that and makes forecasts about how much output strategies like this will deliver. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Based on that spread?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Based on that relative valuation spread. Quality – you always pay a premium for quality. Historically it’s anywhere from 30% -- comparing high quality to low quality stocks – anywhere from a 30% premium to a 100% premium. The norm seems to be about a 60% premium. So if you’re paying a 60% premium, quality will perform like the market. If you’re getting away with buying quality at only 30% premium double down. Because quality is cheap. It may be at a premium historically with the market but it’s cheap, relative to historic norms.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Where are we now? <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: 120% premium. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: For quality?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes. And people are piling into quality strategies. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q The 120% premium – how is that calculated?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: The gap is between high quality versus low quality.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: How is quality measured?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: The standard measure for quality is profit margin. And, in constructing factors, the norm is to take the best 30% and the worst 30% and look at that as a long-short portfolio. So the 30 highest profit margin businesses are going to be priced at higher multiples than the 30 lowest profit margin businesses. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Does this mean that if you invest in a quality index today you will likely overpay?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes. You can overpay. And if you’re paying double for the higher quality, well quality is not going to perform very well. And that’s provable. And where are we now? At slightly more than double. Well over the top of our historical low valuation.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: You’re saying that right now the outlook for the quality factor funds would be for a poor performance in the coming five years.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Right. I wrote a paper in 2016 about how factor investing could go horribly wrong [<a href="https://www.researchaffiliates.com/en_us/publications/articles/442_how_can_smart_beta_go_horribly_wrong.html" target="_blank">How ‘Smart Beta’ Can Go Horribly Wrong</a> by Rob Arnott, Noah Beck, Vitali Kalesnick, John West]. And it stirred quite a backlash. A couple of competitors who were offended said that I was suggesting valuation mattered for factors. I thought it was amusing because if I had written the same article about stock picking – how can stock picking can go horribly wrong – [there would not have been a backlash]. If you buy a stock that has performed brilliantly and it’s trading at high valuation multiples, you might be making a mistake. Of course, everyone knows that. But, by saying exactly that message about factors and strategies, folks got mad. It was really quite interesting.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Do you think the backlash came possibly because the halo effect around factor investments had gotten so glowing, as it were, the sponsors had not heard any criticisms of their strategies?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: They hadn’t heard much criticism. It was seen as a new Holy Grail. The paper portfolio results were amazing. The live experience results were not too bad through 2015. Most factor strategies were in fact beating the market but not by nearly as much as they were supposed to. And so that paper [on how smart beta can go horribly wrong] came along at a time – you’re right – there was a glow and a halo. And yet the basic message was so intuitive and so unexceptional, uncontroversial to somebody who thinks about markets that I thought it was quite hilarious that people took umbrage at it. <o:p></o:p></span></div>
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<span style="font-size: large;">We used that methodology in June of 2016 to say the most expensive factors right now are low volatility, momentum and quality. And the only one that’s trading really cheap is value. And six months later value had outperformed growth by about 400 basis points. <o:p></o:p></span></div>
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<span style="font-size: large;">And low volatility had underperformed by well over a thousand basis points. In fact, there were low volatility ETFs – not long/short but just by low vol stocks that had underperformed by 800 to 1,000 basis points in six months. So we did a short piece saying alright here’s the evidence it actually does work, meaning the analysis had relative valuation. <o:p></o:p></span></div>
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<span style="font-size: large;">We had a low volatility ETF that had huge inflows and they were angry because I singled out low vol as the most overpriced. My response to them was, it’s performed brilliantly and you’ve seen those inflows because it got more and more expensive. People were paying more than twice as much for low volatility companies than for high volatility companies. And you think you’ve got downside protection when you’re paying twice the multiple? And that strategy then underperformed by close to 1,000 basis points in the next six months.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: So right now, the spread for value relative to historic norms is very low? <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: In the U.S. it’s in the bottom quintile. In international markets it’s about 35<sup>th </sup>percentile, cheaper than historic norms but not drastically so. And in emerging markets it’s the cheapest it’s ever been. So that level of cheapness tells me that value should beat growth in emerging markets by a huge margin. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: That would be the one segment that is most likely to outperform.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: And I eat my own cooking. I’ve put close to half my liquid portfolio in emerging markets.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: In your own portfolio?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes. I wouldn’t ever do that for a client. It’s too much maverick risk. Could it underperform a 1,000 or 2,000 basis points before it outperforms? Of course, it could. And if you’re comparing Standard and Poor's 500 versus emerging markets deep value you can have a huge tracking error. For a client portfolio I would go as far into emerging market value as your guidelines will permit. And for most of those, that’s going to about 10 percent.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Should institutional investors allocate additional funds to reach 10 percent in emerging markets value?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: If you had 10 percent allocation and if emerging markets deep value beats Standard and Poor's 500 by 1,000 basis points a year over the next five years, hypothetically, that’s enough for you to capture – if it’s a 5 percent allocation its 50 basis points a year better performance – if it’s a 10 percent allocation its 100 basis points better performance. It’s enough to make a difference. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: This is obviously long term strategy and not a short term strategy.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: We don’t pretend any expertise in picking when a turn is going to happen. We do think we have considerable skills in identifying which markets are priced best to outperform long term, over a five or ten year horizon. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: We’re talking about equities here, right?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: For asset allocation, not just equities but the whole spectrum of asset classes. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: I have heard it is a good time to get into emerging market bonds.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes. That’s our view. We think the lowest hanging fruit is emerging markets value stocks. We think the lowest hanging fruit on a risk-adjusted basis is emerging markets local currency. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Local currency bond funds?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes. And the reason for that is really simple. Emerging markets debt currently has a higher yield than U.S. junk bonds, even though the majority of emerging markets debt is investment grade. This investment grade has a higher yield than U.S. junk bonds. That’s interesting.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Yes. <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Because of narratives relating to trade war and uncertainty in emerging markets, currencies are also cheap. [Emerging markets] currencies have fallen sharply relative to the dollar. What a great time to buy non-dollar. In fact, one of the things I find interesting is that I get a ton of questions about do you currency-hedge your risk. That question rises most typically after the dollar has soared. And it’s an interesting anecdotal market timing matter, but it seems when I get the question a lot – and I’m starting to get it a lot – the turn is usually not that far off.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: What message do you have for investors reviewing their portfolio for new asset allocation or even shifts in their allocation?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: I wrote a paper in the <i>Journal of Portfolio Management</i>last fall called “The Folly of Hiring Winners and Firing Losers.” And in that paper, I pointed out – and this works just as well in asset allocation – I pointed out that if you buy a mutual fund because it’s performed well – if you haven’t checked whether it did well by dint of having become more expensive, by dint of the valuations multiple story, then chances are you’re buying a newly-overpriced fund. And setting yourself up for the classic buy at the top, sell at the bottom pattern. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Do you find that institutional investors appreciate that analysis?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: I think in general yes. You get push back from some because the easiest time to sell a product is when it’s performed brilliantly. So institutional sales people aren’t going to point to this kind of analysis. They just aren’t – because the funds they can sell most easily are the ones that have done well. Most of them did well by getting overpriced. But if you want to be a successful investor, buying low and selling high works a lot better than buying high and selling low. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: No kidding.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: So we’re having fun with this. We’re doing some interesting work. If a consulting firm that helps people choose funds, even someone like Morningstar, if they were to publish information on how the funds performed 1, 3, 5 and 10 years and how its relative valuation has changed 1, 3, 5 and 10 years, now you’ve got a more complete picture. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: No one does that, do they?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: And it’s beat the market by over 20 percent over the last 5 years but it’s gotten 30% more expensive, that’s a strategy that just got lucky. Not a strategy we want to embrace.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: You’re saying that institutional investors can see how relative valuation works as an analytical tool when you talk to them about it. Do they normally put relative valuation into their calculations?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Normally, no. I’d love to see a consultant present to their clients that tier of information. How has it performed and what happened to the relative valuation? Because what you want is material performance that is materially better than change in valuation. RAFI has outperformed over the last decade in an environment that has been brutal for value, at a time when it’s gotten cheaper. That’s good news. And for most people, you’ll look at the performance and say it’s only added a few 10s of basis points. <o:p></o:p></span></div>
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<span style="font-size: large;">But not only that, it was bucking the fact it was a value oriented strategy. It has as much value as the value indexes did. And value indexes underperformed growth by 400 basis points a year for the last 10 years and we’ve been able to shrug that off and add value. That’s pretty cool.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Over last few years I’ve interviewed several fund managers who say they keep thinking at some point that value investing would be coming back soon because the gap has gotten so wide the potential turn was there. But that hasn’t happened.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: That’s been my view. The gap has gotten wide and it’s more likely to revert to the mean than get wider. And in 2016 that was correct. But in 2017 and 2018 not so much. So this isn’t good for timing. It’s great for gauging forward-looking returns. Relative valuation, when value gets as cheap as it is now in the U.S., historically on average it’s beat growth by 4% a year over the next four to five years. With about 5% uncertainty. Which would mean somewhere between zero and 10%. Oh, I’ll take that bet. The low end of the spectrum of the range is zero. But I could be hurt by it in individual years, including the first year after I make that bet. <o:p></o:p></span></div>
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<span style="font-size: large;">And in emerging markets it’s cheaper. The expected outperformance is 8% a year with 5% uncertainty. I’ll take that risk anytime. <o:p></o:p></span></div>
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<span style="font-size: large;"> <b>Q: This person said they wanted to wait until they see a major investor get into value and see the price move into value and see value respond, then people will pour in.<o:p></o:p></b></span></div>
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<span style="font-size: large;">A: Now that will be after the turn.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: So they will have missed the turn?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: They will have missed the turn. Because the flows in aren’t going to happen until after.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Right. But the ones who benefit the most will be those who had the foresight to be there first before the turn.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: The trouble with being a contrarian is that it is profoundly uncomfortable and uncomfortable for clients. Because if you buy what’s cheap, you’re buying what’s out of favor. You are buying what people are loathe to buy. There is no such thing as a bargain in the absence of bad news. Every bargain has a narrative of why it deserves to be cheap and why things could get worse. It’s a truism. You have to have those conditions to have a bargain. <o:p></o:p></span></div>
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<span style="font-size: large;">This means that when you buy, chances of picking the bottom tick are slim to none. When you buy, chances are it’s going to get cheaper before it gets expensive. <o:p></o:p></span></div>
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<span style="font-size: large;">So you look like an idiot until the turn happens. And when the turn happens, you were there with maximum exposure at the low because you’re averaging in a bigger position as it gets cheaper. We know contrarian investing works but we also know it’s profoundly uncomfortable and that it requires patience. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: That is working against people making that decision.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Correct. Early 2015, or no early 2016 I was getting a whole flurry of calls saying why are you in emerging market stocks – they are in free fall? And my response was the share is actually under 10 and that’s for the market. The value is under 6. The U.S. stock market was under 6 only one time in the last 10 years for one month, end of May 1932. My response was if you wait until conditions are less scary, you’ll have missed the opportunity. And, of course, emerging markets value stocks nearly doubled in the next couple of weeks. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: That’s where this person was describing most institutional investors would be, ready to make the move but not making the move.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Right. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: And the longer that goes on the more likely the turn is going to happen. <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: If you analyzed it properly then you would be more inclined to make the move. Right?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Right. And you’d more inclined to make the move but in the context where clients hearing this constant narrative of why things are going to get worse and worse. If you have true bargains you don’t need good news for the strategy to work. All you need is an absence of worse news than expected. Because the market is already priced to reflect an expectation that terrible things are going to happen. So they have to be more terrible than expected for things to get cheaper. If they are less terrible than expected, you’ve got a bull market. <o:p></o:p></span></div>
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<span style="font-size: large;">Brazil – when Dilma Rousseff<b></b>was under investigation for corruption, it was getting cheaper and cheaper and cheaper. And then they announced the impeachment hearings [around September 2016] and that was the bell for the turn of that market. All of a sudden nobody would expect Brazil to suddenly become a country under the rule of law with no corruption. But, all of a sudden there was a clear path to less corruption, a clear path to change in leadership – and a change in leadership to what? Uncertainty. People hate uncertainty, so it was still cheap but getting less and less cheap. So Brazil more than doubled in 12 months. The turn was almost exactly on the day the impeachment hearings started.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Now among all the emerging markets, where do you put Russia?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Russia is both at the top of the risk spectrum and one of the best of bargains. The P/E ratio for Russia is about 5 times, about 5 to 6. So you can buy the Russian stock market at about 5 to 6 times its 10-year smoothed earnings. That’s pretty cool. What are the risks? Well, that’s just valuation. That doesn’t have a Putin component. <o:p></o:p></span></div>
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<span style="font-size: large;">When Vladimir decides to engage in foreign adventures that dissipate cash and treasury and blood, alright, you aren’t going to see earnings grow. And if he gets angry about sanctions and says OK, I’m expropriating all foreign ownership then you have minus 100% returns. So both of those are possibilities, one is higher odds than the other. But they are both possible. So it’s that narrative that creates the chance. <o:p></o:p></span></div>
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<span style="font-size: large;">But if at the other extreme, Putin is succeeded by somebody who wants to reinstitute some rule of law and wants to turn to the global markets for capital and therefore wants the rule of law to apply particularly on capital markets, then you could see it go to 10 times earnings, 12 times earnings with earnings being higher. <o:p></o:p></span></div>
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<span style="font-size: large;">And if that happens, you got a market that just tripled. So the bad news is that there are some low odds scenarios that involve a minus 100%. And then there are some low-ish odd scenarios that involve plus 100% or plus 200%. Do I want to invest in Russia? Yes. Do I want to be overweight relative to the market? Yes. Do I want a big commitment, a big part of my portfolio, in Russia? Heavens, no. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Well, he’s very unpredictable.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: How big a part of emerging markets is Russia?<o:p></o:p></span></b></div>
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<span style="font-size: large;"><br />A: That’s where it gets interesting. As a share of the earnings of publicly traded companies in emerging markets, Russia represents 8 percent. As a percent of market capitalization, it’s 3 percent. So the RAFI weighting is 8 percent. And it looks like it is massively overweight. But is it massively overweighed? Or is the cap weighted index massively underweighted? <o:p></o:p></span></div>
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<span style="font-size: large;">The other one that’s pretty cheap is Turkey. Poland and South Korea are both moderately cheap. And then you have some countries that are kind of expensive in the emerging markets. They’re two-thirds of the U.S. valuation. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: What about China?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: That is moderately cheap now for the first time in a long time. Now China the worry is – if you look at earnings growth in China, it’s been pretty relentlessly negative. And that’s because shareholders get diluted. There’s new share issuance all the time, raising money from the Chinese citizenry. And the consequence is you’re diluted historically by 10% to 20% a year. <o:p></o:p></span></div>
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<span style="font-size: large;">So if there’s that much new issuance, there’s not 10% macroeconomic growth, so the growth doesn’t make up for it. So earnings per share goes down, not up. And so that’s an issue. But China is at a cheaper valuation level than its true historic norms. It’s all trade war related of course. <o:p></o:p></span></div>
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<span style="font-size: large;">One of the things I love is when you see a dramatic event in the global economy or geopolitics and it’s moving markets and it’s got everyone’s attention. Ask this very simple question. How much will this matter in ten years? Take the Trump-Xi trade wars. Ten years from now will it have materially affected the growth size of the economy for the U.S. or for China? I kind of doubt it. In which case the price moves affected by this issue create buying opportunities. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Of course, if you want to minimize your exposure to a single country you buy a basket of assets.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: That’s what I do. I don’t take concentrated country risk. I take that back. My one biggest bet is a concentrated country bet – and that’s away from the U.S. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Is that in your own portfolio?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes. And for in our asset allocation for our portfolios. Our asset allocation strategies are severely underweight U.S. – stocks, and to a lesser extent, bonds. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Because the valuations are so high?<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Yes. So the U.S. is priced for perfection. Things have to go very, very well just to keep valuations where they are. We’ve got headwinds in the next ten years. We’ve got headwinds from demography. The baby boomers are a big cohort. Right now, we’re all working. If our age cohort is sensible, they are saving aggressively for retirement because you can’t really trust Social Security. And if you’re saving aggressively for retirement, you become a valuation indifferent buyer. You’re happy to buy no matter what the price is. You have to. <o:p></o:p></span></div>
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<span style="font-size: large;">Well, ten years from now most boomers will be valuation indifferent sellers. Because they’ll be in retirement. They have to sell in order to buy goods and services in retirement. And they have to take whatever the market place offers them. So then the question is – are the millennials a big enough generation to have buying enthusiasm to match boomer seller enthusiasm. In our analysis that’s not likely. The natural valuation of U.S. stocks will be less than it is today.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Even more reason to diversify away from U.S. securities.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: If we get inflation, a lot of it will come from imports becoming more expensive. If that happens, you will want non-U.S. investments. It’s kind of interesting. European stocks are cheap. European bonds are miserably expensive. Japanese stocks are moderately priced, not cheap. But Japanese bonds are miserably expensive. In emerging markets stocks are very cheap. Value is exceptionally cheap. And their bonds are kind of cheap. Their yields spreads are better than [our junk] bonds. That’s a good situation. I’ve been called a perma-bear because I say markets are expensive. Right now there are markets that are cheap and kind of interesting but they are just not the markets most people are investing in. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Right now I guess people fear emerging markets more than usual.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: In the case of a flight to safety, that means a flight to further benefit their bias against emerging markets.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: But in all of that, there are institutional investors who see the opportunity and are willing to increase their allocation to emerging markets value. But basically, it’s a view that doesn’t come naturally and they resist that idea like everyone else. <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: And I get it. I can understand why. It’s painful to be wrong for very long if you are investing in something that is out of favor. If it gets cheaper, you look and feel like an idiot. If you’re a committed contrarian you buy more. But it goes against human nature. And your clients might not like it.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: I guess that’s why it is lone investors who typically act on this kind of understanding.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Right. You get rewarded for being a contrarian alone if you’re right. However, you get more rewarded if you have a very conventional, comfortable strategy and you’re right. It doesn’t happen very often. If you’re conventional and you are mainstream in your thinking and your process, and you underperform, you have a ton of company. Everyone around you is underperforming. So you can collectively lick your wounds and commiserate. You aren’t going to get fired nearly as fast as if you were a contrarian and temporarily wrong. <o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: The world of investing can be very interesting and one where you need to be constantly learning. <o:p></o:p></span></b></div>
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<span style="font-size: large;">A: Ah, yes. Endlessly fascinating. I’m 64 and I’m still a student.<o:p></o:p></span></div>
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<b><span style="font-size: large;">Q: Thank you for sharing your thoughts about investing.<o:p></o:p></span></b></div>
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<span style="font-size: large;">A: You’re welcome. It’s been my pleasure.<o:p></o:p></span></div>
