James Saft http://blogs.reuters.com/james-saft Mon, 09 Nov 2015 05:23:32 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 Economy can handle rate rise, but can markets?: James Saft http://blogs.reuters.com/james-saft/2015/11/06/economy-can-handle-rate-rise-but-can-markets-james-saft/ http://blogs.reuters.com/james-saft/2015/11/06/economy-can-handle-rate-rise-but-can-markets-james-saft/#comments Fri, 06 Nov 2015 20:02:06 +0000 http://blogs.reuters.com/james-saft/?p=95985 Nov 6 (Reuters) – The economy can handle a rate rise. It
remains to be seen if financial markets can.

Following on from today’s robust U.S. jobs report, an
interest rate hike from the Federal Reserve in December is
looking highly likely.

That’s the easy part; much more difficult is foreseeing the
reaction of a financial system with the accumulated buildup of
risks from seven years of zero rates and a Fed balance sheet
equal to 25 percent of annual output.

The jobs report had something for everyone. Not only did the
economy create 271,000 jobs in October, taking the unemployment
rate down to a flat 5.0 percent, but wages showed surprising
signs of strength. They are now rising at a 2.5 percent annual
rate, up from the 2 percent area we’ve typically seen during a
long and tepid recovery.

So this report is not only red meat to the hawks, who
already advocate getting rates up off of the floor, but it
answers most of the questions posed by centrists like Fed Chair
Janet Yellen and even some of the concerns of doves.

Financial markets immediately moved to raise expectations of
a December rate hike, to more than 70 percent from 58 percent
yesterday and only about 5 percent a month ago. Stocks fell, not
violently, with the S&P 500 down about 0.3 percent while
two-year U.S. Treasury yields spiked nearly 10
percent higher, touching levels not seen in 5-1/2 years.

For long months financial markets have disregarded Fed
future projections of interest rates, the “dot chart,”
preferring instead to bet that rates will rise much more slowly.
Until now, those bets have been justified.

“What is happening today is that investors for the first
time in months are thinking that there is a risk that the
complacency on the Fed rates path needs to be re-examined,”
Citigroup strategist Steven Englander wrote to clients.

“However, if the data keep coming in on the strong side,
investors will assume that hikes will come quicker. Ironically,
the market ‘dots’ will converge to the FOMC dots.”

The Fed will doubtless do what it can to ensure a “dovish
liftoff,” talking down the rate of ascent. Despite the central
bank’s track record of being pushed about by movements in
financial markets, and usually pushed towards being more
accommodative, there may be a limit to this should more signs of
wage and inflation pressures emerge in coming months.

That’s not entirely likely in the few weeks before the Fed
meeting on Dec. 15-16, though we will see one more jobs report.

PHILLIPS CURVE RESURRECTION?

Potentially the most important implication of the data is
the idea that perhaps the Phillips curve, the traditionally
assumed relationship between employment and inflation, may
actually be coming back into force. Two Fed officials, Lael
Brainard and Daniel Tarullo, both advanced arguments recently to
the effect that its effects seem no longer to hold in current
circumstances, a conclusion which would support waiting longer
to hike.

If wage pressure is taking hold, then the only issue becomes
how much “catch up” – overshooting on inflation to the upside –
the Fed might tolerate. That’s an idea that is profoundly scary,
rightly or not, to many in financial markets, especially given
the sheer weight of money now sitting in very low-yielding
instruments, or in strategies which depend on low yields to make
their own mechanics work.

If rates do need to rise more rapidly than the market has
thought, perhaps even more rapidly than the Fed itself has
predicted, then there is a good deal of repricing needed across
financial markets.

While total credit market debt to GDP in the U.S. has fallen
gently since the financial crisis, at 331 percent it is still at
extremely high levels historically. That’s part of the plan of
zero rates: investment and speculation as a means to goose
growth. The problem is that interest rates look likely to rise
much more rapidly than the cashflows which must service the
debts. This is probably true even if the economy shrugs off
global weakness and carries on strongly.

The finance and insurance sector has done well under these
conditions. Those industries contributed real value added growth
of 12 percent in the second quarter, or about a quarter of real
output. In nominal terms banking and insurance is now bigger
than it was in 2007.