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<span style="font-size: large;">END</span><o:p></o:p></div>
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<span style="font-family: "times new roman" , serif; font-size: large;">Copyright © 2019 Robert Stowe England</span></div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-63272775594870604982018-08-23T07:47:00.000-07:002019-06-23T15:02:40.344-07:00Investors Gain Premium from Timely Shift into Small Business Funds<div class="separator" style="clear: both; text-align: left;">
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<span style="font-family: "calibri" , sans-serif;"><i>A shift into small caps in the spring is reaping big summer rewards</i></span></div>
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By Robert Stowe England</div>
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Investors have been increasing their stakes in small cap equities since mid-May, according to EPFR Global, a Boston-based firm that tracks the performance of $38 trillion in mutual funds and ETFs. During June, net inflows into small cap funds rose to around $10 billion a week and have continued at the pace through mid-August. <o:p></o:p></div>
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The move into small caps that began in May has given investors in this sector a significant bonus. "This year small caps as a fund group are the best performing through the first week of August,” beating large cap and mid cap, according to Cameron Brandt, director of research for EPFR Global. The performance premium for small caps began in March and then took off in May and has continued into August. <o:p></o:p></div>
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Optimism in the small business sector of the U.S. economy has been rising since late 2016. The Small Business Optimism Index rose to <a href="https://tradingeconomics.com/united-states/nfib-business-optimism-index" style="color: #954f72;">107.9</a> in July. It was the second-highest reading in the survey’s 45-year history, just shy of the all-time high of 108 in July 1983, according to the National Federation of Independent Business, which conducts monthly small business sentiment surveys.<o:p></o:p></div>
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Businesses with fewer than 500 employees represent nearly half the economy, according to the Small Business AdministrationThe net increase in allocations to small cap equity funds is almost entirely from shifts by institutional investors and not retail investors, according to Brandt. Diving deeper, one finds that net inflows into small cap<i> growth </i>equity is outpacing those into value and blend funds, according to EPFR.</div>
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The surge of new money from investors marks an enormous turn around in sentiment for the small cap sector, according to Brandt. The data bear this out. From 2012 until the end of the first quarter, there was a significant exodus of money moving out of small cap funds, driven largely by a deteriorating outlook for small businesses during those years, according to Brandt.<o:p></o:p></div>
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Net outflows from small cap funds, which began modestly in the second half of 2011, rose to $10 billion weekly in early 2012, then $25 billion in 2014, hitting more than $175 billion weekly in early 2016. </div>
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The move into small cap equities stands in contrast to ongoing multi-year outflows from both mid-cap and large cap stocks as institutions have trimmed their equity exposures after huge stock price run-ups. At the same time, baby boomers in the individual retail market have continued to switch from equities to fixed income investments, according to Brandt.</div>
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Performance for small cap stocks began to rise after the 2016 election and gained momentum in December after Congress passed tax reform legislation lowering business tax rates. <o:p></o:p></div>
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<span style="font-family: "times new roman" , serif; text-align: center;">Copyright © 2018 Robert Stowe England</span></div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-14175164863068764122018-06-08T09:54:00.000-07:002019-10-21T09:32:59.675-07:00John B. Stetson in the Gilded Age: Sitting on Top of the World<div class="MsoNormal" style="font-family: "Times New Roman", serif; line-height: 24px; margin: 0in 0in 0.0001pt; text-align: center;">
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<a href="https://www.blogger.com/blogger.g?blogID=1466228407005500695" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=1466228407005500695" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=1466228407005500695" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a>Portrait of John B. Stetson by Irwin Benoni, 1895. Credit: John B. Stetson Company.</div>
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Sitting on Top of the World <o:p></o:p></h2>
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<span style="font-family: "georgia" , serif; text-align: left; text-indent: 0.5in;"><i>Note: This sample chapter is from the forthcoming book </i>Stetson: An American Icon</span></div>
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<a href="https://www.blogger.com/blogger.g?blogID=1466228407005500695" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=1466228407005500695" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=1466228407005500695" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><span style="font-family: "georgia" , serif; text-align: left; text-indent: 0.5in;"> After conquering the West, the rapid growth of John B. Stetson &</span><span style="font-family: "helvetica"; text-align: left; text-indent: 0.5in;"> </span><span style="font-family: "georgia" , serif; text-align: left; text-indent: 0.5in;">Company after 1880 propelled the company toward another accomplishment – becoming the largest hatter in the world. While there are no historic data on the number of hats sold for most of the 1880s and 1890s, available information on earnings growth sheds light on the company’s rapid ascent up the ranks of hat makers. Starting from a net annual profit of $70,136 in 1879, Stetson’s earnings more than doubled to $185,457 eight years later in 1887. </span></div>
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<span style="font-family: "georgia" , serif; text-align: left; text-indent: 0.5in;"> By 1890, profits were sharply higher at $332,624 on an estimated $1,330,000 in revenues.</span><span style="font-family: "times new roman" , serif; text-align: left; text-indent: 0.5in;"><span class="MsoEndnoteReference" style="font-family: "times new roman" , serif; text-indent: 0.5in; vertical-align: super;"></span> </span><span style="font-family: "georgia" , serif; text-align: left; text-indent: 0.5in;">Based partly on those revenues and its ever-expanding factory complex, Stetson would claim in 1891 that it was the largest fur felt hat maker in the United States.</span><span style="font-family: "georgia" , serif; text-align: left;"> </span><span style="font-family: "georgia" , serif; text-align: left; text-indent: 0.5in;">In the 1898 catalogue, Stetson claimed to have the largest and most complete hat factory in the world. The company was clearly edging toward the top. To reach its goal, however, Stetson faced stiff competition from major hat makers in America and around the world. </span><span style="font-family: "georgia" , serif; text-align: left; text-indent: 0.5in;">In the competition for first place, Stetson’s hat production in 1901 reached 939,000 hats, pushing it close to number one. </span></div>
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<span style="font-family: "georgia" , serif; text-align: left; text-indent: 0.5in;"> By 1907, the number of Stetson hats shipped had zoomed to 2,660,016, </span><span class="MsoEndnoteReference" style="font-family: "times new roman" , serif; text-align: left; text-indent: 0.5in; vertical-align: super;"></span><span style="font-family: "georgia" , serif; text-align: left; text-indent: 0.5in;">by which time Stetson could rightfully claim to be the world’s largest hat maker. Further cementing this claim, the February 1914 issue of <i>Moody’s Magazine </i>identified Stetson as “the largest hat makers in the world.” Stetson’s annual production of hats peaked at 3,762,876 in 1917, as sales of campaign hats for American soldiers and officers surged after the United States entered the Great War. </span><br />
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<span style="font-family: "georgia" , serif;">To reach the top, Stetson faced a strong challenge in the 1880s when another American hat-maker beat them to the punch with the introduction of the fedora, a hat destined to become a perennial favorite. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">The name fedora comes from the play <i>Fedora </i>by French dramatist Victorién Sardou. It tells the tragic story of Russian Princess Fedora Romanoff and her star-crossed love affair with Count Loris Ipanoff, the man who killed Fedora’s fiancé shortly before the date set for their marriage. The play debuted in Paris in 1882. The dazzling performance of international theatrical star Sarah Bernhardt assured the play would be a triumph. While some claim the inspiration for the fedora was a man’s hat worn in that play by Bernhardt, the reviews make no mention of it.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> A more likely origin of the men’s fedora hat style is tied to the October 1, 1883, American debut of <i>Fedora </i>starring Fanny Davenport at the Fourteenth Street Theater in New York. Edwin H. Price, Davenport’s husband and business manager, secured from Sardou in Paris the American rights to <i>Fedora </i>and the exclusive right for his wife to star in it. Davenport, while in Paris with her husband, had studied Bernhardt’s performance and Sardou later coached her in rehearsals in Nice, France. The New York run of the play, like the one in Paris, was a sensation and it was twice extended, leading the <i>New York Times </i>to call it “the most successful play of the year.” Following its New York triumph, the play was taken on the road to packed theaters around the country. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Davenport’s co-star was English-born Robert Mantell, a manly and handsome actor who later became a renowned Shakespearean actor. Years after <i>Fedora</i>, some newspapers credited a hat worn by Mantell in the play as the inspiration for the fedora hat. </span><span class="MsoEndnoteReference" style="vertical-align: super;"></span><span style="font-family: "georgia" , serif;">One of those claims appeared in the <i>Philadelphia Evening Public Ledger </i>in 1919, as follows: “The Quiz editor, our source of all miscellaneous and useless information, tells us that the fedora is named after Sardou’s drama of that name, because in that play Mr. Mantell wore a lid so comely that all men imitated it.” Historical sleuthing has not yielded any photos or drawings of Mantell in costume as Count Loris Ipanoff wearing a fedora style hat, although one photo shows him holding a top hat. In a publicity photograph card from 1903, Mantell is pictured in a jaunty pose wearing a fedora. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif; font-size: 10pt;">Photo of actor Robert B. Mantell published in 1903. He played the part of Russian Count Loris Ipanoff in the New York production of <i>Fedora </i>with the play’s lead Fanny Davenport in 1883.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">It was Stetson competitor Knox the Hatter of New York that seized upon the eminent opening of <i>Fedora </i>in New York to introduce a new style of man’s hat he called fedora on September 26, 1883 – five days <i>before </i>the opening of the play. Knox the Hatter was the handsome Edward Knox, a second lieutenant in the Union Army awarded the Medal of Honor for heroism at the Battle of Gettysburg in 1863. In his ad for the new hat in <i>The Sun </i>of New York, Knox claimed his new soft felt hat was imported from France. After the opening of the play proved to be a sensation, newspaper ads around the country by retailers of men’s hats depicted the new Knox fedora style hat with a tall tapered crown. The top of the hat is flat in some the drawings. In others, a round crown has a large vertical crease front to back. Both styles had a sprightly brim with a curled edge that bowed upward on either side when viewed from the front or back. A wide grosgrain ribbon hat band completed the look. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">The new Knox fedora hat style was reminiscent of the Homburg hat that so captivated the Prince of Wales and future King Edward VII of England on his annual summer visits to the thermal mineral baths in the town of Bad Homburg, Germany. Given that Americans then tended to follow hat styles from Europe, Knox was following a familiar path to success in the hat business. Three days after Knox the Hatter advertised the new hat in the <i>Sun </i>and two days before the opening of the play, a brief item in the <i>Brooklyn Daily Eagle </i>on September 29, 1883, told readers where they could buy the new Knox fedora. It was for sale at a shop located at 310 Fulton Street in lower Manhattan, the site today of the Freedom Tower of the World Trade Center.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Knox claimed in his ad in the <i>Sun </i>that the French designer of his new fedora was named Gavarny, apparently referring to French illustrator Paul Gavarni, the <i>nom de plume </i>of Sulpice Guillaume Chevalier. Gavarni was famous for his fashion plate drawings for magazines, as well as for his costume designs for the theater and opera in Paris. “In the first years of his celebrity he designed costumes for nearly every actor and actress on the Paris stage,” wrote a reviewer of a biography of Gavarni and his work published in 1873. While Gavarni had died a generation earlier in 1866, a selection of Gavarni’s illustrations was published in <i>Arts and Letters </i>in London in 1883. Either those illustrations or any of many fashion or costume designs Gavarni did in his life could have been the inspiration for the design of the first fedora introduced by Knox. <o:p></o:p></span><br />
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<span style="font-family: "georgia" , serif; font-size: 10pt; line-height: 20px;">Self portrait by Gavarni, December 31, 1841</span><span style="font-family: "georgia" , serif;"><o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> Stetson immediately jumped on the fedora bandwagon. By February 1884, Baltimore haberdasher Joseph Sigmund was advertising the arrival of Stetson’s own “Fedora! Fedora! Fedora! All Shades. Complete Stock.” Soon Stetson fedoras were competing with Knox fedoras and those of every major hat-maker churning out their version of the new style. By 1891, Stetson could say it was a larger maker of fur felt hats than any other U.S. hatter. By 1901, 24 of the 132 styles pictured in the Stetson catalogue could be classified within the fedora style category. Stetson played the long game and won.</span><br />
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<span style="color: #0070c0; font-family: "georgia" , serif; font-size: 12pt; font-style: italic; text-align: center;">Growing the Factory Complex</span></div>
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<span style="font-family: "georgia" , serif;">In response to its ever-rising sales and profits, John B. Stetson was perpetually building and expanding his factory complex. The pace of that expansion was captured in industrial site surveys done periodically between 1877 and 1892 by Ernest Hexamer, a Philadelphia publisher of fire insurance atlases that included detailed sketches put together by field surveyors. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> In February 1877, the first Hexamer survey of the Stetson complex in the South Kensington neighborhood included five buildings in the center of a V-shaped city block just north of Columbia Avenue, with North Fourth<sup> </sup>Street on the east and Cadwalader Street on the west and Montgomery Avenue on the north. The factory employed 300 workers. Eleven years later in the survey of October 1888, Hexamer reported that the factory had taken up nearly the entire block. Factory employment had risen to 800. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif; font-size: 10pt; line-height: 20px;">Source: <i>Hexamer General Surveys</i>, John B. Stetson Plant, 1892.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">In the survey of November 1892 Hexamer reported 1,100 workers at the factory. Two new large buildings had expanded the factory’s capacity by nearly half. There was a new seven-story building at the southernmost and narrowest point of the triangular block. The building, designed by Philadelphia architect George Pearson, had a clock tower and an enormous bell whose size, shape and design were reportedly inspired by the Liberty Bell at Independence Hall. The Stetson tower bell was made by McShane Foundry of Baltimore in 1889 and not by Whitehall Chapel in London, where the original Liberty Bell was cast. A new six-story building on the west side of Cadwalader Street ran south from Montgomery </span><span style="font-family: "georgia" , serif; text-indent: 0.5in;">Avenue for nearly half a block. </span><br />
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<a href="https://1.bp.blogspot.com/-qF40JEv8DSU/XQrl8YyPopI/AAAAAAAAAUI/r_UDn7r-GWEE_gYJ1LLPatsT2pM07U4dwCLcBGAs/s1600/Screen%2BShot%2B2019-06-19%2Bat%2B9.47.25%2BPM.png" imageanchor="1" style="clear: right; display: inline; float: right; margin-bottom: 1em; margin-left: 1em; text-align: center; text-indent: 0.5in;"><img border="0" data-original-height="768" data-original-width="1162" height="422" src="https://1.bp.blogspot.com/-qF40JEv8DSU/XQrl8YyPopI/AAAAAAAAAUI/r_UDn7r-GWEE_gYJ1LLPatsT2pM07U4dwCLcBGAs/s640/Screen%2BShot%2B2019-06-19%2Bat%2B9.47.25%2BPM.png" width="640" /></a><span style="clear: right; display: inline; font-family: "georgia" , serif; font-size: 10pt; margin-bottom: 1em; margin-left: 1em; text-indent: 0px;"><a href="https://1.bp.blogspot.com/-qF40JEv8DSU/XQrl8YyPopI/AAAAAAAAAUI/r_UDn7r-GWEE_gYJ1LLPatsT2pM07U4dwCLcBGAs/s1600/Screen%2BShot%2B2019-06-19%2Bat%2B9.47.25%2BPM.png" imageanchor="1" style="clear: right; display: inline !important; margin-bottom: 1em; margin-left: 1em; text-indent: 0.5in;">The John B. Stetson Co. factory, Philadelphia, 1894, engraving by A.H. Markley</a></span><br />
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<span style="font-family: "georgia" , serif;">Beginning in 1877 Stetson augmented his Philadelphia production capacity with a separate factory in Orange, New Jersey, according to the business ledgers of John B. Stetson & Company. </span><span class="MsoEndnoteReference" style="vertical-align: super;"></span><span style="font-family: "georgia" , serif;">Prior to 1877, his older brother Napoleon Stetson had owned and managed factories of the family business since 1853 and was considered the leading hatter in Orange during those years, according to historian </span>David <span style="font-family: "georgia" , serif;">Lawrence Pierson</span><span style="font-family: "georgia" , serif;">. </span><span class="MsoEndnoteReference" style="vertical-align: super;"></span><span style="font-family: "georgia" , serif;">N. Stetson Company, however, was buffeted by the long six-year depression that followed the Panic of 1873. Beginning in 1877, John B. took charge of the business, while Napoleon continued to work there. His return to rescue the family business demonstrated that he had retained cordial relations with his older brother. John B.’s father Stephen died in Philadelphia on February 13, 1878 at the age of 81, living long enough to see his son’s early success in Philadelphia and to see him rescue the family business in New Jersey. While there is no record of where in Philadelphia his father lived at the time, it is possible that he lived his final days with John B. and his second wife Harriet at 1717 Spring Garden Street. John B.’s mother, Susanna Batterson Stetson, had died in 1862 when John B. was out West.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">According to the 1879 industrial survey by Hexamer, John B. Stetson & Company’s Orange Valley factory employed 100 workers. The plant was located at the site where John B.’s father Stephen Stetson had built his first hat manufactory in 1830, at the corner of Jefferson and Mitchell Streets. The factory was made up of a complex of seven buildings, including those built by John B. after 1877. All but one of the buildings were located along the east side of the East Branch of the Rahway River, and built on land that is today inside Orange Township. The dye house was on the west side of the branch and inside the boundaries of what is today West Orange Township.</span><br />
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<span style="color: #0070c0; font-family: "georgia" , serif; font-size: 12pt; font-style: italic; text-align: center; text-indent: 0px;">No Name Hat Manufacturing Company</span></div>
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<span style="font-family: "georgia" , serif;">On December 28, 1883, the Stetson operations in Orange Valley were incorporated under New Jersey law as a separate entity known as the No Name Hat Manufacturing Company. John B. had controlling interest with 800 of 1,500 shares. He built a new modern factory complex and became the company’s first president. This is the first time No Name is used in association with the Stetson family business in Orange. None of the operations that went before 1883 bore that name. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Why was such a name chosen? Some have suggested whimsically it was because the Stetsons could not come up with another name on which they could agree. Another more credible reason was stated in a 1936 ruling by Judge John H. Woolsey who said this about No Name: “Its somewhat awkward name being chosen at the instance of John B. Stetson to avoid use of the Stetson name elsewhere than in his Philadelphia business.” The judge’s comments were made in a ruling in a lawsuit brought by the John B. Stetson Company in 1934 against Stephen L. Stetson, the grandson of Napoleon Stetson, who had begun making and selling fur felt hats in New York in 1933 under his own name. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">In 1893, John B. Stetson turned the reins of No Name over to Napoleon’s son Henry, also known as Harry, who became its president. Harry, like so many of his kin before him, had the knack for making hats. He “brought the No Name factory to a high state of prosperity,” according to historian David Lawrence Pierson. Harry Stetson later was elected mayor of Orange in 1898 and served as mayor until 1904. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif; font-size: 11pt;">New factory built in Orange, New Jersey in 1883 by No Name Hat Manufacturing Company</span><br />
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<span style="font-family: "georgia" , serif; text-align: justify; text-indent: 0.5in;"> After Harry took the reins of No Name, the question arose again about using the name Stetson name on any of the hats made by No Name. The matter was brought to John B.’s attention by J. Howell Cummings, who had written to John B. at his winter home </span><i style="font-family: georgia, serif; text-align: justify; text-indent: 0.5in;">Gillen </i><span style="font-family: "georgia" , serif; text-align: justify; text-indent: 0.5in;">in DeLand, Florida. Stetson wrote back to Cummings in a handwritten letter dated December 20, 1893. “I note what you say about the No Name,” confirming his own concern about the matter. “If I Remember Harry Stetson is under Contract not to use Stetson in Hats for ten years.” He recommended that Cummings consult on the matter with Theodore C. Search, then treasurer and general manager at Stetson “and if He thinks Best Consult Mr. Elsasser.” Paul M. Elsasser was the company’s lawyer.</span></div>
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<span style="font-family: "georgia" , serif;">Stetson’s letter to Cummings was written on the stationery of The Atlantic, Gulf and Havana Railway Co. of Florida, a company based in St. Augustine. Stetson owned the company and was its president. The company’s goal was to build 170-mile railroad from St. Augustine via Daytona to DeLand and then to Tampa Bay. The railway was one of many business ventures launched by John B. Stetson during the last twenty years of his life, when he spent every winter in Florida. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">The matter of the use of the Stetson name by No Name is not a topic of concern in subsequent letters from John B. in Florida to Cummings in Philadelphia. Antique hats from that era held by collectors have the No Name brand stamped inside. The hats also sometimes contain stamps for The Fray, a patent on leather hat bands held by Stetson in Philadelphia, suggesting the matter of branding between No Name in Orange and Stetson in Philadelphia was amicably resolved. Harry died in 1905 of pneumonia at the age of 48, and the management of No Name passed outside the Stetson family. In 1906, a few months after the death of the founder, the John B. Stetson Company registered Stetson as a trademark.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Stephen L. Stetson, Harry’s son, worked at various positions at No Name until it closed in 1927. As noted above, Stephen L. resurrected the issue of using the name Stetson on hats in 1933 when he launched his own hat company, Stephen L. Stetson Co., Ltd. Eventually the Federal District Court for the Southern District of New York ruled that Stephen L. could use his own name but that in doing so, he should take care not to appear to be associated in any way with the John B. Stetson Company in Philadelphia. After protests from the John B. Stetson Company, the court also required Stephen L. to take more care to avoid the appearance of a relationship in the future, which he did. Stephen L. died in 1947; however, antique hat collectors report that the Stephen L. Stetson brand continued to be used in men’s felt hats into the 1960s. Stephen’s son, Stephen Henry, also worked in the hat industry.<o:p></o:p></span><br />
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<span style="font-family: "georgia" , serif; font-size: 10pt; line-height: 20px;">Stephen L. Stetson label inside the top of the crown of one of his hats.</span><br />
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<span style="font-family: "georgia" , serif;">John B. Stetson & Company was launched in 1866 as a partnership between John B. Stetson and his younger brother Charles Walter Stetson. In 1871, Charles is identified as the manager of the factory. The year following, Charles named his first-born son John Batterson Stetson in honor of his brother. Sometime between 1880 and 1885 Charles W. Stetson left the company. A new partner was brought on board. He was Henry H. Roelofs, John B. Stetson’s son-in-law, who was married to his daughter Wilhelmina Stetson. A surviving company ledger shows Roelofs as an executive who earned stock from the company for the years 1886 to 1889. <o:p></o:p></span><br />
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<span style="color: #42474b; font-family: "georgia" , serif; font-size: 11pt;">Photograph of Stetson mansion <i>Idro </i>by Samuel Fitch Hotchkin</span><b><span style="color: white; font-family: "helvetica"; font-size: 11pt;"><o:p></o:p></span></b></div>
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<span style="font-family: "georgia" , serif;">John B. Stetson demonstrated considerable affection for his son-in-law and their relationship at times appeared to be more like that of father and son. His son-in-law referred to him as “Pa” in surviving correspondence in Stetson company archives. By 1889, however, John B. would have three sons of his own from his third marriage to Sarah Elizabeth Shindler in 1884. At the time of the marriage, she was 26 and he was 54. The marriage “was to all accounts a happy and productive one,” according to Rosa Meddaugh, who wrote a booklet on Elizabeth’s life. They had three sons, John, Jr., born in 1884; Benjamin, born 1885; and George Henry, born 1887.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">By late 1889 Henry Roelofs wanted to leave John B. Stetson & Company and set up his own hat business and asked his father-in-law to buy out his stake in the Stetson enterprises. Stetson worked with his son-in-law to reach agreement to pay him $50,000 for his share of the partnership in Philadelphia, as well as his investment in the No Name Hat Manufacturing Company. A letter to John B. from his attorney Paul M. Elsasser on December 26, 1889, appears intended to reassure John B. about the matter. “My dear Mr. Stetson, I am glad to know that you have come to a settlement with Harry. I knew there would be no trouble between you, as you were both prepared to do the fair thing,” Elsasser wrote. </span><br />
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<span style="color: #0070c0; font-family: "georgia" , serif; font-size: 12pt; font-style: italic; text-align: center; text-indent: 0px;">Takeover Target?</span></div>
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<span style="font-family: "georgia" , serif;"> Early in 1890, a rumor began circulating that an unnamed English syndicate had offered $3 million to buy John B. Stetson & Company. Overnight, a cloud of uncertainty appeared over the future of the company. Stetson himself was nearly 60 years old and no longer had a clear line of succession should he die, given that his son-in-law Henry H. Roelofs departed the company only months before and his oldest son, John, Jr., was only five years old. On February 3, the <i>Philadelphia Inquirer </i>published Stetson’s response to the rumor. “No effort has been made to buy my factory by any sort of syndicate, English or otherwise,” Stetson stated. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">In the final months of 1889 and the first months of 1890, English investor appetite for investing in American concerns was on the rise. Several new English investment companies had been formed in London with $100 million in aggregate capital to invest in American industrial enterprises, according to Samuel Untermyer, a New York attorney with close ties to American breweries, then the chief target of English syndicate offers. It was only a matter of time until one of the London investment companies made an offer to buy Stetson. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Sure enough, an English syndicate came forward with an offer some time in the following year. News of the offer was made public in April 1891, when the <i>Philadelphia Inquirer </i>reported Stetson had rejected “strenuous efforts to purchase the business” from an unnamed English syndicate. The <i>Inquirer </i>also revealed why Stetson rejected the offer. “The change is owing to the age of Mr. Stetson and the fact there is no one to succeed to his business, the oldest of his three boys being only six. Mr. Stetson does not want it to pass from his hands, his present resolve being actuated by a desire to perpetuate the business for his boys,” the newspaper reported. </span><br />
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<span style="color: #0070c0; font-family: "georgia" , serif; font-size: 12pt; font-style: italic; text-align: center; text-indent: 0px;">The 1891 Incorporation</span></div>
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<span style="font-family: "georgia" , serif;">Stetson, meanwhile, had been busily working out the future of the company and surprised the world by announcing in April 1891 that he would incorporate his business under Pennsylvania law and offer stock in the company to the investing public. He had made an end-run around English investors, their promoters, and London’s investor-friendly infrastructure and found a way to go directly to American investors to become a publicly-held American stock company.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Under the planned launch of the new corporation, preferred and common stock would be sold to close friends of John B. Stetson with most of the shares going to heads of departments and other employees, many of them with the company for a long time, according to the <i>Philadelphia Inquirer</i>. William F. Fray, superintendent of the factory, was named vice president and general superintendent and would serve as a director. Fray had been with the company since 1866. In May 1891, highlights from the prospectus for the new corporation were advertised in the <i>Philadelphia Inquirer </i>and <i>The Times </i>of Philadelphia. </span><span class="MsoEndnoteReference" style="vertical-align: super;"></span><span style="font-family: "georgia" , serif;">Notices were also published in New York, Boston, Buffalo, Baltimore, Chicago, Cincinnati, Detroit, St. Louis, New Orleans, and Galveston, Texas.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> Stetson chose two New York firms to take the company public. The lead underwriter was the John H. Davis and Company, one of the oldest brokerage houses on Wall Street. Davis began his business career in Philadelphia in 1868 and moved to New York shortly thereafter and joined the New York Stock Exchange in 1873. In 1886, the Davis firm set up offices in the Astor Building at 10 Wall Street, directly across New Street from the Wall Street entrance to the New York Stock Exchange. Manhattan Trust Company was also a broker. The Provident Life and Trust Company of Philadelphia was chosen as transfer agent. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> The stock offering came with an auditor’s certificate from Barrow, Wade, Guthrie & Company, a respected London chartered accountant with a New York office at 130 Broadway. Stetson was the first American corporation to furnish an auditor’s certificate with its stock offering, according to Paul M. Clikeman, associate professor of accounting at the University of Richmond Robins School of Business. This was a landmark advance in financial disclosure in the United States, according to Clikeman. Having an audited statement about the company’s financial condition made it a lot easier for the brokers to attract investors. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> The John B. Stetson Company authorized $2.7 million in preferred and common shares, all stock priced at $100 par value, in what the prospectus claimed was the largest fur felt hat manufacturer in the United States. Of that total, $1.5 million represented preferred shares paying dividends of 8 percent annually. The remaining $1.2 million was authorized for common shares with a variable dividend rate tied to profit levels. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> With the release of the prospectus, outside investors and the world at large gained insight for the first time into Stetson’s profitability, long a closely-held secret. Barrow, Wade, Guthrie & Company certified that Stetson’s earnings rose from $274,427 in 1887 to $332,624 in 1890. The auditors also certified that during the four years from 1887 to 1890 Stetson’s average yearly net profit margin was a healthy 22 percent.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> The auditor’s statement claimed that the company’s average annual profit for the prior four years, if it had been earned under the new corporation, was sufficiently robust to pay the 8 percent dividend on the preferred stock and, in addition, to also pay a 14 percent annual dividend on the common stock. The combination of those two numbers – 8 percent and 14 percent – represents that 22 percent average net profit margin over the prior four years. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">The prospectus offered insight into Stetson business practices. It stated the company designed and made hats for other hat makers. “This fact is important, as it insures the good will and friendly co-operation of the trade,” the notice stated. The offering also stated that the company only made hats for advance orders and had no excess inventory. “Notwithstanding the large capacity of the works, it has been impossible to keep up with orders received, hence there is not a dollar invested in or jeopardized by dead stock,” the offering claimed. Without having to finance idle hat stock, the company had yet another advantage over its competitors. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> Stetson securities were to be listed and traded on the Philadelphia Stock Exchange, the nation’s oldest exchange, founded in 1790. Even though the offering was placed by New York brokers, Stetson was not listed or traded on the New York Stock Exchange, according to Peter Asch, corporate archivist for the exchange. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;"> The stock offering in May 1891 was a success. The lead broker, John H. Davis, was a prominent man in New York finance and society who would later report that many of his friends and business associates invested in Stetson shares on his advice. A month following incorporation of the business, the <i>Philadelphia Inquirer </i>published a list of 123 wealthy men in the city and its environs that were worth $1 million or more. Stetson was number 35 on the list with wealth estimated at $2 million.</span><br />
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<span style="color: #0070c0; font-family: "georgia" , serif; font-size: 12pt; font-style: italic; text-align: center;">Navigating Hard Times</span></div>
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<span style="font-family: "georgia" , serif;"> Earnings sagged in 1892, the company’s first full year of production after incorporation. Stetson paid an 8 percent dividend on its common shares, which was a bit of a disappointment to investors. This was below the 12 percent marker Stetson had put down at the time of the offering. He had pledged that in any year the company could not pay a dividend of at least 12 percent he would forgo his $25,000 annual salary. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Stetson’s hope that earnings would return to normal in 1893 was not to be realized. Instead, in January the Financial Panic of 1893 plunged the United States into its worst depression since its founding. Unemployment rose to 19 percent. </span><span class="MsoEndnoteReference" style="vertical-align: super;"></span><span style="font-family: "georgia" , serif;">The panic was a result of the collapse of railroad companies from overbuilding, much of it with shaky financing. Failing railroads, such as the Pennsylvania and Reading Railroad Company, led to a string of bank failures. There was another smaller Panic of 1896, prompted about concerns about the gold standard.<o:p></o:p></span><br />
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<span style="color: #434343; font-family: "georgia" , serif; font-size: 10pt;">Stetson catalogue, 1897<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Stetson, of course, had to steer the business through these rocky times, as he had done in the long depression of the 1870s. To his dismay, Stetson’s earnings fell in 1893 and sank even lower in 1894, as profit margins shrank to a skinny 9 percent, far below the 22 percent level of the late 1880s. Stetson slashed the dividend to 4 percent and it remained there through 1897. Even as profits narrowed, Stetson was increasing its revenues, which by 1898 had soared to $1,479,000. Profits that year rose to $275,912, the highest since 1891, and profit margins widened to 17 percent. Stetson could finally raise the dividend on its common shares to 8 percent. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Business boomed in 1899 and the profit margin widened to 19 percent, as a temporary expansion in factory capacity implemented the prior year was made permanent. The expansion of the factory was paid for by funds raised by issuing new shares. At last, the company could declare a 12 percent dividend, allowing John B. to fulfill investor’s expectations when they had invested in 1891. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">By 1899, Stetson was producing 600,000 hats a year and employed 1,200 workers. The company continued to expand the number of hat styles it offered to its 2,800 American retailers. The company’s foreign footprint had expanded to 200 retail shops in Latin America, Europe, Japan, Australia, New Zealand and South Africa. The company was offering an increasing array of hats and had introduced ladies’ hats into its catalogue. Stiff derby hats were still the best seller. Stetson had introduced innovations that expanded the appeal of its line of soft felt hats.</span></div>
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<tr><td class="tr-caption" style="text-align: center;"><i style="text-indent: 0px;"><span style="font-family: "georgia" , serif; font-size: 10pt;">Stetson’s Monthly</span></i><span style="font-family: "georgia" , serif; font-size: 10pt;">, featured hats from Stetson catalogue: left to right, stiff hats, flange brim hats (soft felt), and Boss Raw Edge style hats (soft felt), October 1899. Credit: Hagley Museum </span></td></tr>
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<tr><td class="tr-caption" style="text-align: center;"><i><span style="font-family: "georgia" , serif; font-size: 10pt;">Stetson’s Monthly</span></i><span style="font-family: "georgia" , serif; font-size: 10pt;">, featured hats from Stets0n catalogue: left to right, staple styles, cowboy styles, and ladies styles, October 1899. Credit: Hagley Museum</span><br />
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<span style="font-family: "georgia" , serif;"><br /></span><span style="font-family: "georgia" , serif;"> John B. Stetson created a bit of a kerfuffle in late 1899 when he fired Theodore C. Search, executive director and secretary of the corporation, who had been hired in 1895 to run the company, in part because of Stetson’s failing health. Search had managed company operations in the four years when Stetson’s sales and profits recovered, boosted by a rebounding economy.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">In response to the firing, Stetson’s New York investment banker John H. Davis wrote a letter to John B. Stetson on December 11, 1899, conveying his dismay and urged him to reconsider his decision, tying the company’s success in the late 1890s to Search’s guiding hand. Stetson offered Davis reassurances about his decision but refused to budge. He offered to meet with Davis, who declined. Davis finally withdrew his demands. “I can well understand that there may be causes for the recent change, which are of greater importance than, in the absence of details, I was able to appreciate,” Davis wrote in a letter on December 16 in response to Stetson’s December 13<span style="font-size: x-small;">th </span>letter to him. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">A year after Search’s departure, Stetson promoted James Howell Cummings, the man who would be his successor, from secretary to second vice president to take on the role Search had filled when he was at the company. While the reasons for Search’s dismissal are lost to history, what mattered more was that Stetson managed to smooth over relations with Davis, who was responsible for the success of the company’s 1891 stock issue. It was important because the John B. Stetson Company would rely on additional periodic stock issues to fund its very rapid expansion in the early 20<sup>th</sup>century. </span><br />
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<span style="color: #0070c0; font-family: "georgia" , serif; font-size: 12pt; font-style: italic; text-align: center; text-indent: 0px;">An Investor Bonanza</span></div>
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<span style="font-family: "georgia" , serif;">Notwithstanding the worries that may have troubled some investors, the good times for investors were just beginning in 1899. In 1900, profits exploded to $567,000 on sales of $2,222,000. Profit margins zoomed past 25 percent. <o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">With a strong economy giving Stetson headwinds, its fortunes soared. In 1901, the net profit margin widened to nearly 27 percent of sales. The company declared a lofty 17 percent dividend for common shares, its highest so far. In 1902, Stetson issued $500,000 in common stock to fund the building of a new warehouse, a new hospital building and a five-story addition to its new power house. In 1904 and 1905 the net profit margin rose to 30 percent. In 1906, Stetson shattered all records with a net profit margin of 32 percent on higher sales of $5,495,00o. Investors reaped a bonanza they never expected to see. </span></div>
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<span style="font-family: "georgia" , serif;">While the company would triple its revenues by 1920 and net profits would remain strong, in no year after 1906 would the company deliver such celestial investor rewards. Share prices in 1906 reflected expectations for continued high earnings. Stetson’s common stock traded on the Philadelphia Stock Exchange at $271, far above its $100 par value. Even the preferred shares traded for a premium at $152.</span><br />
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<span style="color: #0070c0; font-family: "georgia" , serif; font-size: 12pt; font-style: italic; text-align: center; text-indent: 0px;">Military and Police Hats</span></div>
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<span style="font-family: "georgia" , serif; text-indent: 0.5in;">One way Stetson became the largest hatter was the considerable appeal of its military hats in the U.S. West and Canada, many of them having a design derived from the Boss of the Plains. Stetson also became the preferred hat for state and provincial police officers in the United States and Canada, as well as some military forces outside North America. </span></div>
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<span style="font-family: "georgia" , serif;">During the Boer War of 1899 to 1902, for example, Stetson received an order for 10,000 hats from the British government for the South African Constabulary, which had been formed by Major General Robert Baden Powell in August 1900. The general had seen members of the Royal Canadian Field Artillery fighting with the British. The Canadian soldiers wore tan felt hats made for them by Stetson. The hats had a wide brim and an oval cylindrical crown with indentations, a variation of the Boss of the Plains that had become very popular among cattle drivers of Canada’s western plains, according to the Canada War Museum. </span><span class="MsoEndnoteReference" style="vertical-align: super;"></span><span style="font-family: "georgia" , serif;">General Powell admired the Canadian Stetson hats so much he “ordered 10,000 directly from the American company to outfit his constabulary,” the museum stated. “The Stetson factory made and shipped them within six weeks of the receipt of the order,” according to Fray. </span></div>
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<span style="font-family: "georgia" , serif; font-size: 10pt;">Left, Major General Robert Baden Powell wearing Stetson campaign hat for Britain’s South Africa Constabulary. Right, </span><span style="font-family: "georgia" , serif; font-size: 10pt;">Major Frederick Russell Burnham, an American who fought in the Second Boer War, wearing a Stetson on the day King Edward VII awarded him the medal for the Distinguished Service Order.</span></div>
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<span style="font-family: "georgia" , serif;">Stetson’s prominent role as a maker of military hats can traced back to the 1870s, when the company began to make hats for the U.S. Cavalry. A cavalry hat from 1875 can be found in a collection of vintage Stetsons at the Buffalo Bill Center of the West in Cody, Wyoming. Today Stetsons are worn by the members of the 1<span style="font-size: x-small;">st </span>Cavalry Division of the U.S. Army at Fort Hood, Texas, which still maintains a Horse Cavalry Detachment for ceremonial purposes and morale. <o:p></o:p></span><br />
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<span style="font-family: "georgia" , serif; font-size: 10pt; line-height: 20px;">1875 Stetson Calvary Hat, Buffalo Bill Center of the West.<o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif; font-size: 10pt;">1st Cavalry Division Horse Cavalry Detachment, Fort Hood, Texas. </span><span style="font-family: "georgia" , serif;"><o:p></o:p></span></div>
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<span style="font-family: "georgia" , serif;">Stetson hats were also an early and enduring favorite of the Texas Rangers. Texas stills requires Rangers to wear only western hat styles “commonly called the Rancher or Cattleman.” Stetson is still the hat of choice.<o:p></o:p></span></div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com1tag:blogger.com,1999:blog-1466228407005500695.post-32549168382950713792017-01-05T07:45:00.001-08:002017-02-18T05:18:12.503-08:00Designers of Retirement Calculators Strive for Better Fidelity to Real LifeThe providers of retirement calculators vie to improve the forecasting accuracy of their models<br />
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Robert Stowe England<o:p></o:p></div>
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January 5, 2017</div>
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See companion article at <a href="https://mindovermarket.blogspot.com/2017/01/why-retirement-calculators-disagree-on.html" target="_blank">this link</a>. </div>
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In recent years intensifying competition among providers of retirement calculators has sparked a race to build better models. The goal is to design a calculator that can forecast results that can more closely mimic
actual results from real people saving for retirement.<o:p></o:p></div>
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The models, in essence, aim to raise the degree of fidelity
of the model to real life. Fidelity, in this case, “is defined as the ability
of a calculator to potentially produce reality,” according to retired software
developer Darrow Kirkpatrick, who has published a list of<a href="http://www.caniretireyet.com/the-best-retirement-calculators/"> The Best
Retirement Calculators</a>.<o:p></o:p></div>
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The constant testing of existing and new calculators for
their strengths and weaknesses has been at the heart of the race to attain high
fidelity.<o:p></o:p></div>
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Those working to build more sophisticated models, including
some that now require customers to pay licensing fees, are unlikely to publish
the results of their tests of their own calculators and those of others.<o:p></o:p></div>
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Fortunately for consumers, expert independent analysts like
Kirkpatrick have done sophisticated tests of the many calculators now available
and have published some of their results. So far Kirkpatrick has reviewed 82
calculators and estimates there may be another 40 or so calculators out there.
“A few of the newer ones are on my internal list still to review,” he says.<o:p></o:p></div>
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Kirkpatrick sees value and merit in both basic simple calculators
as well as complex and sophisticated models. The simple ones are appropriate
for use early in one’s working career, he says. The more sophisticated
calculators are better “when you need precise answers about your retirement
date or tax moves.”<o:p></o:p></div>
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Kirkpatrick says credit for the articulating the concept of
fidelity in retirement calculators belongs to Stuart Matthews, a retired
electrical engineer who in 2011 developed the<a href="http://pralanaretirementcalculator.com/index.html"> Pralana Retirement
Calculator</a>, offered by Pralana Consulting LLC, Plano, Texas.<o:p></o:p></div>
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Matthews, who retired in 2009, developed his own retirement
calculator to plan out the last ten years of his working life. In 2011 he read
a review of online retirement planning tools by<a href="http://www.consumerreports.org/cro/magazine-archive/2011/february/money/financial-planning/online-retirement-planning/index.htm?loginMethod=auto">
Consumer Reports</a> and decided to test them and see what results he got.
“Wow! What a disappointment,” he<a href="http://pralanaretirementcalculator.com/html/about.html"> wrote</a> and
set out to build a better model.<o:p></o:p></div>
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Not satisfied with his original Pralana model, Matthews
worked to improve it. As part of his research, Matthews took a small set of actual
test examples of people saving for retirement. He ran the data from those text
examples through several models and compared the results.<o:p></o:p></div>
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From these findings, Matthews rated the calculators as
having high fidelity or low fidelity. He has since developed a more
comprehensive set of tests and evaluations of eleven calculators and<a href="http://pralanaretirementcalculator.com/html/calculator_evaluations.html">
published</a> his findings.<o:p></o:p></div>
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Matthews has been careful to note that low fidelity
calculators should not be disregarded because they are simple or sponsored by
an asset management company. <o:p></o:p></div>
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“If you can summarize your financial situation with
relatively few numbers and assumptions and want to get a quick estimate of
whether you’re on track or not, these tools can probably meet your requirements
at no cost and with a minimum of effort on your part,” Matthews<a href="http://pralanaretirementcalculator.com/html/calculator_evaluations.html">
has written</a>.<o:p></o:p></div>
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To improve the accuracy of their forecasts, developers of
calculators are using more complex formulas and assumptions on the rate
of return on investments.<o:p></o:p></div>
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Most simple calculators use a measure of the <i>average rate
of return</i> to forecast how assets will perform in the future. This approach
can provide<a href="http://www.caniretireyet.com/the-best-retirement-calculators/"> an overly
optimistic result</a> because it may not reflect the impact of market
volatility on investment returns, according to Kirkpatrick.<o:p></o:p></div>
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To address volatility, some calculators perform a<a href="https://www.riskamp.com/files/RiskAMP%20-%20Monte%20Carlo%20Simulation.pdf">
<i>Monte Carlo</i></a><i> </i>simulation of a range of outcomes randomly
chosen. However, Kirkpatrick is not sure that Monte Carlo simulations
accurately incorporate the volatility in the real world.<o:p></o:p></div>
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Some models base their rate of return on <i>historic </i>market
data on the performance of asset classes over the past century. If the future
is not like the past, then the accuracy of this approach will suffer, Kirkpatrick
stated.<o:p></o:p></div>
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In the end, users of retirement calculators will likely have
to make judgment calls on such things as which method to use to measure the
rate of return.<o:p></o:p></div>
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Kirkpatrick has suggested that consumers should try all
three methods – average, Monte Carlo and historic – and compare the results.