If we accept that little innovation of true value has come
from the sector since the invention of the cash machine, it is
hard to see this growth as anything but artificial.

As rates rise, as they now look like doing, insurance and
finance will come back down to earth.

The Fed put, the idea that it stands guarantor against sharp
market falls, may be tested.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

]]>
http://blogs.reuters.com/james-saft/2015/11/06/economy-can-handle-rate-rise-but-can-markets-james-saft/feed/ 0
Active funds earn keep, barely, in bear markets: James Saft http://blogs.reuters.com/james-saft/2015/11/04/active-funds-earn-keep-barely-in-bear-markets-james-saft/ http://blogs.reuters.com/james-saft/2015/11/04/active-funds-earn-keep-barely-in-bear-markets-james-saft/#comments Wed, 04 Nov 2015 21:09:29 +0000 http://blogs.reuters.com/james-saft/?p=95983 Nov 4 (Reuters) – Active fund managers’ skill in timing bear
markets may be enough to balance their costs and other
shortcomings.

That’s the upshot of a new paper, but before you get too
excited, the implication may simply be for investors to be more
or less indifferent to the active vs. passive debate.

Unless, of course, you think you can predict bear markets,
in which case you are likely already an active investor, as well
as being a seer.

Numerous studies have indicated that active managers produce
worse returns than passive benchmarks. A new study from J.
Spencer Martin of the University of Melbourne and George J. Wang
of Manchester University computes an option-based valuation of
active managers’ timing skill during bear markets added to
security selection value. This adds to evidence from earlier
studies that active managers outperform, or produce alpha,
during market downturns.

“Our findings imply that professional managers, as a group,
are covering their costs rather than destroying value,” the
authors write in the study, updated in October. (here)

“We find the option-adjusted alpha is statistically
indistinguishable from zero. This finding suggests that the
benefit of the service provided by fund managers may actually
fall in line with its cost.”

That description of active fund management’s offering:
“alpha is statistically indistinguishable from zero” will not
make it into large type in many funds’ marketing materials, but
the implications, if true, are substantial.

What’s more, the data indicates that the zero alpha offering
holds good not just for active fund management in aggregate but
at the portfolio level.

Looking at fund performance from 1986 through 2010, the
study finds that active managers do better than previously
thought, in part because the value of market timing skill is
higher during bear markets, when volatility, as measured by the
VIX index, is higher.

By better reflecting the option value of market timing
around bear markets, the study purports to show that active
managers’ virtues “can be large enough to compensate for other
drawbacks”.

WHO BENEFITS?

Clearly the debate around active fund management performance
will continue, with many on the active side arguing that manager
selection can provide alpha, a view not backed up by this study,
at least.

The conclusion, that active management can more or less pay
its own way, isn’t earth-shattering. It does accord with the
economic theory that mutual fund managers, like actors in any
other economic sphere, will do work, in this case collecting and
analyzing market information, only up to the point where the
marginal benefit meets the marginal cost.

That view may well be correct, though there are plenty of
examples of economically irrational activity.

Some of the implications of the study, if confirmed by
further research, could be profound.

“As such, unconditional negative alphas relative to passive
benchmarks do not necessarily imply that fund investors have
suffered significant welfare losses, or that investors do not
want to invest in those funds, or that index funds should be
overwhelmingly preferred,” the authors write.

That first idea, that fund investors suffer a loss through
active management, is both common and underlies plans to address
failings in the pension savings system in the U.S.

A rule now proposed by the U.S. Department of Labor will if
enacted force financial advisors selling retirement products and
advice to act as fiduciaries, meaning that they would be obliged
to put clients’ interests above their own.

Fund analysts at Morningstar last week said that that
fiduciary standard may send $1 trillion of additional assets to
passive investment products.

That’s partly because smaller accounts will be uneconomic
for full-service advisors who tend to place clients in active
products with larger fees. That certainly was the experience in
the UK, where the passing of similar rules led to a fall in the
number of advisors and a rise in passive investment, as well as
of low-cost fund-allocation platforms.

Remove the idea that passive is better and you remove some
of the justification for those changes.