Then, taking into consideration the results from each method, they should rely
on their own judgment to decide on a rate of return they feel will be
realistic.<o:p></o:p></div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com1tag:blogger.com,1999:blog-1466228407005500695.post-34417724227408042132017-01-05T07:32:00.000-08:002019-06-17T11:31:52.677-07:00Why Retirement Calculators Disagree on How Much You Need to Retire<div class="MsoNormal">
<a href="https://www.blogger.com/null" name="OLE_LINK2"></a>Those who have tested several calculators find different models tend to come up with different answers</div>
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By Robert Stowe England</div>
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January 5, 2017<br />
<br />
See companion article at <a href="https://mindovermarket.blogspot.com/2017/01/designers-of-retirement-calculators.html" target="_blank">this link</a>.</div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">How much money will you need to retire and live comfortably? That’s
the question online retirement calculators try to answer. The answer to that
question, in turn, affects how much you need to save every year and how you should
invest your assets to reach your retirement goals. <o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;"><br />
Those who have tested several calculators find different models tend to come up
with different answers to the same question. Some observers attribute the
different outcomes to different model designs and varying assumptions about
inflation and investment return, among other factors<o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Online retirement tools require users to submit data on annual
income, annual savings, accumulated assets, and the number of years until
retirement. The tools generate an estimated total savings you will need when
you retire. Some also calculate how much annual income can be distributed from
savings during all your retirement years.<o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">While there have been scores of online retirement calculators
created in recent years, online retirement calculators have been around more
than two decades. The </span></span><a href="https://www.ebri.org/"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Employee
Benefit Research Institute</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">, Washington, D.C. has since the 1990s offered a
free basic </span></span><a href="http://www.choosetosave.org/ballpark/?fa=interactive"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Ballpark
Estimate</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;"> calculator to estimate how much you need to
save for retirement. EBRI developed the calculator for the <a href="https://www.saveandinvest.org/american-savings-education-council-asec" target="_blank">American Savings Education Council</a> </span></span><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">after the launch of the <i style="mso-bidi-font-style: normal;">Choose To Save</i> public education campaign.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Many online tools are free. Some are quite simple and easy to use. For
example, </span></span><a href="https://www.calcxml.com/"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">CalcXML</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;"> of Salt
Lake City, Utah, offers a free </span></span><a href="https://www.calcxml.com/calculators/retirement-calculator"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">basic
calculator</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;"> that requires only a dozen inputs to answer the
perennial question, “How much will I need to save for retirement?” <o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Many of the newer design calculators have added additional functions
and enhanced capabilities. For example, the </span></span><a href="http://financialmentor.com/calculator/best-retirement-calculator"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Ultimate
Financial Calculator</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;"> by FinancialMentor.com of Reno, Nevada, allows a
user to plan for a retirement with more flexible retirement options. These
include gradually phasing in retirement income, taking into consideration income
from a part-time business, as well as factoring in earnings from real estate.<o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">If you plan to use a retirement calculator you should keep in mind that
retirement calculators rely on assumptions about the future that may turn out
to be wrong, according to economist John Turner, director of the </span></span><a href="http://pensionpolicycenter.com/"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Pension Policy Center</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;"> in
Washington, D.C. He has studied the design and performance of calculators.<o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">“Calculators differ. If you’re really serious about using them, you
should try two or three calculators to see how results vary,” Turner says. <o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">One of those key assumptions is the <i style="mso-bidi-font-style: normal;">target replacement rate</i>. That’s the income you need in retirement
to live comfortable expressed as a portion of your pre-retirement income. For
example if a couple earning $80,000 a year anticipates they will need $64,000 a
year in retirement, that would represent an 80 percent replacement rate. <o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Replacement rate income targets usually range from 70 to 90 percent
of pre-retirement earnings and they often include Social Security as part of
retirement income. If the target rate is set too low, you may not save enough
for future needs.<o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Some people may want to have a cushion in their retirement assets for
unexpected expenses, especially unpredictable health care costs. <o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Retired software developer Darren Kirkpatrick tested several
calculators in 2012 and found the forecasts less than convincing. He found that
</span></span><a href="http://www.caniretireyet.com/why-most-retirement-calculators-dont-work/"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">“most
retirement calculators don’t work.”</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;"><span style="mso-spacerun: yes;"> </span>Kirkpatrick, who retired early at age 50, evaluates
retirement calculators and posts his views online at a site titled </span></span><a href="http://www.caniretireyet.com/"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Can I Retire Yet?</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;"> <o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Kirkpatrick points out some common problems. Some calculators err by
relying on inflation rates that are too low for the long term and err again by
assuming a rate of return on investments that may be too high. “[That] gives
you a bit of insight into where you stand financially today, but it tells you
virtually nothing about what will happen in the future,” he has stated.<o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">According to </span></span><a href="http://financialmentor.com/retirement-planning/mistakes/18212"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Todd
Tresidder</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">, founder of FinancialMentor, inflation is one
of the </span></span><a href="https://www.gobankingrates.com/retirement/30-greatest-threats-retirement/"><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">greatest
threats to retirement</span></span></a><span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">. “It’s a hidden tax on savings. You have no
control over it. It can’t be predicted. It gnaws away at an otherwise healthy
retirement like cancer to a healthy body,” he has stated.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
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<span style="mso-bookmark: OLE_LINK1;"><span style="mso-bookmark: OLE_LINK2;">Given the uncertainties inherent in predicting the future,
retirement calculators will always be subject to error. Even so, they can be
helpful in giving a big picture view of how much you need to save. As you get
closer to retirement, retirement calculators will likely prove to be more
accurate in their forecasts. <o:p></o:p></span></span></div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com1tag:blogger.com,1999:blog-1466228407005500695.post-88317730176504202602016-07-20T09:26:00.001-07:002016-07-20T16:56:58.117-07:00Banks Strive to Thread the DoL Fiduciary Advice Needle in a Way That Allows Them To Retain Small Accounts<div class="MsoNormal" style="line-height: 150%;">
Wealth management operations at banks are burning the midnight oil to devise ways to bring all investment advice involving retirement money into compliance with the Department of Labor’s new fiduciary rule. <o:p></o:p></div>
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By Robert Stowe England<o:p></o:p></div>
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<o:p> </o:p> </div>
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Raising fiduciary standards for investment advice across a banking organization creates a strategic challenge. How do you thread the needle of compliance while
still also making sure that customers of the bank with smaller retirement account
balances are not lost in the shuffle?<o:p></o:p></div>
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First of all, you clearly make it a
goal that you intend to retain your wealth management clients, both large and
small, according to JoAnn Schaub, manager of institutional wealth management at
BOK Financial Corporation of Tulsa, Oklahoma with $71.9 billion in assets under
administration. <o:p></o:p></div>
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The advent of the rule itself
provides an opening, a silver lining of sorts. “It gives us an opportunity to
sit down with our clients and evaluate where they are,” says Schaub, “What are
their retirement goals? Where are they today? What should they be doing
differently? What is in their best interest?” <o:p></o:p></div>
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Face it. People saving for
retirement do need financial advice so they do not make some of the classic
errors people tend to make, such as selling stocks in the middle of a panic
like the one in 2008, notes Joan Warner, managing editor and senior analyst for
Financial Services at Oxford Economics. “Human beings are hard wired to buy
high and sell low,” says Warner. “Whatever made us good at escaping from a
saber tooth tiger makes us terrible investors. That’s why we need financial
advisors to help us with our investing discipline.” <br />
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A common solution for banks with
broker dealer operations is to shift larger clients to the bank’s registered
investment advisors (RIAs) while offering a robo investment advice solution to smaller
accounts that require “less hand holding,” according to Betty Moon, principal
at Moon Consulting Group, Charlotte, N.C. Even with those options, a lot of wealth
management clients could fall through the cracks. “That means you are going to
have to fix compensation and that is going to be difficult,” says Moon.<o:p></o:p></div>
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Some banks will continue to sell
commission-based funds in Individual Retirement Accounts (IRAs), according to
Scott Cooley, director of policy research at Morningstar. “So the advisor might
have to do business a little bit differently but not as dramatically as
switching to an RIA model,” says Cooley.<span style="mso-spacerun: yes;">
</span>This will require disclosing commissions and managing the conflict to be
sure the advisor always acts in the best interest of the clients, he adds. <o:p></o:p></div>
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Changing the compensation structure
could also see an early exodus of commission-based advisors who are close to
retirement age, Moon warns, further limiting the number of professionals who
can provide investment advice. She points to the experience in Europe where new
fiduciary rules effectively eliminated commission-based advice. “It was
probably not because they were bad it. They just couldn’t make the transaction
to a fee based model,” says Moon.<o:p></o:p></div>
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BOK Financial got an early start on
its advice solutions just after the Department of Labor issued its April 2015
revision of the rule it first proposed in 2010. In response, Scott Grauer,
executive vice president for wealth management and chief executive officer of
the broker dealer, launched a steering committee to oversee working groups
charged with developing plans to implement the new rule, according to Schaub. <o:p></o:p></div>
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Mindful of the potential to lose
clients, BOK Financial would have to offer more retirement savings options than
in the past, while retaining commission-based products for clients where that
was appropriate, says Schaub. Robo investment advice is one of the new
solutions the bank will offer clients that indicate they would prefer a digital
option. <o:p></o:p></div>
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The tougher question for BOK
Financial has been what to offer people with smaller retirement accounts who
want to talk to an advisor. For these clients, BOK Financial plans to offer level
fee managed accounts to clients with as little as $10,000 to invest, according
to Schaub. This option exists because the bank’s broker dealer has a registered
investment advisor (RIA) through which it can offer managed accounts. <o:p></o:p></div>
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Five years ago BOK Financial made
it a priority to position its wealth management business to offer managed
accounts. This move was made in part because the bank expected the world of
investment advice to shift away from commission products to level fee products,
according to Schaub.<o:p></o:p></div>
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Offering only a robo solution will
not work for all people with small accounts so banks will need other solutions
that provide personal advice, according to Rhomes Aur, executive vice president
for wealth management at First Tennessee. “Millennials and GenXers that are
just now growing their net worth. If you ignore those people today, twenty years
from now they’re going to have all the money and the banks aren’t going to have
clients,” says Aur. “We can’t just say we’re not going to deal with these
clients because it’s not worth our while right now.”<o:p></o:p></div>
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<!--EndFragment-->Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-62991344079639410522015-10-30T08:42:00.001-07:002015-11-05T14:08:47.142-08:00How Bernanke's Encouragment of Bue Sky Thinking Shaped the Fed's Responses in the Financial Crisis<i>At Bernanke's behest, in response to early tremors foreshadowing the financial crisis, Federal Reserve board members and staff engaged in </i><i>a process of idea generation and brainstorming. The effort was aimed at finding creative ways to </i><i>provide emergency short-term lending and guarantee programs to extinguish the potential fires of financial panic and restore collapsed financial markets. </i><br />
<i><br /></i>
<i>This blue sky thinking was well underway by September 2007 and prepared the Fed for what Bernanke calls "the dark abyss" at the height of the panic and pushed the limits of the Fed's authority in the bailouts of Bear Stearns and AIG. </i><br />
<br />
By Robert Stowe England<br />
October 30, 2015<br />
<br />
Before former Federal Reserve Chairman Ben Bernanke came up with an array of lending facilities to put out the fires of financial panic that broke out in 2007, he laid the groundwork inside the Fed with a brainstorming effort he called blue sky thinking. “We had ongoing conversations that were like a doctors diagnostic discussion, where you throw out ideas and then try to think about what could go wrong and the advantage and disadvantage of each approach,” says Bernanke at his office at Brookings Institution, where he is a distinguished fellow in residence with the Economic Studies Program.<br />
<br />
By summer’s end 2007, after the first tremors of the financial crisis rattled the financial world, creative thinking inside the Fed had already generated a blue sky list of options to fight financial panic, according to Bernanke’s new book The Courage to Act: A Memoir of a Crisis and Its Aftermath, published by W.W. Norton October 5.<br />
<br />
Compiling a playbook of short-term emergency lending options to fight panic was an important development at the Fed, according to David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at Brookings Institution. “It is kind of amazing Bernanke got the job at the time he did” because he brought important insights from his study of the role of monetary policy in the Great Depression, Wessel says. One key lesson: “The arteries of the economy were clogged with the carcasses of dead banks. And, the Fed’s inability to deal with that stopped the economy from recovering,” he says.<br />
<br />
Bernanke reports in his book that he laid out his case in support of the policy options on the blue sky list in a September 2, 2007, email to Fed Vice Chairman Don Kohn, New York Fed President Timothy Geithner, and Fed board member Kevin Warsh.<br />
<br />
Top of the blue sky list was a proposal to offer foreign currency liquidity swap lines with other central banks to provide dollars to overseas markets with repayment collateralized by the borrowing central bank’s home currency. This idea was soon implemented in December 2007 when the Fed extended swap lines to the European Central Bank and the Swiss National Bank. A proposal to auction interest rates for short-term loans to depository institutions to take away much of the stigma attached to borrowing from the Fed’s discount window became a reality in December 2007 with the creation of the Term Auction Facility.<br />
<br />
A third blue sky proposal was to invoke the little-known Section 13(3) of the Federal Reserve Act, which would allow the Fed in “unusual and exigent circumstances” to lend short-term to any creditworthy person or entity, not just depositories, provided there was good collateral to back the loan. When board members who received Bernanke’s email pushed back on this idea, Bernanke resisted and said he would keep it, but as a gesture to those who criticized it, he offered to list it under the “Hail Mary section.”<br />
<br />
By March 2008, with fresh crises erupting almost daily, Bernanke decided it was time “to break out the Hail Mary section of the playbook.” With Bear Stearns cash reserves down to $2 billion on Thursday, March 13 from $18 billion only three days earlier, the firm was facing bankruptcy the next day, Friday, March 14, a prospect the promised a wider panic. In response to what was seen as a systemic threat, the Fed’s board agreed to allow the New York Fed to provide a $12.9 billion emergency non-recourse loan to JPMorgan Chase, which was then to be lent to Bear Stearns. The loan was given to keep Bear Stearns afloat over the weekend so that a deal could be hammered out with JPMorgan to acquire the firm.<br />
<br />
Two days later on Sunday, March 16, the Fed’s board also approved a second non-recourse loan of $29 billion to facilitate the acquisition. This loan, combined with a $1 billion loan from JPMorgan Chase, allowed the New York Fed to acquire $30 billion in toxic assets and place them in Maiden Lane, a limited liability corporation. The name of the special purpose vehicle came is also the name of the lower Manhattan street that runs along side the back of the New York Fed building. Tom Baxter, general counsel for the New York Fed, has said that the reserve bank wanted to call the special purpose vehicle “Liberty Street,” which is street on the front side of the New York Fed building and also its street address but found that name had already been taken by another entity. So they switched the name to Maiden Lane.<br />
<br />
In the case of the $12.9 billion emergency loan to JPMorgan to bolster Bear Stearns, the Fed invoked Section 13(3) for the first time since the Great Depression. “We felt the uncontrolled collapse of Bear Stearns would be very damaging to the broad financial system and the economy,” Bernanke says. Section 13(3) was invoked again for the second $29 billion loan to acquire Bear Stearns’s assets. Blue sky thinking have paved the way as the Fed had already had internal discussions more than half a year earlier about when it should be used. After the two loans were made, former Fed Chairman Paul Volcker slammed the Fed for intervention and accused the central bank of acting on “the very edge of its lawful and implied power.” Bernanke takes some comfort in noting that at least Volcker did not say the Fed had gone over the edge of its authority.<br />
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The New York Fed has been made whole for its loans to rescue Bear Stearns and facilitate its sale to JPMorgan Chase. By June 2012 Maiden Lane LLC had fully repaid with interest its $29 billion loan from the New York Fed from the net proceeds of some of its assets. In September 2014 Maiden Lane repaid with interest the $1 billion loan from JPMorgan Chase with the proceeds from sales. The New York Fed receives 100 percent of cash flows from the remaining assets at Maiden Lane.<br />
<br />
Within six months of the Bear Stearns rescue, the Fed would face yet another test of the limits to which it could go to extinguish the raging flames of financial panic. During the week of September 15, 2008, Bernanke recalls, the Fed “stared into the abyss of financial collapse in the darkest says of the crisis.” Lehman went bankrupt and American International Group (AIG) was poised to follow closely behind. In a much-derided decision, the Fed decided not to provide emergency short-term funding to Lehman to provide it liquidity until a buyer, possibly the United Kingdom’s Barclays Bank, could be found for its good assets while possibly a consortium of banks would acquire the bad assets and place them in a special purpose vehicle. “Barclays ultimately bought the broker dealer, a small part of the overall firm. They did not make an offer on the overall firm because their regulator told them they couldn’t,” Bernanke says.<br />
<br />
As for AIG, the former Fed chairman describes how he and Treasury Secretary Hank Paulson engaged in agonizing deliberation and consultation with President Bush and Congress over whether to bail out the company out with an $85 billion emergency line of credit. For the Fed, the decision was fraught with risks, according to Bernanke. The company lacked sufficient financial assets to serve as collateral for so large a loan. However, there was sufficient collateral if you included all of AIG assets, including its many insurance subsidiaries and other financial services companies. The risk, however, was that the underlying value of the subsidiaries would plummet if the holding company failed. This amounted to lending against equity and not lending against assets, which would ultimately raise questions about its legality. Despite those concerns, the Fed “saw no alternative” but to go ahead, Bernanke says.<br />
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After Paulson and Bernanke consulted with congressional leaders to explain what they thought they had do to, they got a blunt response from Senate Majority Leader Harry Reid, Nevada Democrat. “Mr. Chairman. Mr. Secretary. I thank you for coming here tonight to tell us about this and to answer our questions. It was helpful. You have heard some comments and reactions. But don’t mistake anything anyone has said here as constituting congressional approval of this action. I want to be completely clear. This is your decision and your responsibility,” Reid said, according to Bernanke.<br />
<br />
The New York Fed, the regional reserve bank that extended the AIG loan, required AIG to cede control of 79.9 percent the company, a move seen by some critics as a step beyond the edge of the Fed’s authority. While the rescue was helpful, AIG continued to limp along. Ultimately, the Fed had to continue to advance funding to AIG until its lending totaled $182 billion, the largest bailout for a single company during the crisis. Fannie Mae and Freddie Mac together required $187 billion in advances to stabilize them. The New York Fed eventually expanded its ownership stake in AIG to 92 percent of its common shares. When share prices recovered a few years later, the U.S. government gradually sold off its stake, completing the last sale in December 2012. At the end, the full amount of all the cash advances made to AIG was paid back and the government pocketed a $22.7 billion gain.<br />
<br />
Even though the Fed’s loans to AIG were repaid, fresh doubts about the AIG bailout surfaced in June 2015, when Judge Thomas Wheeler of the U.S. Court of Federal Claims ruled that the New York Fed had no right to control and run a company that had taken a sizable loan from it. The ruling came in a shareholder lawsuit brought by former AIG chairman Maurice Greenberg, who owned a sizable stake in the company. The Fed in an official statement stated its actions with AIG “legal, proper and effective.”<br />
<br />
Mark Calabria, director of financial regulation studies at the Cato Institute, Washington, D.C., takes issue with the Fed’s response to the Judge Wheeler’s finding the Fed had broken the law and had taken actions beyond its authority. “For the Fed to show such little respect for the judicial system I think is troubling,” Calabria says. “Can you imagine Jamie Dimon saying stuff like that? Well I know we’ve been found guilty of this, but whatever.” The judge also ruled that shareholders could not be compensated for their losses because the government’s action was unauthorized.<br />
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The Fed’s blue sky thinking would yet serve up more ideas that the Fed successfully used to calm financial markets. In October 2008, the Fed began purchasing commercial paper and, in the process, stabilized the money market fund industry. In November the Fed set up its Term Asset-Backed Securities Loan facility that provide non-recourse loans to help finance new issues of asset-backed securities that are collateralized by student loans, auto loans, credit card loans, and small business loans. This action revived the ABS market, which had collapsed a year earlier.<br />
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According to a Fed spokesman, ongoing research about how to respond to potential systemic risk has been institutionalized at the Fed within the Office of Financial Stability Policy and research, which houses 27 economists. Wessel thinks that Fed probably continue to engage in creative thinking, especially about “how do we begin the tighten monetary policy so that it is something approaching normal without freaking out everyone.”<br />
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Blue sky thinking could be a beneficial way to go about finding solutions to the fiscal challenges that have divided and gridlocked Washington along party lines, according to Wessel. This is an important challenge that needs to be addressed. He points out that while the deficit has been brought down, the U.S. still has a very high debt-to-GDP level and the nation faces a big debt problem ahead based on aging populations and health care costs. At the same time the economic recovery remains lackluster and subpar and could benefit from fiscal stimulus. “What is the right fiscal policy to do that makes the present better without making the future worse? That’s a really hard question to answer,” says Wessel. It is also a question that could be posed to a group policy experts and policy makers for an intensive exercise in blue sky thinking.<br />
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Bernanke agrees with Wessel about the need to think creatively about fiscal policy and contends that for too long the Fed has done all the heavy lifting on policy matters. It is time, he says, for other policy makers in Washington in the Executive Branch and in Congress to work together on fiscal and regulatory ideas that could energize an economy growing too slowly in part because of slow productivity growth that began before the crisis. That would seem to be an extraordinarily daunting challenge. Bernanke agrees. “It’s obviously not an easy proposition.”<br />
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<br />Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-74331842737292109402015-07-12T10:36:00.000-07:002015-07-12T10:36:22.949-07:00With or Without a New Bailout, Greek Banks "Insolvent," Need Capital InjectionsRising loan delinquencies and declining public confidence will require banks to recapitalize. Based on their Texas ratios, they are already bankrupt, according to U.S. economist Steve Hanke.<br />
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By Robert Stowe England<br />
July 11, 2015<br />
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With or without a new bailout package for Greece, it will take more than a green light by the European Central Bank to raise the Bank of Greece’s ceiling for Emergency Liquidity Assistance to undo the damage done from the capital controls imposed Greek banks on June 29. Indeed, their financial condition was already deteriorating over the course of the last six months, as customers withdrew more than €40 billion in deposits. When the banks re-open, there’s worry the exodus of deposits could resume.<br />