This all begs the question of why an advisor might argue for
active fund management if it was only going to produce “alpha
statistically indistinguishable from zero”. At least it keeps
fund managers, who might otherwise get on their spouses’ nerves,
busy.

Being good during bear markets may not turn out to be
enough.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

]]>
http://blogs.reuters.com/james-saft/2015/11/04/active-funds-earn-keep-barely-in-bear-markets-james-saft/feed/ 0
Monetary policy and Asia’s people-shaped hole: James Saft http://blogs.reuters.com/james-saft/2015/11/03/monetary-policy-and-asias-people-shaped-hole-james-saft/ http://blogs.reuters.com/james-saft/2015/11/03/monetary-policy-and-asias-people-shaped-hole-james-saft/#comments Tue, 03 Nov 2015 14:53:18 +0000 http://blogs.reuters.com/james-saft/?p=95981 By James Saft

(Reuters) – For years in the U.S. an argument has been made that the Federal Reserve has unsuccessfully tried to fill a fiscal stimulus-shaped hole with monetary policy.

In Asia, notably in China and Japan, the deficit monetary policy is trying and failing to bridge is demographic: a people-shaped hole.

This was amply illustrated in China when the Communist Party announced last Thursday it would scrap its longstanding one-child policy just days after the country’s central bank moved to cut interest rates for the sixth time in less than a year.

One phenomenon is linked to the other: China’s slowdown, against which the People’s Bank of China is fighting, is in part the result of the drying up of its formerly huge pool of underutilized labor. That, as China is well aware, calls into question its long-standing economic model based on investment and exports, and argues for making the difficult transition to one centered on domestic consumption.

Japan is little different, just a lot further down the track of shrinking population.

In both instances, as arguably it has been in the U.S., monetary policy and the manipulation of financial markets are being asked to do the economic heavy lifting quickly.

Monetary policy, as the Fed, still unable to raise interest rates off of the zero lower bound after seven years has found, is better at driving prices on traders’ screens than activity or inflation, much less, in the Asian context, the making of babies or welcoming of immigrants.

What monetary policy can do is act quickly, and often with less political difficulty than longer-term policy solutions.

China, of course, faces no political hurdles to exerting its will internally. Its new two-child policy comes as the working-age population shrinks and it faces a future including declining overall population from about 2030, placing an increasing burden on those of working age.

From an economic standpoint, there are two problems with China’s policy change: it won’t work and even if it did, help would arrive too late.

In the absence of massive subsidies, Chinese parents likely will by and large decline to have a second child. Their reasons are economic, just as were their grandparents’, who generally lived in the country and saw large families as a route to old-age support. But Chinese today, like their peers in Mexico, Japan, South Korea and elsewhere, prefer to concentrate limited resources on fewer children.

MORE EASING

For now, China faces a slowdown which threatens to take its growth rate far below the official 7 percent target, a figure officials are in the process of back-pedaling from. Economists at Fathom Consulting in London estimate that actual growth has more than halved in China since the beginning of last year, from over 6 percent to less than 3 percent.

The upshot: more easing.

“We see further substantial cuts in China’s policy rates of interest over the next year, not least because in real terms they remain stubbornly high,” Fathom wrote in a note to clients.

Abenomics, the suite of policies pursued by Japan under Prime Minister Shinzo Abe, is also an effort which has demographic difficulties as its usually unstated subtext. The plan is a combination of all-out quantitative easing to try to stimulate growth and inflation, fiscal stimulus and structural reform.

Despite allocating hundreds of billions of dollars in direct government spending, and the Bank of Japan buying up assets equal to almost 70 percent of annual output, the program has yet to meet its fundamental goals of prompting self-sustaining growth and inflation.

The Bank of Japan last week held interest rates and its asset-buying plan where they were, despite saying that the outlook is worsening. Growth contracted in the second quarter and may well still be shrinking, taking Japan into the second recession of Abe’s three-year tenure.

The BOJ pushed back yet again its goal for achieving 2 percent inflation, which it now says won’t happen until the second half of fiscal 2016.

The BOJ appears to have lost its nerve, unsurprising given the very mixed record its and Abe’s policies have demonstrated.

As in China, Japan has plans to try to increase fertility, but help will arrive far in the future.