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With hope rising for a new bailout package for Greece, it will take more than a fres flow of funds from the European Central Bank to the Bank of Greece and out to the Greek economy to undo the damage done by shutting down the banking system for two weeks except for small daily withdrawals for 60 euros. Greece’s banks have been weakened by the shutdown and public confidence on the banking system, already declining, has fallen sharply lower.<br />
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Buffeted by a rising tide of bad loans on a thin capital base, Greece’s largest banks are sailing toward bankruptcy, according to Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore and director of the Troubled Currencies Project at the Washington, D.C.-based Cato Institute, which monitors currencies that are in trouble. “The banks are on tenterhooks. They have almost no good collateral to even go the European Central Bank to get more liquidity and they are probably insolvent,” Hanke says.<br />
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Non-performing loans on Greece’s banking system reached €78 billion at the end of the first quarter of 2015, representing 35 percent of bank portfolios, according to the Bank of Greece, up from 34 percent at the end of 2014. Nearly half of all consumer credit was in arrears, while 35 percent of business loans and 30 percent of mortgages were delinquent. Banks have reserved €50 billion to cover losses on the troubled loans.<br />
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The four largest Greek banks – the National Bank of Greece, Piraeus Bank, Eurobank Ergasias, and Alpha Bank – hold €346.4 billion or 87 percent of €397.8 billion assets in the Greece’s banking system. “They have huge dominance,” says Hanke. Given their central role to the economy, Hanke argues, the Big Four will have to be recapitalized to salvage the Greek economy, which declined 0.4 percent in the first quarter is expect to decline the rest of the year.<br />
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Hanke’s gloomy analysis is based in part on the fact the Texas Ratio scores for Greek banks have risen to a level that in the past has predicted bank failure. The Texas Ratio was devised during the U.S. savings and loan crisis of the 1980s by RBS Capital bank analyst Gerard Cassidy to identify banks and thrifts likely to fail and helped identify which bank and thrifts were like to fail in New England during the 1990s.<br />
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At year-end 2014, the Texas ratio for Greece’s four largest banks was at or above 100 percent. Any measure above 100 means that the book value of all bad loans and foreclosed real estate is greater than the bank’s entire tangible equity plus loan loss reserves. “If you have a ratio over 100 percent, there is a high probability the bank will end up being insolvent if those nonperforming loans ultimately have to be written off,” explains Hanke. The National Bank of Greece has the best Texas ratio at 98.7 percent. The other three are higher: Eurobank Ergasias, 124.7 percent; Alpha Bank, 129.4 percent; and Piraeus, 195.1 percent.<br />
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The Texas ratio, while very useful, can still mask weaknesses, according to Hanke. For example, a dominant share of Greek bank equity is made of up a tax deferred assets. Hanke calls such deferred tax assets “phantom capital” because they are only useful to offset future earnings and offer no real capital buffer in a time of crisis when banks are unprofitable. At the Big Four banks tax deferred assets range from a low of 38 percent of tangible equity capital at the National Bank of Greece to high of 61 percent at Eurobank Ergasias. Taking out tax deferred assets from the capital, adjusted Texas ratios give a grimmer but more accurate snapshot of the Big Four, according to Hanke. For example, the adjusted Texas ratio rises to 122 percent for National Bank of Greece. It rises to 265.5 percent at Piraeus Bank.<br />
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Hanke points to the steady decline in money supply as a key culprit in the deteriorating outlook for Greek banks. According to the Bank of Greece, the nation’s central bank, the M3 measure of money supply fell 16 percent year-over-year in May, falling from €193.6 billion in May 2014 to €161.9 billion in May 2015. Worries about the Greek banks are also draining away deposits. Even thought depositors added funds to the banking system most of last year, since last fall deposits at Greek banks have plunged 22 percent or €39.9 billion, falling from €178.5 billion in October 2014 to $138.6 billion by the end of May, according to the Bank of Greece.<br />
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To boost falling capital ratios, banks are also scaling back the size of their loan portfolios by not making new loans and refusing to roll over some loans when they come due. As a result, loan portfolios at Greek banks shrank from €235.5 billion in January 2015, a recent peak, to €229.6 billion in May. “There is no money and credit being produced in the banking system,” Hanke says. “That means the depression they are going to have in Greece is going to be massive when compared to what it’s been in the past.”<br />
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With deposits falling, Greek banks are growing more vulnerable to restrictions on how much emergency liquidity assistance the European Central Bank will allow the Bank of Greece to provide to Greek banks to compensate for loss of deposits at banks. “Greek banks are now almost as reliant on funds from the Eurosystem . . . as they are on the customer deposits,” Moody’s Investors Service stated in a comment by analysts Alpona Banerji, Nondas Nicolaides and Colin Ellis on June 22.<br />
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Greece’s banks were shut down June 29 for six days to prevent their collapse a day ahead of Greece’s default on a €1.6 billion debt payment to the International Monetary Fund with withdrawals limited to €60 a day. On July 6 the capital controls on the bank were extended through July 9. Also on July 6, the day after Greek voters soundly defeated the European Union’s austerity proposals in a referendum, the Governing Council of the ECB held steady its €89 billion cap on emergency liquidity assistance but also tightened the screws by requiring the Bank of Greece to apply haircuts to the collateral from banks for the funds the central bank advances under the emergency program.<br />
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Resolving the Greek crisis will necessarily also mean finding a way to bolster confidence in the banks by boosting their capital levels. The banks last year raised €8.3 billion in private capital but now need additional capital injections to bolster their balance sheets. Without the capital, the banks will continue to shrink their balance sheet to compensate for rising levels of non-performing loans and falling deposits, starving the Greek economy of money, its economic lifeblood, according to Hanke.<br />
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While in the past the banks could have gone to the financial markets to raise real equity capital, the window of opportunity may be closing. “That’s just not going to happen because the price of shares in the banks is way below book value,” Hanke says. More shares would just completely dilute the value of existing shares, he argues. A second option, going to the Greek government for capital injections, is “improbable,” says Hanke, because the government has no money to do the recapitalization. A third option would be to have the European Union recapitalize the bank and, in effect, take ownership of the Greek banks – but that may be politically impossible, he adds.<br />
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One viable option, say Hanke, would be for the Greek government to privatize some of its considerable holdings of land and buildings to raise the cash to capitalize and nationalize the banks, a more politically palatable resolution. “That should be their top priority because without the banks functioning you have an engine shut down that normally supplies 87 percent of the money in the system,” says Hanke.<br />
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<br />Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-88385701585732498402015-07-10T05:41:00.001-07:002015-07-10T05:41:18.180-07:00Greek Prime Minister Alexis Tsipras CapitulatesThere's no way to interpret the proposal of terms from Greece to obtain yet another bailout other than to say Greek Prime Minister Alexis Tsipras has caved to European Union demands, mostly the terms of Germany's finance minister Wolfgang Schaeuble.<br />
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July 10, 2015<br />
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Here is the <a href="http://www.wsj.com/public/resources/documents/GreekProposals070915.pdf" target="_blank">Greek proposal</a>.<br />
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Also, see scathing analysis from naked capitalism <a href="http://www.nakedcapitalism.com/2015/07/tsipras-has-just-destroyed-greece.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29" target="_blank">here</a>.<br />
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Also, see analysis from The Business Insider <a href="http://www.businessinsider.com/greece-blinked-and-its-last-six-months-of-chaos-have-been-a-complete-waste-2015-7" target="_blank">here</a>.<br />
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<br />Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-86850429901735789692015-06-26T10:49:00.000-07:002015-06-26T10:49:26.558-07:00Dennis Gartman: Own European stocks, sell euro<span style="background-color: rgba(0, 0, 0, 0.85098); color: #cccccc; font-family: 'Gotham Narrow SSm 4r', Arial, 'Helvetica Neue', Helvetica, sans-serif; font-size: 11px; line-height: 15px; white-space: pre-wrap;"><iframe allowfullscreen="true" bgcolor="#131313" height="298" src="http://player.cnbc.com/cnbc_global?playertype=synd&byGuid=3000391459&size=530_298" type="application/x-shockwave-flash" width="530"></iframe></span><br />
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Dennis Gartman of The Gartman Letter talks about how to trade Europe amid Greek tensions on CNBC, June 25, 2015. He thinks that the euro would be better off without Greece in it and would prefer to see a Grexit than to see Greece stay in the monetary union.<br />
<br />Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-40637658152814790752015-02-27T12:43:00.001-08:002015-02-27T12:48:45.533-08:00In 2014 America's Corporate Pension Plans Gave Up Most of Their Funding Level Gains From 2013<div style="font-family: Cambria;">
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When it comes to restoring funding levels lost in the financial crisis, U.S. corporate pension plans seem to be on a treadmill going nowhere.</div>
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In 2012, the funding level for U.S. corporate plans stood at 77 percent. Funding then rose sharply to 89 percent in 2013 as market returns soared, giving the plans their best funding status since before the recession. During 2014, however, plans gave up 9 percentage points, as funding levels fell to 80 percent, according to Towers Watson.</div>
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The stumble in funding status in the current cycle is a big disappointment for struggling pension plans and may call for diminished expectations for a full recovery, according to Alan Glickstein, a senior retirement consultant at Towers Watson in Dallas. </div>
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In the past plans were able to fully recover, according to Glickstein. For example, after funding fell sharply in 2002, from 101 percent to 82 percent, plans “clawed their way back” to 99 percent 2006 and 106 percent in 2007, he says. However, in the current ongoing cycle that began after a big drop in funding to 77 percent in 2008, “we’re not clawing our back,” to full funding, Glickstein says. “We’re just circling the drain here at the 80 percent level.” </div>
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“Maybe there’s a new normal here,” says Glickstein, where the funding gap is not closed unless and until there are higher interest rates – the key factor that caused funding levels to plummet in 2014. When interest rates are low, under rules governing how a plan’s pension benefit obligation is calculated by actuaries, plans have to assume current assets will earn less in the future. </div>
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The funding status of a plan is a ratio of the current value of assets held by a plan as a share of the present value of the plan’s future pension obligations. The ratio is based on a calculation of how much the plan will pay out to current workers and retirees in the future. If a plan is fully funded, its funding level is 100 percent and it can meet all its future obligations for current workers and retirees.</div>
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During 2014, a lower discount rate caused most of the slide in funding. The discount rate is the interest rate used to calculate the future returns on a plan’s investment assets. Since 2007, the average discount rate has declined every year except for 2013. While the average discount rate was 6.29 percent in 2008, it slide to 3.95 percent in 2012, then rose to 4.78 percent in 2013 – giving plan funding a good boost. In 2014, however, Towers Watson the plans in its analysis will use an average discount rate of 3.90 percent, lowest rate so far in the current cycle. </div>
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Towers Watson calculates that the plans in its analysis had a $1.520 trillion pension benefit obligation in 2013, rising to $1.746 trillion in 2014 – a significant 15 percent increase in liabilities. At the same time, plan assets are estimated to have increased a modest 3.27 percent from $1.358 trillion in 2013 to $1.402 trillion in 2014.</div>
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Plans had another setback in their funding calculations in 2014, as they prepared to incorporate one-time longevity improvements for workers and retirees. Watson Towers estimates that revised mortality assumptions represent the second largest factor driving down the funding level of plans, representing 40 percent of the overall 9 percent decline in funding levels, according to Glickstein. </div>
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Last October the Society of Actuaries’ Retirement Plans Experience Committee released its final report for the Mortality Improvement Scale, known as MP-2014, and its Mortality Tables Report, RP-2014. Under the new mortality tables, a 65 year-old male has improved his lifespan by 4.5 percent over the 2000 tables, while a 65-year-old female has gained 5.8 percent in her expected life span. </div>
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If the IRS adopts the Society of Actuaries 2014 mortality tables for reporting requirements for plans, it would increase the average lump sum payout for a 55 year old by 5.1 percent, assuming an equal amount of men and women in the workforce, according to <a href="http://www.octoberthree.com/news/article/Society-of-Actuaries-releases-updated-mortality-tables"><span style="color: #0433ff;">October Three</span></a>, a Chicago consulting firm. </div>
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The pension benefit obligation also incorporates future expected contributions from the corporate sponsor to their pension plan for employees. Relying on publicly released information in annual company 10-K filings with the U.S. Securities and Exchange Commission, Towers Watson estimates that companies contributed $30 billion to their plans in 2014 – even though many of them have been closed to new hires.</div>
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“Unless there is an uptick in interest rates or equity market performance, this year will most likely bring higher expense charges and additional contribution requirements,” says Dave Suchsland, a senior retirement consultant at Towers Watson in Lafayette Hill, Pennsylvania.</div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-83134314174405206092014-12-15T05:47:00.002-08:002014-12-15T05:48:52.319-08:00Paul Singer: Looking Ahead to 2015 and Risks to the World Economy<iframe allowfullscreen="" frameborder="0" height="233" src="//www.youtube.com/embed/rd0hYLhhm_0" width="434"></iframe><br />
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Hedge fund manager Paul Singer, founder and president of Elliott Management Corporation, on global financial and political issues and the risks they engender.<br />
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Mr. Singer was interviewed by Andrew Ross Sorkin at the New York Times DealBook Conference, December 11, 2014 at 1 World Trade Center, New York.Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-26608084650184617372014-10-07T06:25:00.000-07:002014-10-07T06:28:45.362-07:00The Lehman Rescue Efforts: What Went Wrong; Was a Better Way Available?<div style="font-family: Helvetica; font-size: 12px;">
By Yusuke Horiguchi</div>
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1. In a systemic financial crisis, strong forces of contagion--a virulent form of negative externality--put even the solidest financial firms with no faults of their own at serious risk, because of other firms' plight. This is a notorious example of market failure, providing a justification for public intervention aimed at preventing the financial system's collapse, typically involving taxpayer money. This is a standard economic analysis, widely accepted, at least at this level of generality, and with a straightforward prescription on the general direction of policy to be followed when coping with severe system-wide financial stresses. It needs emphasis, however, that the prescription is applicable only to systemic crisis situations. </div>
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2. The situation of September 2008 and the ensuing few months was none other than that of an epochal systemic crisis. It in fact was the epitome of "unusual and exigent circumstances", in which the Fed was authorized to exercise extraordinary lending power under Section 13-3 of the Federal Reserve Act (in particular pre Dodd-Frank). What was needed then was not just one but a series of decisive public interventions, with the Fed playing a critical role using its Section 13-3 power. Not bailing out a big financial firm in trouble in such a situation could cost taxpayers much more dearly than the direct cost of bailout, as witnessed in the wake of Lehman's collapse, an event which should have been prevented.</div>
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3. Why did the Lehman rescue efforts fail? It does not take a rocket scientist to figure out that then Treasury Secretary Paulson's dogged adherence to his policy of no public money for a Lehman rescue made an already very difficult task of preventing Lehman's collapse an almost impossible one, as documented amply in Ross Sorkin's Too Big To Fail, and former Treasury Secretary Geithner's Stress Test. What caused Paulson's absolute aversion to another use of public money was the political flak he had been getting, especially following the bailouts several days earlier of Fannie and Freddie. He could not stomach any more politicians' damning refrain "here goes Paulson again with his checkbook". As pointed out in those books, had Paulson chosen to take a higher road and indicate, at a strategic moment, his potential readiness to be less inflexible, at the end of the day, perhaps contingent on certain conditions, the process and the outcome of rescue efforts could well have been different.</div>
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4. Paulson found a convenient defense for his position in an analytical assessment circulating at the Treasury and the Fed with considerable top-levels support, that financial firms were ready to cope with a Lehman failure given their preparation over the six months since the Bear Stearns event. This analysis, however, was a cavalier one, to say the least, ignoring altogether a fallacy of composition typical in a panic whereby individual firms' rational behavior to run from risks collectively acts almost like a death sentence for the financial system already on its knees. A sloppy analysis should be accorded no place as a basis for a strong policy position like that of Paulson's, especially in a moment of truth. </div>
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5. Strangely, post Lehman's bankruptcy, Paulson's public statements on why Lehman was not bailed out cast aside his policy of no public money for Lehman. Paulson instead contended, like then Fed chairman Bernanke, that, given the lack of adequate collateral on the part of Lehman, they had no legal authority to lend to Lehman, even under Section 13-3, an amount sufficient for it to weather the storm and survive. Aside from a question why Paulson had to be so vehemently opposed to something that, according to him, they were not even legally authorized to do, a set of "circumstantial evidences" points to rather shaky grounds on which this contention stood. </div>
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6. To begin with, contrary to their public statements, the real legal authority issue in Lehman's case was not whether the Fed had legal authority to lend to Lehman under Section 13-3 but rather whether the Fed had legal authority to proffer a guarantee for Lehman's trading obligations during the interim between the time of Barclays (a UK bank, the only potential buyer of Lehman in the final stage) and Lehman signing an acquisition agreement and the time of the deal's closure. On Sunday September 14, with a consortium of major banks having already agreed, to meet Barclays' demand, to put up $33 billion to fund a special vehicle to purchase Lehman's toxic assets--a la Maiden Lane the NY Fed created for Bear Stearns rescue--the last hurdle blocking Barclays top executives' signing of an agreement in New York that day to acquire Lehman was the absence of a Barclays shareholders' yes vote on proffering trading obligations guarantee. </div>
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7. With the UK authorities refusing then to waive the country's requirement of a shareholders' vote on this, the only way viewed as potentially available for the merger deal to get signed that day was for the Fed, instead of Barclays, to proffer such a guarantee to Lehman, until the time of Barclays shareholders' yes vote. And that was what was deemed legally impossible for the Fed to do, as articulated by NY Fed general counsel Baxter in his statement to the Financial Crisis Inquiry Commission. So, Paulson and Bernanke were right in claiming that they did not have legal authority, but the legal authority in question was not one related to lending to Lehman in the alleged absence of adequate collateral but one related to proffering a temporary guarantee for Lehman's trading obligations. This distinction is critical. The Fed's lack of legal authority in this very specific and narrow matter cannot be considered as the last word on a broader issue of whether a legal way to use public money to rescue Lehman could not have been found. </div>
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8. A key issue in that broader context is whether Lehman had adequate collateral for a Fed loan under Section 13-3. The assertion of Paulson and Bernanke notwithstanding, a strong support for a positive answer to this question is found in the bank consortium's unambiguous decision to provide $33 billion to fund a special vehicle to buy Lehman's toxic assets. According to the Sorkin's book, the way the consortium valued those assets for deciding how much to provide was merciless, with 25-50% writedowns from Lehman's own downbeat estimates being common across those assets. A reliable basis for assessing the suitability of those assets as collateral for the Fed's potential loan operation for a Lehman rescue is found in NY Fed lending for Bear Stearns rescue. In that bailout, the collateral for the NY Fed's $29 billion loan to Maiden Lane was valued using, as is, Bear Stearns marks as of March 14. It would be a mystery if the Fed indeed had no legal authority to lend for a Lehman rescue based on the far more stringently valued collateral.</div>
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9. These considerations indicate that a way could have been found to get around the aforementioned specific legal obstacle and let Barclays sign the purchase deal. For example, given the consortium's commitment to provide $33 billion, a plausible scenario for Lehman rescue would have been for the consortium, instead of the Fed, to proffer the needed guarantee, using that money as a means to boost the guarantee's credibility, and for the Fed in tandem to fund a special vehicle to purchase Lehman's toxic assets, as it did for Bear Stearns. Would the consortium have demanded that the guarantee be secured by collateral? Not likely, in the light of the total lack of any "fusses" on the part of JP Morgan Chase in proffering the required guarantee to Bear Stearns, in sharp contrast to its adamant refusal to proceed with the acquisition deal in the absence of the Fed's commitment in effect to covering the great bulk of possible losses associated with Bear's toxic assets. Had the consortium asked for collateral, it very likely would have found adequate collateral among Lehman's non-toxic assets valued then at more than $500 billion. </div>
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10. As a final point on the legal issues, it should be emphasized that the Fed's lack of legal authority to proffer a guarantee as such should not have been taken as precluding a search for an instrument available within the Fed's legal power that performs a function equivalent to a straightforward guarantee for Lehman's trading obligations. To leave no room for doubt that Lehman's commitment in trade deals be honored, all that the Fed would have had to do was to make a non-recourse loan to Lehman in the amount of any trading transaction that Lehman did not have resources to consummate, taking the assets acquired from the counterparty to the deal as primary collateral. The Fed had the authority to make such a loan (and could have prevented a bankruptcy) but did not use it. Another possible channel through which to provide public financial support for a Lehman rescue was thus left unexplored. </div>
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11. The absence of official financial support to underpin the Lehman rescue plan being developed in New York made the UK authorities highly skeptical of the plan's workability, causing them to refuse to go along with the US authorities' prodding to give Barclays the green light for its acquisition of Lehman. The sketch provided by Paulson of the deal in the works, notable for no official skin in the game, clearly indicated to the UK authorities that Barclays would be taking on more risk than it could manage. What they looked for, in order to be supportive, was an assurance that the deal was sufficiently watertight to cope with any worst-case scenario. In their view, such assurance was possible, in the midst of the raging systemic crisis, only with an unequivocal financial backing of the US authorities for the deal. While the UK authorities' strong disinclination to go along, including its refusal to waive the requirement of a shareholders' vote on proffering of the guarantee, was taken by the US side as the final nail into the coffin of the deal, it should have been crystal clear from the very outset that there was absolutely no way for the UK government-or any other government for that matter-to endorse the deal as envisaged, in effect bankrolling a US investment bank when the US authorities would not. </div>
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12. By way of concluding, a mention has to be made of a concern about the moral hazard affecting big financial firms, a concern almost certain to have been underlying all those individual reasons for the failure of the Lehman rescue efforts. Despite its powerful influence in politics, substantively moral hazard affecting such firms is merely an untested extrapolation of a concept relevant for individuals' behavior to organizations'. To begin with, an official bailout of such firms is for the system's stability and never for any individual stakeholder. In cases where a firm on the brink gets bought into a healthier firm, it loses its own identity, and its stakeholders typically lose big time. Even in the bailouts of AIG and Citi in which their identities were preserved, the losses incurred by their shareholders as well as top executives and highly paid staff, typically with substantial holdings of shares of their respective companies, were enormous. Given that, an idea that individual stakeholders behave recklessly just because of the knowledge that their firm would be bailed out in time of crisis is absurd. So, then, is the notion of the moral hazard affecting large financial firms. </div>
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13. Moral hazard was not a driver of large financial firms' pre-crisis reckless behavior; greed and other basic frailties of many key individual stakeholders were. Despite its little substance, the concern about moral hazard has intensified in the aftermath of the repeated bailouts of unprecedented scales. This is visible in certain recent regulatory changes, including in particular Dodd-Frank's elimination of the Fed's power to lend to individual nonbanks and of the broader FDIC guarantee authority. Making the collapse of systemic firms during a crisis less preventable while lessening the authorities' ability to keep the panic from spreading can prove a devastating combination. In contrast to significant regulatory reform achieved on crisis prevention side, retrogression is the clear trend for the crisis management apparatus charged with the imperative of preserving systemic stability, driven by moral hazard concern and anti-bailout sentiment. Last time, the authorities failed to make full use of available instruments; next time of a category-5 hurricane, they will find themselves short of instruments. This has to change without delay. </div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-42712769265860209142014-05-03T11:27:00.002-07:002014-05-04T07:56:01.209-07:00Federal Reserve’s Weak Dollar Policy Pushing Dollar Toward Collapse<div class="MsoNormal" style="line-height: 24px; margin-left: 1em; margin-right: 1em;">
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Q and A with James Rickards<br />
Part 1 of 3<br />
Part 2 <a href="http://mindovermarket.blogspot.com/2014/05/gold-price-manipulation-masks-potential.html" target="_blank">here</a><br />
Part 3 <a href="http://mindovermarket.blogspot.com/2014/05/strengthen-dollar-or-face-imf-as.html" target="_blank">here</a><br />
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May 3, 2014</div>
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By Robert Stowe England<o:p></o:p></div>
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<i>James G. Rickards is a lawyer, economist and investment banker with 35 years of experience on Wall Street. His new book </i>The Death of Money<i>, published by the Penguin Group, is a New York Times bestseller. His first book, </i>Currency Wars<i>, published in 2011, and was also a Times bestseller. In his new book he explores further the consequences of the weak dollar policy pursued by the Federal Reserve Bank, coupled with the huge run up in deficits and debt by the United States, and the failure of Congress and the Obama Administration to devise policies that would spur faster economic growth. Rickards is a portfolio manager at West Shore Group, LLC, Haddonfield, N.J., an investment fund set up in 2013, and an adviser on international economics and financial threats to the Department of Defense and the U.S. intelligence community. He gained first-hand experience on the front lines of a financial crisis as counsel for the hedge fund Long-Term Capital Management, when he was principal negotiator in the 1998 bailout of the fund by the Federal Reserve Bank of New York.</i><o:p></o:p></div>
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Q: Obviously the Federal Reserve and the dollar are at the center of the story in your new book. What are the most important things Washington needs to understand to face the reality of a possible dollar collapse and possibly prevent it?<o:p></o:p></div>
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Rickards: Part of the thesis of the book is the fact that the people in charge – meaning the Treasury and the Fed, other central bankers and monetary elites – actually have very limited comprehension, if any, as to how dangerous the situation is. The idea that the elites see the danger and the everyday investor doesn’t – I would stand that on its head. And say it’s beginning to sink in to the everyday investor that there are serious problems and they need to take precautions because the central bankers are driving the bus over the cliff. But they don’t see the cliff.<o:p></o:p></div>
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Q: What are the things the people in charge of monetary and dollar policy in Washington least understand? What are they missing?<o:p></o:p></div>
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Rickards: Well, they’re missing everything. Let me say what I mean by that. All policy, at least the way it’s done today by central bankers, is based on some paradigm as to how the economy works, some specific models as to how certain functions and factors work within the economy. And if you get your model wrong – worst yet, if you get your paradigm wrong, then your policy is going to be wrong every time. And that is problem.<o:p></o:p></div>
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The central bankers are sort of a closed circuit. They all went to the same schools. You could pick five schools. You can say M.I.T. [Massachusetts Institute of Technology], Harvard [University], [University of] Chicago, Stanford [University], and maybe Yale [University] and [the University of California at] Berkeley and maybe throw in a couple of others. And then go around the world and look at all the major central banks and where they went to school. They went to one of those five places. They took the same courses. They had the same professors. In a lot of cases they were each other’s professors. Stan Fisher walked into the Board of Governors having been thesis adviser to some of the other members. So, you have a groupthink problem.<o:p></o:p></div>
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They’re using general stochastic equilibrium models, which do not sync into reality. Their paradigm is they have an equilibrium model. There’s some perturbation that throws the economy out of equilibrium. And what you do is apply policy that gets it back to equilibrium and once it gets back to equilibrium the clock starts ticking again and it’s all good. That’s kind of how they think about things. <o:p></o:p></div>
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But, in fact, the economy is a complex system. And if you look at complexity theory and I do that in <i>The Death of Money</i> and also in my first book <i>Currency Wars</i>, and I’ve done a lot of research along those lines, you see that what happens in complex systems is they kind of mimic an equilibrium system for awhile and then they just go off on a tangent and there are the so-called black swans. And I don’t really like the phrase black swan because it is amorphous and inexact. But that’s as good a term as any that everyday readers can understand. But the textbook term for that is <i>emergent properties</i>, which means that things just seem to come out of nowhere. There’s nothing about perfect information in the system that would allow you to infer what’s coming next because, as I say, it just kind of pops up out of nowhere.<o:p></o:p></div>
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And when it happens it’s an irreversible process. In many cases you can’t make it go back to what it was. And so therefore risk management in a complex system is all about mitigating the scale of the system so that you don’t have these mega-catastrophes in the first place. Whereas in an equilibrium system, if you think that printing money is the right policy to affect equilibrium, you may actually print so much money that you increase the scale of the system and increase the probability of a catastrophic result.<o:p></o:p></div>
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So, they’ve got the wrong model. I mean that’s empirical. It’s not just an opinion. You can look at the time series of prices in any market. It’s not normally distributed. It’s a power curve that signifies a complex dynamic underneath. And if you dig deeply, that’s exactly what you find. So, it’s not a surprise that they get it wrong every time. The Fed has a one year forecast that they do every year. It’s one year forward. So, in 2009 they’ll forecast 2010. And 2010, they’ll forecast 2011 and so forth. If you look at the last four years, they’ve been wrong every year by orders of magnitude – not just a little bit wrong, but completely wrong. [They forecast will] say 3.5 percent, it comes it at 2.4. It’ll say 3 percent. It comes in at 1.9. Those are big errors, big orders of magnitude in something like forecasting GDP, which is only ever going to go between something like negative 3 and plus 6, and it’s not a wide range.<o:p></o:p></div>
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So, if you go back to 2007, just look at [former Fed Chairman Ben] Bernanke’s own words taken from the minutes of the FOMC [Federal Open Market Committee] meeting where first he says the housing crisis will blow over. As late as 2008 they didn’t understand the magnitude of it. They underestimated the duration of it. Once they got a couple of years into it, they began to appreciate the duration, but they were still applying the wrong policy because this is a structural problem. We’re in a depression that began in 2007 and will continue indefinitely. And they’re applying a liquidity or cyclical solution. You can’t solve a structural problem with a cyclical solution. You need a structural solution. So they’re still applying to wrong medicine.<o:p></o:p></div>
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So, I would say the biggest problem in the world today in finance and economics is that the people in charge are using the wrong paradigm, the wrong understanding of how the world works, the wrong models, and they are applying the wrong medicine and we’re going to get disastrous results.<o:p></o:p></div>
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Q: Your book suggests there seem to be so many forces in play that the system has reached criticality. That is, things have become so critical that almost anything could set off a crisis or meltdown. If policy makers were on top of this, what should they be doing?<o:p></o:p></div>
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A: Well, that’s a very good question. They should be doing a lot of things, some of which in the short run would be painful, which is one reason they don’t do them. Your description of what I’m writing is actually a very succinct way to put it. The system is actually reaching criticality – what can you do about that? Well, the first thing they can do is to back away from it. Raise interest rates. Begin to reward savers instead of punishing savers. Begin moving to more of a savings and investment kind of model rather than a borrowing and debt and consumption driven model. And reverse QE as fast as they can and not just reduce purchases as they are doing now. They’re still printing money. They’re just printing at a slower pace.</div>
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They should actually get rid of some money and take it out of the system by reversing QE. Then they should normalize interest rates. Normalize the balance sheet and then say to the Congress, hey, look, this is not something that we the Fed can solve. Money printing does not create jobs. Cyclical programs don’t solve structural problems. You, the Congress please do your job and [come up with] actual structural solutions. You say what are those? It would be a basket of things involving fiscal policy, labor policy, labor mobility, various cost uncertainties that are being imposed on the economy, the Keystone pipeline. There’s a long list of things to do there.<o:p></o:p></div>
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Q: You talk about de-scaling the complex system to reduce risk and uncertainty.<o:p></o:p></div>
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Rickards: You need to break up the system. I know I use the [single snow flake causing an] avalanche metaphor but I try to make the point that it’s more than a metaphor. The dynamics and the math are actually the same, just in a different phenomenological space. So what does the ski patrol do when you see snow building up and it’s going to cause an avalanche and kill some skiers? Well, they explode dynamite. They fire a cannon into it or throw some explosives and a charge and they break it up at a time when no one is skiing below and make it harmless and then after that the skiers can enjoy the skiing.<o:p></o:p></div>
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As applied to banks, that would mean breaking up the banks. Just take JPMorgan for Exhibit A and break it into five banks. It used to be when I started in banking that what is today JPMorgan was five different banks. It was Manufacturers Hanover, Chemical, the old J. P. Morgan, Chase Manhattan and Wachovia. This is not nostalgia on my part. This is what you would do prevent collapse and then you could say, hey, if one of these five banks were to fail, that might be a little painful but it’s not going to take down the system. Put them all together. They whole thing fails and obviously it does and then the government has to intervene and that just means more intervention and more distortion and then the whole thing just gets worse.<o:p></o:p></div>
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Q: You criticize the widespread use of derivatives by banks that are too big to fail.<o:p></o:p></div>
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Rickards: I would ban most derivatives, not all of them. I think exchange-traded futures, and a few tests having to do with transparency, good risk management and good collateral management [are OK]. The Chicago future exchanges have 150 plus years track record of doing things right. I think we can have some confidence in those. But, over-the-counter swaps and derivatives that are off the balance sheet of the books of the banks that don’t have good capital, I would ban most of those. So the combination of breaking up the big banks and banning most derivatives and increasing capital requirements – those three things taken together would be the equivalent of exploding some dynamite that isn’t dangerous now and preventing the avalanche danger. These are all ways of descaling the system. It’s not that there won’t be failure anywhere. It’s just that it won’t be systemic.<o:p></o:p></div>
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Q: I noticed that you also called for reinstating the Glass-Steagall Act, particularly provisions in the 1933 law that separates investment banking from commercial banking by deposit-taking institutions that was repealed in 1999 the Gramm-Leach-Bliley Act. Would separating those business into separate companies add another layer of protection for the financial system?<o:p></o:p></div>
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Rickards: Yes. Absolutely. When I say these [like bring back the Glass-Steagall Act,] I like to put some science, some data or analytics behind them so they don’t come off as political rants because I’m not that political and I try not to be a ranter. But take the whole history – the pre-history, the history and the post-history of Glass Steagall. What happened? Well, in the 1920s banks in the United States discovered they could create garbage products and sell them to their customers and essentially fleece the customers. And that collapsed in a pyramid and the stock market crashed and [we had] the aftermath of 1929.<o:p></o:p></div>
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So, in 1933 the Congress had hearings and said our job is to protect the public, so let’s find out what happened. And they had hearings and they reached a conclusion that there were inherent conflicts of interest[between taking deposits and lending, on one hand, and investment banking, on the other]. So, they said, OK, this is simple. From now on you can take deposits and make loans. That’s fine and you’ll be regulated. Or, you can underwrite and sell securities. And that’s fine. But you can’t do both. It’s a conflict of interest to take depositor money off the street of basically from people who trust you and then use that to speculate in the securities market and use your franchise or store window to sell garbage to customers. You can’t do that. Well, that was Glass-Steagall in a nutshell.<o:p></o:p></div>
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That was the law for 65 years until 1999 and in the entire 65-year period we did not have any systemic crises of the kind we saw in 2008. We’d have to go back to 1929 and before that to 1907 to find this type of crisis and then all the way forward to 2008 to find it – and in between we didn’t [systemic crises]. Now, we did have bank failures. Some of the were pretty big. We had Penn Square. We had Continental Illinois. We had problems in the banking system, the [savings and loan] crisis of the 1980s, which cost about $200 billion in real terms in today’s money to clean up. So, I’m not saying it was trouble free but we never had anything like the systemic risk or TARP. Now, come forward to 1999, Congress repealed Glass-Steagall. And then they repealed swaps regulation in 2000 [when they passed the Commodity Futures Modernization Act].<o:p></o:p></div>
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So what happens? Within years [of repealing Glass-Steagall] the banks originated garbage products and started selling them to their customers. So is that any surprise that eight years later we have a massive systemic crisis that almost destroyed the banking system? In other words, the minute you took the guard rails off the banks, they went right back to doing what they were doing in the 1920s, which should come as no surprise because they’re greedy and there are inherent conflicts of interest and once you take the guard rails off. And so, it’s almost as if the Congress in 1999 thought they were smarter than the Congress of 1933. But they weren’t. The Congress of 1933 had just lived through a disaster and they wanted to do something about it. And they did something that worked for 65 years. Why on earth would you repeal it? Why on earth would you think you’re smarter than the people who had first hand experience with it and came up with a solution? So, yeah, put Glass-Steagall back on as soon as possible.<o:p></o:p></div>
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That is also consistent with the idea of doing what I call de-scaling, which is what physicists would describe as what you are doing to the system. Break the system into smaller parts so that a failure of any part does not threaten the system as a whole. That’s the basic idea. Glass-Steagall does that. Breaking up the banks does that. Reducing derivatives does that. It all feeds in.<o:p></o:p></div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-65271117553006796562014-05-03T11:12:00.000-07:002014-05-03T13:47:18.983-07:00Gold Price Manipulation Masks Potential for Gold Demand Shock<div class="MsoNormal" style="line-height: 200%; text-align: left;">
Q and A
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Part 2 of 3<br />
Part 1 <a href="http://mindovermarket.blogspot.com/2014/05/federal-reserves-weak-dollar-policy_3.html" target="_blank">here</a><br />
Part 3 <a href="http://mindovermarket.blogspot.com/2014/05/strengthen-dollar-or-face-imf-as.html" target="_blank">here</a></div>
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<span style="line-height: 200%; text-align: justify;">By Robert Stowe England</span></div>
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<i><span style="line-height: 200%;">James G. Rickards</span><span style="line-height: 200%;">
is a lawyer, economist and investment banker with 35 years of experience in
capital markets on Wall Street. His new book </span><span style="line-height: 200%;">The Death of Money</span><span style="line-height: 200%;">, published by the Penguin Group, is a </span><span style="line-height: 200%;">New York Times</span><span style="line-height: 200%;"> bestseller. His first book, </span><span style="line-height: 200%;">Currency Wars</span><span style="line-height: 200%;">, published in 2011, and was also a </span><span style="line-height: 200%;">Times</span><span style="line-height: 200%;"> bestseller. In his new book, he
explores further the consequences of the weak dollar policy pursued by the
Federal Reserve Bank, coupled with the huge run up in deficits and debt by the
United States, and the failure of Congress and the Obama Administration to
devise policies that would spur faster economic growth. Rickards is a
portfolio manager at West Shore Group, LLC, Haddonfield, N.J., an
investment fund set up in 2013, and an adviser on international economics
and financial threats to the Department of Defense and the U.S.
intelligence community. He gained first-hand experience on the front lines of a
financial crisis as counsel for the hedge fund Long-Term Capital Management,
when he was principal negotiator in the 1998 bailout of the fund by the Federal
Reserve Bank of New York.</span></i></div>
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Q: Another thing I found intriguing
in your book is the discussion of how gold prices have been manipulated to keep
the price low to facilitate a stealth rebalancing of gold reserves from the
west to the east, especially China. Obviously the central bankers know about
this. How could they not?<span style="mso-spacerun: yes;"> </span>The price
manipulation has been done by selling numerous paper investments backed by same
stash of gold in unallocated and leased sales. Could you explain how underlying
stresses in the system could lead to a gold buying panic? <span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
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Rickards: Well all these things are
connected. They kind of work hand in glove. What’s the big thing that’s going
on? The big thing that’s going on is that China needs to get gold. And Russia’s
getting gold and other central banks are acquiring gold. But the 800 pound
gorilla, if you will, is China rebalancing gold away from the west to China – a
very well known story, very well documented. But the question is why and how.
What’s going on here? Why is it being done? How is it being done? And that’s
where the price manipulation comes in. Because if the price of gold took off,
if there was sort of a buying panic, if you will, [it would create a] buying
shock. I talked with the head commodities trader at one of the largest banks in
the world. He told me that he’s looking for what he calls is a demand shock in
China. The Chinese credit pyramid is clearly imploding, which I talk about in
Chapter 4 of the book. [“China’s New Financial Warlords”]<o:p></o:p></div>
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When you look at the Chinese, they
have a closed capital account so [the Chinese people] can’t buy stocks and
bonds [outside of China]. The Shanghai stock market is a bit dismal. The real
estate is the thing that’s going to collapse. And the banks pay them 25 basis
points on savings. So you look around and say what the heck can I buy that will
preserve wealth? And the answer is gold. And this is beginning already in
certain ways but it will accelerate. So when this crash comes, it’s again a
demand shock and that’s exactly right. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
Now, China’s problem is they have
the fastest growing economy in the world. Even with the problems and even with
the slowdown it’s still the fastest growing economy in the world as a percent
of global GDP. So, think about the right reserve mix of gold at the market
price as a percentage of GDP, which is what I talk about in the book. It’s in
that Chapter 9 [“Gold Redux”] and Chapter 11 [“Maelstrom”]. If you think about
it, China is a moving target. No matter how much gold they buy, they have to
keep buying more, first of all to reach the same ratio as the United States and
they are not quite there yet – and then to maintain it because their economy is
growing faster than the United States. That means they are going to buy more
gold just to keep the ratio the same. If you combine that with a rising price,
all of sudden the price goes to $2,000, $2,500, $3,000 et cetera, this gets to
be out of reach. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
I’ve got a moving target in the
quantity. Now I’ve got a moving target in the price. Things are getting away
from me. Things become more transparent as the buying power [decreases] so
China might not ever got there. So dynamically they have to keep the lid on the
price until the rebalancing is done. Then, at the point it doesn’t matter. So
wherever the price goes, China’s on the bus. This is all about making sure
China’s on the bus. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
Q: What about all the paper gold?
What role does that play?<o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
Rickards: The leasing and the
unallocated gold, and the paper gold and the gold futures and all that, those
are the tools for price depression. By the way I don’t believe or I’ve
certainly not seen any evidence that major banks are taking position risks to
make this happen. They are just intermediaries. They are making spread. They
are charging commissions. They are doing what the customer wants but the
customer happens to be the BIS (Bank for International Settlements]. And it’s
mentioned in the book and documented in the footnotes from BIS financial
statements that they do transact with banks and central banks and commercial
operations in gold leasing operations. So, if the customer happens to be the
BIS, you are going to do what the customer wants. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
So it’s coming from the central
banks [who created the BIS and are its constituency]. So, that’s the price
depression [of gold]. And, by the way there’s more and more statistical
evidence coming out. And I’m sure you heard about the study at Stern School of
Business at NYU [New York University]. [The <a href="http://www.bloomberg.com/news/2014-02-28/gold-fix-study-shows-signs-of-decade-of-bank-manipulation.html" target="_blank">authors</a> of the draft research paper
are Rosa Abrantes-Metz of New York University and Albert Metz, a managing
director at Moody’s Investors Service.] <span style="line-height: 200%;">I haven’t seen it because it’s not
published yet, but I’ve seen some excerpts and synopsis that indicates that
there’s powerful statistical evidence that gold is being manipulated.</span></div>
<div class="MsoNormal" style="line-height: 200%;">
<o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
I’ve also spoken to another guy, <span style="mso-spacerun: yes;"> </span>a Ph.D. statistician for a major billion-dollar
hedge fund and who is not a gold bug. He did the work and reached the same
conclusion [the gold prices are being manipulated]. He did a 10-year price
study of [changes in gold prices] on Comex [the Commodity Exchange, a division
of the New York Mercantile Exchange] during trading hours versus after hours.
When you’re talking about markets and statistics, those two accounts should be
the same. But the answer was they weren’t anywhere near the same. The Comex [during
working hours] actually performed dismally and the after hours account did
multiples what actual gold did. There’s no explanation for that other than the
manipulation of the Comex. And he agreed with me that is the right conclusion. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
So the evidence is everywhere [of
manipulation of gold prices] and it’s all designed to keep the price of gold
low until China gets the gold they need to be on the bus and you kind of go
from there. What has been surprising is that utter nonchalance of the U.S.
government. Because I’ve gone down to senior officials in the Pentagon, the
intelligence community and the Treasury and elsewhere and in Washington with a
little bit of alarm saying, hey, do you know what the Chinese are doing? Do you
see what’s going on here? The reaction is they are either completely
non-plussed or they were unaware of it or they are aware of and they don’t see
why it’s such a big deal.<o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br />
But let me explain why it is a big deal – not for just geopolitical
geostrategic reason I just mentioned, but in terms of the technical set up for
where gold is going to go from here. If you think of stocks and flows in round
numbers there are about 35,000 tonnes of official gold in the world and about
177,000 tonnes of total gold. And mining output is quite small. All the mining
in the world increases the total stock by about a little over one percent a
year. So, it’s a factor but it’s not a big factor. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
So when 500 metric tonnes of gold
moves from a GLD warehouse to China’s government vaults in Shanghai – which it
did last year, by almost a straight line with a stop in Switzerland just to get
re-refined. But, when gold does that, a lot of analysts look at that and say,
well, so what? It was in a vault in London. Now it’s in a vault in Shanghai. They
just turned it from a 400-ounce bar to a kilo bar. Whatever. It’s the same
gold. It moved from one vault to another. Who cares? And that’s kind of where
the national alarm comes from. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
But here’s the difference. When
gold moves from the GLD warehouse to the government vault in Shanghai, there is
no change in the total supply, but there is a diminution in the floating
supply. The floating supply is that portion of the total stock that’s available
for trading. So, if I’m in GLD or I’m in a bullion bank and I’m a UBS, that
gold is available for the kind of paper trading we just talked about. But if
you put it in private storage, you put in a Chinese government vault, it’s not
available for paper trading. It’s just gold being put away. Well, that’s
exactly what’s going on. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
If you think of the gold market as
an inverted pyramid, and on the bottom there are a couple of bricks of gold.