Abe in September said his plan, supported by only sketchy details, is to raise the birth rate from 1.4 to 1.8 children per woman, stabilizing population at 100 million in 50 years, down from 127 million today. He also hopes to bring more women into the workforce, which would help by increasing the working population. On immigration, the obvious answer, Abe has remained silent or negative.

If China looks to Japan as an example it will find that a people-shaped hole is very hard to fill with monetary policy.

(At the time of publication James Saft did not own anydirect investments in securities mentioned in this article. Hemay be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft) ((jamessaft@jamessaft.com))

(Editing by James Dalgleish)

]]>
http://blogs.reuters.com/james-saft/2015/11/03/monetary-policy-and-asias-people-shaped-hole-james-saft/feed/ 0
SAFT ON WEALTH: Bad years are bad news – accounting for sequence risk http://blogs.reuters.com/james-saft/2015/10/29/saft-on-wealth-bad-years-are-bad-news-accounting-for-sequence-risk/ http://blogs.reuters.com/james-saft/2015/10/29/saft-on-wealth-bad-years-are-bad-news-accounting-for-sequence-risk/#comments Thu, 29 Oct 2015 20:40:35 +0000 http://blogs.reuters.com/james-saft/?p=95979 Oct 29 (Reuters) – An unlucky sequence of bad investment
years at the wrong time can derail retirement savings and even
overwhelm decades of decent average returns.

Called “sequence risk,” it is the possibility that a bad
break, a poor run of years or an unusually poor year can have an
outsize impact on savings outcomes, even if savers are diligent
and consistent.

A saver might, for example, assume they’d earn a certain
average return over a planned 40-year working life and another,
perhaps lower, return after retirement. But hit some bad years
late in the accumulation phase and you can disproportionately
hit your overall returns. The same thing can happen if you hit a
bad year early in retirement, when the hit to accumulated
savings can be at its maximum.

The upshot may be that plans based on average return
assumptions understate the risks involved, and may cause nasty
shortfalls. As well, “glidepath” plans, the system of lightening
up on riskier investments as the saver approaches a retirement
target date, may not help very much with sequence risk.

“Sequence risk rears its ugly head wherever cash flows
matter – and we know cash flows matter both in the retirement
and accumulation phases,” Peter Chiappinelli and Ram Thirukkonda
of fund managers GMO wrote in an August paper on sequence risk.

“Current models of asset allocation – the most popular being
static, or predetermined, target date glidepaths – ‘know’ that
sequence risk exists, but behave as if there is nothing that can
be done to mitigate it.” (here)

GMO uses as illustration two retirees, one who started to
save in 1954 and one in 1967. Both worked and saved the same
amount – 9 percent of salary – in the same fund using the same
allocations. Both made identical returns of 8 percent annually
over the 40 years. Yet the one who started in 1967 ends with
$880,000 after 40 years while the older one ends with just
$590,000. The reason: the younger saver suffered through the
lackluster 1970s when she had little accumulated, but hit it
lucky when the market took off as she’d built up wealth in the
1980s. The older saver hit those same 1970s bad years just at
the wrong time: when he had already accumulated enough to make
the hit matter most.

TRANSFER OF RISK

One issue sequence risk raises is that the move to defined
contribution pension plans from defined benefit plans was a
great transfer of risk. Take a mixed cohort in a pension fund
and you can share out the lucky and unlucky years in a way in
which individual outcomes are blended to achieve one reasonably
acceptable average. That, however, is not how typical pension
systems now work.

The risk perhaps of a bad sequence is perhaps greatest
during the last 15 years of the accumulation phase and the first
10 years of retirement, when funds are being drawn out of the
large pool of savings with no cash going in.

Wade Pfau, a professor of retirement income at American
College, argues that the acceptable withdrawal rate, the
percentage of a portfolios’ final value that can be taken safely
over an expected 30-year retirement, varies hugely depending on
sequencing of returns. Using an asset allocation of 50/50 stocks
and bonds, the outcomes, and retirements, have been all over the
map.