And then in the inverted pyramid on the top you have all the paper gold. So, it
would be leasing, unallocated sales, Comex futures which totals up to 100 to 1
[paper claims against each a portion of physical gold]. That’s OK. That’s not
unlike other derivatives markets. But if you start pulling the gold bricks, the
gold out from the bottom you’re going to topple the pyramid. At least you’re
going to force that pyramid to shrink. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
And that’s what’s going on. Total
gold supply is not changing. The floating supply is changing. And that means
less gold to support the paper trading. And that means one of two things is
going to happen. If you keep the paper trading just as big, you are going to
destabilize it. If you shrink it, it’s going to increase the price of gold.
Either way we’re in for some interesting times. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
Q: Does Washington recognize that
China is trying to assure its place in any future international monetary system
by acquiring this gold? Do they at least recognize that?<o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
Rickards: The only really top-level
official I’m spoken to who does recognize that and thinks it’s fine is Min Zhu,
deputy director at the IMF.<span style="mso-spacerun: yes;"> </span>I’ve spoken
with him and he says that just makes sense to him. By extension it makes sense
to the IMF. Because he used a phrase – I was shocked to hear him say it – they make
a distinction between what they call credit reserves and real reserves. That is
exactly the right way to put it [meaning paper money is considered credit
reserves, a claim on the central bank standing behind it]. But I was shocked to
hear anyone say it; because who thinks that paper money is credit reserves? I
do. But I’m not sure many other analysts do. Min Zhu said clearly China is, in
effect – and these aren’t his exact worlds – is overweight paper and
underweight gold. And so they ought to get some gold. So he could see it for
what it was and he thought it made a lot of sense. Why does it matter – unless we’re
somehow going rewrite rules of the game and gold plays a role? Because if we
weren’t going to do that and gold didn’t play a role, then it wouldn’t matter.
But Min Zhu clearly thinks it does. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
Now, on the U.S. government side,
people in the Pentagon are interested [in what’s happening with China’s
accumulation of gold and what it might represent], but they feel constrained in
what they can do because they don’t want to mess with Treasury. And that’s the
other thing people don’t understand. The think of the U.S. government as a
monolith with a single point of view and nothing could be further from the
truth. The U.S. government is an octopus with eight legs and every leg is
dancing to a different tune. And so, the Pentagon is kind of concerned but they
feel they can’t really say anything because that’s the Treasury’s job. Over at
the Treasury I’ve spoken to a number of people there. The risk people there, it
doesn’t even factor in, that’s the kind of thing we were talking about earlier.
Well, the Fed, it’s just not in their mental frame. [I am not sure where key
current and former top Treasury officials stand,] people like Lael Brainard,
[the former Under Secretary of the Treasury for International Affairs] or Secretary
[Jack] Lew. [As for former Treasury] Secretary [Timothy] Geithner, well he is
an IMF guy. His training, his experience, is all in the areas we’re talking
about. <span style="mso-spacerun: yes;"> </span>I haven’t spoken with him. I
can’t read his mind, but I have some difficulty believing he doesn’t understand
it and doesn’t somehow approve [China’s accumulation of significant gold
reserves]. Certainly, the U.S. is in a position to stop it and we’re not
stopping it. So, somehow, at least in principle he must think it’s OK.<br />
<br />
Q: I guess the point of all of this is that if the dollar is in a crisis and
some of the scenarios unfold that you talk about in Chapter 11 [“Maelstrom”],
then China is going to have a say in the design of the next international
monetary system that emerges and they don’t want the dollar as the world’s
leading reserve currency.<o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
Rickards: They will now [have a say]. I
don’t think that was true four or five years ago. It’s definitely becoming true
and I think that’s what’s going on. That’s exactly what’s going on. By the way,
there was a secret meeting in Washington [Sunday, April 12] that was a dry run
for Bretton Woods. [The town of Bretton Woods, New Hampshire, was the site for
a July 1944 United Nations Monetary and Financial Conference of delegates from
44 nations. They met to jointly design and sign an agreement to establish a
post-war international monetary system with the dollar, backed-by gold, as the
centerpiece of the new order.] Friday and Saturday [April 10 and 11, 2014] was
the IMF spring meeting. And these finance ministers and central bankers from
all over the world were there. And when they get together they do all these
things. They do G20 on the sideline. They do BRICS on the sidelines And there
all these get-togethers. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
Well, on Sunday [April 12, IMF Managing
Director Christine] Lagarde hosted a meeting and the head of the Bank for
International Settlement was there and the head of the Swiss National Bank was
there. And of course senior IMF officials were there. And then, this is all in
a press release [issued the next day by the IMF <a href="http://www.imf.org/external/np/sec/pr/2014/pr14170.htm">http://www.imf.org/external/np/sec/pr/2014/pr14170.htm</a>
that reports there were] a number of other prominent economists and officials
were there. But, they didn’t disclose the names. But clearly a mix of senior
national monetary officials and senior bankers and private economist and
academics at a meeting behind closed doors to discuss the future of the
international system. <o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
<div class="MsoNormal" style="line-height: 200%;">
The title of the seminar was “Monetary
Policy in the New Normal.” What will the rules of the game be once we get into
the post crisis period? Of course I’m the one saying we’re not going to get to
the post-crisis period because we’ve got all the wrong policies. But, be that
as it may, that’s what they were doing. So, it looks like it was a one-day
practice round for a new Bretton Woods.<o:p></o:p></div>
<div class="MsoNormal" style="line-height: 200%;">
<br /></div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-28763545509703040192014-05-03T11:11:00.000-07:002014-05-04T08:14:11.517-07:00Strengthen the Dollar or Face the IMF as 'Central Banker to the World'<div class="MsoNormal" style="line-height: 150%;">
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Q and A
with James Rickards</div>
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Part 3 of 3<o:p></o:p><br />
Part 1 <a href="http://mindovermarket.blogspot.com/2014/05/federal-reserves-weak-dollar-policy_3.html" target="_blank">here</a><br />
Part 2 <a href="http://mindovermarket.blogspot.com/2014/05/gold-price-manipulation-masks-potential.html" target="_blank">here</a></div>
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<a href="http://2.bp.blogspot.com/-OxCaSM5XXWI/U2UoprHyH-I/AAAAAAAAAJ4/CaPrNlzkAx0/s1600/The+Death+of+Money.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="http://2.bp.blogspot.com/-OxCaSM5XXWI/U2UoprHyH-I/AAAAAAAAAJ4/CaPrNlzkAx0/s1600/The+Death+of+Money.jpg" height="320" width="212" /></a></div>
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<span style="line-height: 150%; text-align: justify;">By Robert Stowe England</span></div>
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<i><span style="mso-bidi-font-weight: bold;">James G. Rickards</span>
is a lawyer, economist and investment banker with 35 years of experience in
capital markets on Wall Street. His new book The Death of Money, published by the Penguin Group, is a New York Times bestseller. His first book, Currency Wars, published in 2011, and was also a Times bestseller. In his new book, he
explores further the consequences of the weak dollar policy pursued by the
Federal Reserve Bank, coupled with the huge run up in deficits and debt by the
United States, and the failure of Congress and the Obama Administration to
devise policies that would spur faster economic growth. Rickards is a
portfolio manager at West Shore Group, LLC, Haddonfield, N.J., an
investment fund set up in 2013, and an adviser on international economics
and financial threats to the Department of Defense and the U.S. intelligence
community. He gained first-hand experience on the front lines of a financial
crisis as counsel for the hedge fund Long-Term Capital Management, when he was
principal negotiator in the 1998 bailout of the fund by the Federal Reserve
Bank of New York.</i><o:p></o:p></div>
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Q: Now, looking at the scenarios
you point out in Chapter 11 [“Maelstrom”], it appears that most likely
candidate to become the centerpiece and central reserve for a new international
monetary system if the dollar collapses is something called S<span style="line-height: 150%;">pecial Drawing Rights or SDRs issued by the International Monetary Fund is the</span><span style="line-height: 150%;">. Would the SDR be backed by gold?</span><br />
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Rickards: I don’t think they want
it to be backed by gold. I don’t think there’s a central banker in the world
who wants gold-backed money. But, the point I make is that they may have to.
They may have no choice. If people have lost confidence in paper money, such as
the dollar, why should they have any more confidence in the paper SDRs?<o:p></o:p></div>
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[On the other hand,] they might [have
confidence in SDR as a paper currency] for two reasons. Number one. No one
understands it. I’ve spoken to international economists who don’t understand
SDR. Certainly mainstream economists and market analysts certainly don’t
understand it. Everyday Americans or citizens around the world don’t understand
it. Why should they? It’s a very technical subject. I’ve met experts who don’t
understand it. So you might be able to get away with it because nobody knows
what it is. The inflation [in local currencies tied to the SDR] would show up
the grocery store, at the gas pump, but nobody would know where it’s coming
from. They would say oh, those guys at the IMF they’re crazy, you know. Good
luck figuring out who they are – a bunch of Communists and dictators and kings.
Its unaccountable, unelected super-elite who meet behind closed doors. No one
knows what SDRs are. This is the stuff that infuriates me. This is world money
but they don’t want to call it that. So they call it special drawing rights. Is
there anything more anodyne and bureaucratic [a name for money] that you can
think of? I can’t. They do this stuff on purpose for exactly the reason they
don’t want people to understand it. So it might work in the short run on that
basis. And, it might not. <o:p></o:p></div>
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Gold is sort of what I call Plan B.
If you go to Plan B, the United States has enough gold. Europe has enough gold.
China doesn’t. And so China has to get their gold in case we go to Plan B. And
even if we don’t go to Plan B, just when you sit down at the table to come up
with a new system, even if you don’t use the gold standard, your gold is going
to be your chips [as you bargain and negotiate the design of a new system].
Think of it as a poker game, you want a big pile of chips. And the guys with a
little chips -- they’re going to go to the little table. And the guys with a
lot of chips are going to sit at the big table. And China of course, needs a
seat at the big table because they’re the second largest economy in the world.<o:p></o:p></div>
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Q: One of the scenarios you lay out
after the crash of the dollar and the international monetary system is that the
dollar would survive the crash and again by the lead reserve currency because
officials decided to back it with gold. If that happened, you estimate the
dollar price of gold would be set at $9,000 an ounce. <o:p></o:p></div>
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Rickards: I quote the value of the dollar
in a future international monetary system and by the way $9,000 is the right
price. That has all kinds of consequences. How likely is that scenario? People
say now wait a second, Jim. You said $7,000 in your first book <i style="mso-bidi-font-style: normal;">Currency Wars</i>. Now you’re saying $9,000.
What happened? So, the answer is they printed another trillion dollars [since
the first book.] I don’t make these numbers up. I use actual data. And it’s a
very simple ratio of physical gold at market prices to paper money. It’s eighth
grade math. It’s not difficult. So, if you change the inputs, you change the
outputs. If you print more money you get a higher price. <o:p></o:p></div>
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Now, here’s what the number means.
Again I’ll emphasize that there are analytics behind this. These are not just
provocative numbers designed to get a headline. It actually comes from some
place. Here’s what the number means. That’s the implied non-deflationary price.
And what that means is that we don’t have to have a gold standard but if we do,
you have to pick a price and you better get it right because if you get it
wrong you can actually make things worse and create a super depression. This <i style="mso-bidi-font-style: normal;">is</i> what happened in the 1920s. From 1870
until 1914 the world had a very successful gold standard, the classic gold
standard. In 1914 they abandoned that because they knew they had to print money
and borrow money to fight World War I. <o:p></o:p></div>
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So when World War I was over there
was actually a period of turmoil. In 1919 and 1920 you had deflation and
hyperinflation going on side by side. There was extreme inflation in the United
States in 1919 and then we had the depression in 1920. And then you had
hyperinflation in Weimar Germany in 1922. This is a period of enormous turmoil
in the international monetary system and of course there wasn’t a gold
standard. So in 1922 there was an international monetary conference in Genoa,
Italy, and the major powers agreed to go back to a gold standard. But, it was a
very bastardized form of gold standard called the gold exchange standard. <o:p></o:p></div>
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Q: So, what was the problem with a
gold exchange standard?<o:p></o:p></div>
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Rickards: Here’s the problem.
Having abandoned [the gold standard] in 1914 at a certain parity and having
printed enormous amounts of money to fight World War I, and now deciding in
1922 to go back to the gold standard, what would the new price of gold be
measured in your currency? Well, you sort of had two choices. You could be
candid about the fact you had printed all the money and go back to a new parity
where your currency is divided by half. That is one choice. And that is what
France and Belgium and some others did. <o:p></o:p></div>
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Or, you could back to the old
parity. Because it’s always a ratio of paper money to gold. So the amount of
gold is pretty much fixed, so if you doubled the amount of paper money and you
want to go back to the old parity, you have to cut the money supply in half.
And that’s what England did in 1925 when Winston Churchill was Chancellor of
the Exchequer. Well, that meant cutting the money supply in half, which they
did and which threw England into a depression three years ahead of the rest of
the world. You know people kind of date the depression from 1929, but England
was severely depressed in 1927 and 1928. Churchill later said that was the
greatest blunder of his life because he was a good general and good statesman
but not a very good economist and he understood the implications. <o:p></o:p></div>
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And now come all the way forward to
2016 and 2017 and we’re at the international monetary conference and we’re
basically trying to do same thing, rewrite the rules of the game. I make the
point that you don’t have to have a gold standard but if you do, you better not
repeat Churchill’s blunder. You better not pick a price that is so low that the
implied money supply cannot finance gold trade and world commerce without causing
a depression. So, the question is what is the right price? And the answer is
$9,000 an ounce. <o:p></o:p></div>
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Q: Now, if the United States wants
to avoid losing its leading role in the world monetary system, you indicate it
could do so by returning to a set of strict monetary policy rules like those put
into place in the 1980s, when Paul Volcker was chairman of the Fed and the
Reagan Administration pursued a King Dollar strategy. If such policies were put
in place, you say that could preserve the role of the dollar.<o:p></o:p></div>
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Rickards: Correct. Those rules had to do
with what is a sustainable budget deficit and what is a sustainable debt load.
And when I say sustainable I mean based on your debt and deficits, your total
debt-to-GDP ratio and your ongoing deficits, what set of conditions is the market
will to go along with you? OK, you’ve got a lot of debt and you’re running
deficits, but your economy is such that we believe you are now on a sustainable
path and we will continue to buy your bonds. And what I talk about in Chapter 7
[“Debts, Deficits and the Dollars”] are the formulas for that. And the theory
if you stay within those boundaries, you don’t need a gold standard and you’re
not facing a sovereign debt crisis and you might not be facing a currency
collapse. You can kind of keep going. So that’s what I really talked about and
I outlined those metrics. <o:p></o:p></div>
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The problem for the United States
is that despite all the happy talk from Washington, we are continuing to go
down the path to Greece. Now in the last year, year and a half there’s a lot of
self-congratulations in Washington because we’ve cut the budget deficit in
half, which is true. The budget deficit in round numbers has gone from about
$1.4 trillion to about $700 billion in two years. That is true. But the debt to
GDP ratio is still going up. It is still going up because even if you bring the
deficit down from 8 percent to 4 percent of GDP, if your GDP is only growing at
2 percent, you’re still making the debt-to-GDP ratio worse even though you cut
the budget deficit. <o:p></o:p></div>
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So, the budget deficit cannot be
thought of in isolation as an absolute number. You have to think of it relative
to the economy. And since economic growth is weak, cutting the deficit isn’t
enough. And I’m asked if that means you have to cut the deficit further and I
say you have to either cut the deficit further or you have to figure out a way
to grow your economy. That’s where the austerity structural change that Europe
is going through comes in. Europe is doing everything right. It’s been painful
but they’re restructuring things in ways that will be sustainable, all under
the direction of Angela Merkel and that’s what I talked about in Chapter 5 (“The
New German Reich”). But the U.S. is not doing that. So, we’re still driving the
bus off the cliff. We’re just going a little bit slower. <o:p></o:p></div>
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Q: Seeing how well Europe has
handled its crisis and the sustainable path they have chosen and the amount of
gold they have – which is the highest gold to GDP ratio among regions of the
world – why would Europe and the euro not become the leading reserve currency
in a new monetary system?<o:p></o:p></div>
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Rickards: Well, it might and I can’t rule
it out. And to put a finer point on that, there’s one big thing standing in the
way right now and it may go away in a few years and then the euro might play
that role. But here’s the impediment. This has to do with the difference
between a reserve currency and a trade reserve currency. You hear a lot of talk
about the Chinese yuan. They are doing bilateral deals with Brazil and they’re
opening up a yuan bond market, doing all these things deals around the world,
doing deals with us, opening the capital account in small stages, widening the
trade deficit. All that has to do with making the yuan a trade currency. But
being a reserve currency is different. <o:p></o:p></div>
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To be a reserve currency you have
to have a very wide pool of investable assets. Because what are reserves?
Reserves are just a savings account for countries. So, we make a certain amount
of money and we spend some of it and we have some left over. Those are our
savings. And we put them in the bank and maybe buy some stocks or whatever.
It’s no different for a country. If you export and import and you export more
than you import, and you have capital inflows, you end up with savings and
that’s what your reserves are. You have to invest them in something. When
they’re $4 trillion, as in the case of China, or a $1 trillion plus for a
country like Taiwan, Korea and others, you need a really big pool of assets [in
which to invest]. You can’t buy $4 trillion of Australian bonds. I don’t think
all capital markets in Australia are close to that. <o:p></o:p></div>
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So you can’t buy stuff like that
beyond a certain amount. So, what’s standing in the way of Europe? Well, the
Eurozone as a whole is bigger than the United States in terms of population and
I think the economy is slightly smaller but it’s on a par. But the sovereign
bond market is chopped up. You’ve got Italian bonds, French bonds, German
bonds, etc. Now, imagine all those countries had a bond market where every bond
was backed by the full faith and credit of the entire Eurozone. That would be
comparable to the U.S. Treasury market and that’s what they mean to do. And
then at the point you’d want euros because then at the point the bond market
would be big enough. Right now it’s not. I mean, the Italian bond market is the
biggest of the bunch but even it is not big enough for the kind of capital
flows we’re talking about. And, you’re concentrating risk. You’re taking
concentrated Italian sovereign risk. Or Spanish sovereign risk – exactly what
the whole European sovereign debt crisis was about from 2010 to 2012. <o:p></o:p></div>
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But if you unify and back it by the
full faith and credit of the entire Eurozone, now you’re talking. Now they’re
trying to do that. But Merkel won’t let that happen until all the fiscal costs
have gone through. She doesn’t want to write a blank check. So she’s holding
that as a carrot to the stick. The unified credit backed by the full faith and
credit of the Eurozone, which is basically Germany, is the carrot. But the
stick is get your fiscal house in order. But they’re doing that. They’ve signed
a fiscal treaty. They’re monitoring it coming out of Brussels and the IMF. They
now have unified banking regulation. They’re going to have unified deposit
insurance. They’re doing a lot of things in steps. But they’re still a few
years away. No one knows exactly. But my estimate is that they are at least
three years away. They may be a little longer before they can have a unified
European sovereign debt market. So that’s what’s standing in the way [of being
able to have the euro as take a greater role as a reserve currency]. But if
they got there, and the system doesn’t collapse in the next five years, and
Europe goes to a unified sovereign bond market backed by the full faith and
credit of the entire Eurozone, at the point you do have a viable alternative to
the Treasury market. And I would expect the European component of the reserves
to go up significantly and the dollar would go down. <o:p></o:p></div>
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Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-9400475439701098572013-10-24T06:19:00.000-07:002013-10-24T06:19:58.141-07:00Kyle Bass on China: Brakes on Credit Expansion by Banks and Shadow Banks Will Slow Economy<br />
Q&A With Kyle Bass<br />
<br />
By Robert Stowe England<br />
October 24, 2013<br />
<br />
Below is the transcript of a recent interview with J. Kyle Bass, founder and principal of Hayman Capital Management in Dallas, and Richard Howard, managing director and global strategist with Hayman.<br />
<br />
Q: In you letter to investors in June, you talked about the rapid growth of credit in China and how that was driving the economy and how they couldn’t go on forever increasing loans – and a lot of that is in the shadow banking system. Is that really reflected in official numbers of bank lending – that is, the growth of lending in the shadow banking system?<br />
<br />
Richard Howard. I think the growth in Total Social Financing [in the central government’s official data] comes the closest to capturing all that shadow banking activity<br />
<br />
Kyle Bass: Which is a number they do release.<br />
<br />
Q: You cite in your letter that Total Social Financing is now growing at nearly 22 percent a year as of April – and that the total size of Chinese credit system is 256 percent of GDP. You described this as “three times the total credit system growth experienced in the United States at the peak of the bubble in 2006.”<br />
<br />
Howard: And that is the broadest category that they release. We don’t consider it 100 percent reliable, but is nonetheless helpful from a trend point of view.<br />
<br />
Bass: For the record, we don’t deem anything coming out of China to be reliable, as far as data is concerned. You can look at aggregated data. You can look at, like in this case, the [People’s Bank of China] has a depository survey which is based on the four largest banks in China. So, anyway there are data sources that are homogenous throughout time, but they definitely aren’t all inclusive or comprehensive.<br />
<br />
Q: It’s been four months since your wrote in your letter to investors that you talked about a likely recession next year in China. Do you still feel the same way about your outlook as you did then?<br />
<br />
Howard: I think that what we were trying to outline in that letter is that if you saw a significant drop in the expansion of credit then you would likely see a pretty aggressive drop in economic activity as well. We were questioning the utility of that credit expansion because the rate of economic growth had seemed to disconnect and detach itself from that increase in credit expansion. So, we were concerned that if you can’t even generate particularly strong economic activity with such high rates in credit growth, once the high rates of credit growth started to mitigate and to decrease, then you would likely see an even more aggressive downward impact on economic activity. Now, it’s become apparent at least from the data that is being released that there has been a pickup in [economic] activity over the course of the last couple of months since we made those comments.<br />
<br />
Q: There’s been more bank lending?<br />
<br />
Howard. Well, there’s been a little more bank lending but there’s also been a pickup in economic activity. As Kyle mentioned, we take all that data with a healthy sense of skepticism. It certainly conveniently fits within the policy path that’s been set forth by the new Chinese Administration. So, we are, as I say, somewhat skeptical. But at the same time, it’s clear that we are seeing a pickup in some level of activity across the rest of the non-Japan Asia region, which suggests that there is certainly some movement in China.<br />
<br />
Bass: And there’s another point that we were trying to make in that letter that is important. When you talk about the shadow financing system, that’s really a non-bank phenomenon. And when you look at prior credit booms busting it is when the banks stop lending to the nonbanks. And beginning in June, you saw that the nonbank lending was not jumping onto the banks’ balance sheets at the end of the quarter, like it always does. That’s really what led us to believe that you were starting to see the banks not trust the nonbanks and the nonperforming loans start to pick up a little bit.<br />
<br />
You have 250 to 300 percent of GDP in bank assets in China. To compare that to the United States, we have about 100 percent of GDP or a little less in our banks today in bank assets. So, can China put another turn of GDP with bank lending? Well, yeah, because they control the spigot. Basically they can make the problem infinitely worse by continuing to force the banks to lend. And I think that’s what we’ve seen happen in the last 30 or 40 days.<br />
<br />
The short answer is that you don’t know when the government finally stops, but when they do, nonperforming loans will spike to more than 20 percent and the loss revenues will be 100 percent on those loans.<br />
<br />
Howard: And also on top of that, as Kyle mentioned, part of the thrust of the letter was that we were trying to suggest that the marginal return for each additional unit of credit that was being extended was diminishing. And that means that if there is a natural limit to how much credit can be extended, then we got to approach the impact that it has on the growth of economic activity would be even faster [and sooner] than it would otherwise be.<br />
<br />
Q: Thus economic growth would likely slow even if they kept lending.<br />
<br />
Bass: That’s right.<br />
<br />
Q: So what does this outlook in China mean in terms of Hayman Capital’s investment decisions?<br />
<br />
Bass: We don’t invest per se in China. But we do invest in the economies that are some of their biggest trading partners. We currently have an investment in New Zealand, in their government bonds and their interest rate market place. From time to time, we invest in the Australian sovereign market place. As you know, we have a significant focus on Japan. All the peripheral nations will feel significant repercussions if China slows down. So, we follow China as closely as we can, but we have a real problem investing there.<br />
<br />
Q: How confident are you that China will slip into recession next year?<br />
<br />
Bass: That’s like asking me if we know when [China’s President] Xi Jinping is going to cut off the spigot. The best we can do here is be a coincident indicator and say well, if the banks aren’t trusting the banks and the Chinese won’t lower the reserve requirement at the banks, well then lending is going to contract, nonperforming loans are going to show up and they are going to have a problem. If the government wants to go for broke and continue to expand the banks’ assets – the old adage we use here is that the rolling loans gathers no loss – [they can]. And I think that’s what they are doing today.<br />
<br />
Clearly, when any of those loans go bad, they are going to lose 100 percent of their capital. So your question is how aggressive will the leadership of China get to try to starve off a significant recession and contraction. And the answer is pretty aggressive. So, we don’t know.<br />
<br />
Q: Since you don’t invest in China you really would not have an opinion on what this means for people who do invest in China I’m guessing. <br />
<br />
Bass: For people who invest in China I just don’t know how they believe the numbers are the numbers. Even in the Wikileaks you saw that our attaché to China said China keeps two sets of records. It’s clear you’re not seeing the real numbers. You’re seeing the numbers they want you to see. So, as a fiduciary, I don’t know how you invest in that environment.<br />
<br />
See also these stories on Kyle Bass:<br />
<br />
<i>Institutional Investor's Alpha</i>, October 16, 2013: <a href="http://www.institutionalinvestorsalpha.com/Article/3267496/Kyle-Bass-on-Why-Japan-Is-Still-in-Trouble.html" target="_blank">Japan</a><br />
<br />
<i>Institutional Investor</i>, October 22, 2013: <a href="http://www.institutionalinvestor.com/Article/3268586/Asset-Management-Equities/Hedge-Fund-Manager-Kyle-Bass-Bets-on-a-JC-Penney-Stabilization.html#.UmkceRZ22CY" target="_blank">J.C. Penney</a><br />
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<br />Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-75154272661457406662013-10-16T04:12:00.001-07:002013-10-16T04:12:45.524-07:00Bostanjiev: Now Is Good Time To Invest in Russia<object classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=9,0,0,0" height="380" id="cnbcplayer" width="400"> <param name="type" value="application/x-shockwave-flash"/> <param name="allowfullscreen" value="true"/> <param name="allowscriptaccess" value="always"/> <param name="quality" value="best"/> <param name="scale" value="noscale" /> <param name="wmode" value="transparent"/> <param name="bgcolor" value="#000000"/> <param name="salign" value="lt"/> <param name="flashVars" value="startTime=000"/> <param name="flashVars" value="endTime=000"/> <param name="movie" value="http://plus.cnbc.com/rssvideosearch/action/player/id/3000208246/code/cnbcplayershare" /> <embed name="cnbcplayer" PLUGINSPAGE="http://www.macromedia.com/go/getflashplayer" allowfullscreen="true" allowscriptaccess="always" bgcolor="#000000" height="380" width="400" quality="best" wmode="transparent" scale="noscale" salign="lt" src="http://plus.cnbc.com/rssvideosearch/action/player/id/3000208246/code/cnbcplayershare" type="application/x-shockwave-flash" /></object><br />
<br />
<br />
CNBC London host interviews Atanas Bostanjiev, U.K. and international CEO of VTB Capital<br />
October 16, 2013<br />
<br />
Bostanjiev says that due to the situation in the U.S., now is a good entry point for the "emerging markets investor" and says the Russian "story is still very constructive".<br />
Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-63403408542941223672013-09-18T08:02:00.000-07:002013-09-18T08:02:29.278-07:00Lloyd Blankfein: The Fed Should Taper<object classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=9,0,0,0" height="380" id="cnbcplayer" width="400"> <param name="type" value="application/x-shockwave-flash"/> <param name="allowfullscreen" value="true"/> <param name="allowscriptaccess" value="always"/> <param name="quality" value="best"/> <param name="scale" value="noscale" /> <param name="wmode" value="transparent"/> <param name="bgcolor" value="#000000"/> <param name="salign" value="lt"/> <param name="flashVars" value="startTime=000"/> <param name="flashVars" value="endTime=000"/> <param name="movie" value="http://plus.cnbc.com/rssvideosearch/action/player/id/3000200157/code/cnbcplayershare" /> <embed name="cnbcplayer" PLUGINSPAGE="http://www.macromedia.com/go/getflashplayer" allowfullscreen="true" allowscriptaccess="always" bgcolor="#000000" height="380" width="400" quality="best" wmode="transparent" scale="noscale" salign="lt" src="http://plus.cnbc.com/rssvideosearch/action/player/id/3000200157/code/cnbcplayershare" type="application/x-shockwave-flash" /></object><br />
<br />
In an wide-ranging exclusive interview, CNBC's Andrew Ross Sorkin talks with Lloyd Blankfein, Goldman Sachs chairman & CEO, about cuts in the Fed's bond-buying program; the move higher in interest rates; the trade in gold; the best candidate to head the Fed; joining the Dow, and how regulations are impacting the banking industry.<br />
<br />
Interview is from Chicago on CNBC's Squawk Box, September 18, 2013.<br />
<br />Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0tag:blogger.com,1999:blog-1466228407005500695.post-27499839030600131632013-09-12T05:39:00.001-07:002013-09-14T19:22:09.172-07:00The Fed Could Have Saved Lehman Brothers With a Temporary Guarantee of Lehman's Good Assets<!--[if gte mso 9]><xml>
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<i>Even after five years, there has been little acknowledgement of how the Lehman bankruptcy could have been avoided on September 15, 2008. A deal to spin off
Lehman's bad assets to a Maiden Lane special purpose vehicle had been forged
by Wall Street firms willing to lend the funds to make it possible. However, the sale of Lehman's good assets to Barclays Bank
failed for lack of a temporary Fed guarantee of Lehman’s trading book. It may go
done as the biggest mistake in the history of the Fed.</i></div>
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By Robert Stowe
England<o:p></o:p></div>
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<br />
The Federal Reserve could have prevented the bankruptcy of
Lehman Brothers in September 2008 by briefly guaranteeing the trades on
Lehman’s good assets. The Fed guarantee was needed for only about 30 to 60 days to
allow time for a vote by Barclay’s board of directors on Barclay management’s
decision to acquire Lehman’s good assets.</div>
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By Saturday, September 13, a deal had been put together under
direction of Treasury Secretary Hank Paulson and New York Fed President Timothy
Geithner to break Lehman into a good bank and bad bank – and to sell the good
assets to Barclays. The U.K. bank had agreed to buy Lehman’s good assets if
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bad assets.<o:p></o:p></div>
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Paulson had already been successful in bringing together major
Wall Street firms to back a deal to dispose of Lehman’s bad assets, so the
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The heads of the major Wall Street firms, meeting at the New
York Fed Friday night, September 12, worked all night to hammer out an
agreement to lend a newly-created special purpose vehicle $37 billion to buy
the Lehman’s bad assets, hoping to eventually to recoup their loan principal when
the troubled assets were later sold off. A who’s who of banking were present:
Jamie Dimon from JPMorgan Chase, John Mack from Morgan Stanley, Lloyd Blankfein
from Gold man Sachs, Vikram Pandit from Citigroup, John Thain from Merrill
Lynch, Brady Dougan from Credit Suisse, and Robert Kelly from the Bank of New
York Mellon. <o:p></o:p></div>
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The special purpose vehicle would be similar to the Maiden
Lane vehicle set up to acquire the bad assets of Bear Stearns in March 2008,
making it possible for JPMorgan Chase to acquire the failing investment bank.
The Federal Reserve Bank of New York, which is adjacent to Maiden Lane in the
financial district, loaned the first Maiden Lane LLC the funds to buy the troubled
assets of Bear Stearns. (Maiden Lane II and III were set up after the Lehman
Brothers to dispose of bad assets from AIG.)<o:p></o:p></div>
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After the multi-bank rescue agreement was reached, however, a
parallel effort underway among some of the bank chiefs to value the assets of
Lehman reported that they thought the value of Lehman’s bad assets was only $27
billion. This meant the banks would be $10 billion short, assuming valuations
never recovered. Yet, after some bickering amongst themselves and prodding by
Treasury, the banks held firm in their willingness to do the deal. Barclays
agreed to contribute some of its shares to the new entity to reduce the
potential shortfall.<o:p></o:p></div>
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On Sunday, September 14, at 8 am, Barclays chief executive
officer John Varley and Diamond told Paulson, Geithner, and Securities and
Exchange Commission Chairman Christopher Cox that the Financial Services
Authority had declined to approve the deal. Geithner and FSA chairman Collum
McCarthy, who said he had not rejected the deal outright but was wary of
guaranteeing the trade during the time it would take for Barclays shareholders to
vote on the deal. The FCIC reports that the New York Fed, meaning Geithner, had
required that the Lehman’s obligations be guaranteed from the time of the sale
until the transaction closed.<a href="http://www.blogger.com/blogger.g?blogID=1466228407005500695#_edn1" name="_ednref1" title=""><span class="MsoEndnoteReference"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Cambria; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US;">[i]</span></span><!--[endif]--></span></a>
Geithner insisted that Barclays guarantee the trades, which had required of
JPMorgan Chase during the time between its agreeing to purchase Bear Stearns
and the closing of the transaction. <o:p></o:p></div>
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According to the FSA, “Barclays would have had to provide a
(possibly unlimited) guarantee for an undefined period of time, covering prior
and future exposures and liabilities of Lehman that would continue to apply
including in respect of all transactions entered into prior to the purchase, even
in the event the transaction failed.”<a href="http://www.blogger.com/blogger.g?blogID=1466228407005500695#_edn2" name="_ednref2" title=""><span class="MsoEndnoteReference"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Cambria; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US;">[ii]</span></span><!--[endif]--></span></a><o:p></o:p></div>
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Geithner asked McCarthy for a waiver on the shareholder vote
so that the board could immediately accept the deal. McCarthy said that the
waiver could only be granted by Chancellor of the Exchequer Alistair Darling.
At 10 am Paulson called Darling to break the logjam with information that Wall
Street bankers would buy lend the funds to buy the bad assets. Darling refused
to grant a waiver. Paulson told Lehman’s outside council: “We have the
consortium – the British government won’t do it. Darling said the he did not
want to spread the U.S. cancer to the U.K.”<o:p></o:p></div>
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Here is where things are muddy about why the Fed would not
guarantee the trades. Paulson told the FCIC that a Fed guarantee was out of the
question since the shareholders could reject the acquisition and the Fed would
be in possession of an insolvent bank.<a href="http://www.blogger.com/blogger.g?blogID=1466228407005500695#_edn3" name="_ednref3" title=""><span class="MsoEndnoteReference"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Cambria; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US;">[iii]</span></span><!--[endif]--></span></a>
Paulson was worried that a run on Lehman would continue during the time
shareholders were voting, and the Fed would have to provide liquidity for
Lehman, as repo lenders and other parties withdrew funds from the bank. Lehman’s
general counsel Thomas Baxter told the FCIC that Barclays knew full well they
would have to guarantee the trades because of the JPMorgan Chase/Bear Stearns
precedent. Baxter said he believed that the U.K. regulators refused to go along
with waiving the shareholder vote because the U.K. government was uncomfortable
with the deal. <o:p></o:p></div>
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Did anyone tell Barclays and the U.K. regulators that the
Fed could not guarantee the trades? Was the option actually considered to make
the deal possible? Without the Fed as a guarantor and with no other guarantor
in sight, the deal to sell Lehman's good assets fell through and, with it, the
agreement by the consortium of Wall Street banks to buy the bad assets.<o:p></o:p></div>
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It would appear that the guarantee option was not palatable
because Paulson and Bernanke were worried that it would not be sufficient to
stop the ongoing run on Lehman Brothers, as nervous markets waited for a
shareholder vote. If the U.K. authorities had decided to waive the shareholder
vote, then there would have been no waiting period for financial markets. So,
Baxter’s hunch seems persuasive. The U.K. government was too worried about
contagion to waive the shareholder vote. Paulson appears to have been worried
that if the liquidity squeeze continued at Lehman after the Fed guarantee its
trades and the Fed ended up owning Lehman Brothers, it could have had serious
market fallout for Washington’s ability to manage the financial crisis.<o:p></o:p></div>
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It seems there was a bad case of jitters in both London and
Washington. The jitters are more defensible on the part of the United Kingdom
since the atmosphere of crisis had so far been contained to the United States.
For U.S. authorities, however, the failure to act – to have the Fed guarantee
Lehman’s trades in the good bank – revealed that the authorities had not come
even close to understanding the fallout that would follow. <o:p></o:p></div>
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Since it is difficult to know how an alternative history
would play out, it’s hard to know with certainty whether both the U.K. and U.S.
financial regulators by their inaction and inflexibility actually made the
situation worse than it turned out to be. However, it’s also hard to imagine
that if the Fed had guaranteed Lehman’s trades, and the U.K. authorities
accelerated the shareholder voting process down to a week to 10 days, that it
could have turned out worse than it did. Even if the Fed ended up owning
Lehman, as Paulson feared, would it have been worse than what actually
happened?<o:p></o:p></div>
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When Lehman declared bankruptcy on September 15, 2008, it
froze up financial markets around the globe and threatened to collapse global
finance and plunge the world into a depression as regulators struggled to find
ways to unfreeze the markets.<o:p></o:p></div>
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Since September 2008, neither Paulson nor Bernanke have
indicated whether or not they seriously vetted the idea having the Fed
guarantee Lehman's trades and were prepared for the refusal of U.K. authorities
to allow Barclays to guarantee the trades. Or, conversely, that they sufficiently
considered the worst-case scenarios that would occur if Lehman failed. In fact,
we know very little about the details of any of the options that were under
consideration by Paulson and Bernanke in the waning days and hours of Lehman
have surfaced. Paulson in his book, <i>On The Brink</i>, reported that he and
Bernanke in daily one-on-one meetings at Treasury discussed possible options
for rescuing Lehman. Paulson said the options were few but never identified any
of them. Nor was any information on the options being considered by Paulson and
Bernanke revealed in the work of the Financial Crisis Inquiry Commission,
including its conclusions about what caused the crisis. <o:p></o:p></div>
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If Bernanke and Paulson had already considered the potential
use of the Fed guarantee option before the 11<sup>th</sup> hour and rejected
it, we do not know. We do know that the Fed’s chief counsel Scott Alvarez had
prepared a list of options for consideration by Bernanke and Paulson, but we do
not know what they were. If the two had discussed and had already rejected a
Fed guarantee on legal grounds before the Lehman crisis erupted into public
view, it might explain why it was not seriously considered at the last minute,
when it was so desperately needed.<o:p></o:p></div>
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Curiously, in spite of the facts on the record, the perception
emerged at the time of the crisis that the Lehman deal failed for the lack of a
loan guarantee by the Fed to buy Lehman’s bad assets and not by the lack of a
guarantee of Lehman’s trades to help facilitate Lehman’s good assets. This view
that the failure of the Fed to guarantee a loan to buy the bad assets was based
in part on statements made by Bernanke that the Fed could not make loans
without sufficient collateral – this marking the difference between the Fed’s
role in Bear Stearns, where it actually did lend money, and the Lehman case,
where it was not necessary for the Fed to lend money to acquire the bad assets.
Fed loans could have come into play if the run on Lehman had continued after a
deal had been struck to sale the good bank to Barclays and have Wall Street
firms lend money to buy the bad assets.<o:p></o:p></div>
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The Financial Crisis Inquiry Commission in its conclusions
found the regulators shouldered a good deal of blame for the crisis – but
stopped short of pinpointing specific actions that were at fault. <o:p></o:p></div>
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Bernanke indicated in subsequent testimony that he did not
think the Fed had legal authority to engage in unsecured guarantees, meaning
they could not guarantee assets if the collateral was insufficient to cover the
Fed’s exposure. In April 2010, in testimony before the House Financial Services
Committee, he stated: “At the time, neither the Federal Reserve nor any other
agency had the authority to provide capital or an unsecured guarantee, and thus
no means of preventing Lehman’s failure existed.” <o:p></o:p></div>
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The irony is that after the devastating fallout from
Lehman’s failure, the Fed did guarantee assets in a number of efforts to
unfreeze the markets and prevent the failure of more large banks. In its
biggest gambit, the Fed took part in an effort with Treasury and the FDIC to
ring-fence or guarantee most of an enormous $306 billion Citigroup portfolio of
troubled mortgage assets that threatened to bring down the bank. Under the
agreement, Citigroup would take the first $29 billion in losses, while Treasury
was on the hook for $5 billion from TARP funds and the FDIC for $10 billion.
The Fed was on the hook as guarantor of last resort for the remaining $272
billion. Importantly, the value of those assets at the time of the guarantee
were unlikely sufficient to cover the Fed’s exposure. <o:p></o:p></div>
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Carnegie-Mellon University professor of economics Allan
Meltzer, author of an acclaimed history of the Federal Reserve System, did not
hold back in his rebuke of the Fed’s treatment of Lehman. “After 30 years of
bailing out almost all large financial firms, the Fed made the horrendous
mistake of changing its policy in the midst of a recession,” he wrote a year
after the crisis. “Allowing Lehman to fail without warning is one of the worst
blunders in Federal Reserve history.”<o:p></o:p></div>
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Mr. England is author of <i>Black
Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance</i>,
published by Praeger and available at Amazon.com <o:p></o:p></div>
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<a href="http://www.blogger.com/blogger.g?blogID=1466228407005500695#_ednref1" name="_edn1" title=""><span class="MsoEndnoteReference"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Cambria; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US;">[i]</span></span><!--[endif]--></span></a> <i>Financial Crisis Inquiry Report</i>, Final
Report of the National Commission on the Causes of the Financial and Economic
Crisis in the United States, Official Government Edition, January 2011, p. 335.<o:p></o:p></div>
</div>
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<a href="http://www.blogger.com/blogger.g?blogID=1466228407005500695#_ednref2" name="_edn2" title=""><span class="MsoEndnoteReference"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Cambria; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US;">[ii]</span></span><!--[endif]--></span></a> <i>Financial Crisis Inquiry Report</i>, p. 336.<o:p></o:p></div>
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<a href="http://www.blogger.com/blogger.g?blogID=1466228407005500695#_ednref3" name="_edn3" title=""><span class="MsoEndnoteReference"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Cambria; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US;">[iii]</span></span><!--[endif]--></span></a>
<i>On the Brink</i>, pp. 209-210.<o:p></o:p></div>
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<!--EndFragment-->Robert Englandhttp://www.blogger.com/profile/13336376263195092810noreply@blogger.com0