Someone who retired in 1937, having borne the brunt of the
1929 crash and Great Depression, could safely take only 3.95
percent annually of the nest egg they had at retirement. A 1982
retiree could afford a 9.19 percent withdrawal
rate. (://retirementresearcher.com/sequence-risk-vs-investment-r
isk/)

So, what to do? While we are all hostage to our times to a
great extent, there are steps beyond a standard glidepath that
may help to minimize the risks of a particularly poor outcome.
GMO, as might be expected from a value investing specialist,
thinks using valuation as an input to asset allocation can help.
Rotating into cheap equity markets and away from ones with high
valuations produces lower drawdowns, or losses, two-thirds of
the time.

Looking at 40-year investment runs in markets going back to
1881, using a rather simple asset allocation and valuation
metric can have a meaningful impact, GMO says. The mean
portfolio at the end of the 40-year period was more than 13
percent bigger than it would have been using a classic glidepath
approach.

Sequence risk is one to guard against: the markets might,
just might, be efficient. But they certainly aren’t fair.

(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by Dan Grebler)

]]>
http://blogs.reuters.com/james-saft/2015/10/29/saft-on-wealth-bad-years-are-bad-news-accounting-for-sequence-risk/feed/ 0
Holiday pudding – rate hike with a side of dissent: James Saft http://blogs.reuters.com/james-saft/2015/10/28/holiday-pudding-rate-hike-with-a-side-of-dissent-james-saft/ http://blogs.reuters.com/james-saft/2015/10/28/holiday-pudding-rate-hike-with-a-side-of-dissent-james-saft/#comments Wed, 28 Oct 2015 20:56:42 +0000 http://blogs.reuters.com/james-saft/?p=95977 Oct 28 (Reuters) – Now that China appears not to matter much
any more, the Federal Reserve finds itself in the awkward
position of getting ready to deliver an initial interest rate
hike in December with a side order of dissent.

The Fed on Wednesday kept interest rates steady but prepared
the way for finally taking rates higher in its last 2015
meeting.

“In determining whether it will be appropriate to raise the
target range at its next meeting, the Committee will assess
progress – both realized and expected – toward its objectives of
maximum employment and 2 percent inflation,” the Federal Open
Market Committee said in its statement accompanying the
decision.

Specifically mentioning its next meeting was taken as a
clear sign that, data developments aside, a hike is a very live
possibility. Traders buying fed fund futures, which facilitate
bets on interest rate changes, now put a 42.6 percent
probability on a December hike, up from about 33 percent on
Tuesday and just 8 percent a month ago.

Much seems to have changed in a month, both outside the Fed,
where China is rated less of a threat, and inside, where a
bust-up over hiking is threatened.

Gone is September’s caution that global developments (i.e.
China) may “restrain” activity and put “downward pressure” on
inflation. Instead, just a flat statement that the Fed is
“monitoring” developments overseas. Well, the Fed are probably
always “monitoring” global conditions.

This neatly illustrates just how poorly thought through was
September’s decision to hang the decision not to hike on the peg
of Chinese ructions. Given that the economic data coming out of
China remains both mixed and totally unreliable, not to mention
that market prices are a sham, observers are left with very
little of substance on which to judge future levels of concern.

Equities initially sold off on the news, but rallied later
in the day.

To be sure, U.S. data between now and the December meeting
could go either way. GDP figures reported tomorrow are expected
to be less than inspiring and recent durable goods numbers point
to some potential for softening.

WHEN DISCUSSION BECOMES DISSENT

All else being equal, however, Fed Chair Janet Yellen
appears to be sailing into the possibility that she and
colleagues will raise rates over the objections of one or more
FOMC voters.

While today’s dissenter, Jeffrey Lacker of the Richmond Fed,
who wanted an increase, will presumably be pleased with a hike,
Federal Reserve Board members Lael Brainard and Daniel Tarullo
have both laid out arguments for staying on hold within the last
month.

Both argued that the Phillips curve, the supposed
relationship between unemployment and inflation, no longer works
well in current conditions. That idea is still central to how
Yellen and Vice Chair Stanley Fischer view the world. Much of
the impetus for raising rates now comes from the expectation
that improvements in labor conditions will have a corresponding
effect of pushing wages, and with them prices, upward.

Brainard disagrees:

“A variety of econometric estimates would suggest that the
classic Phillips curve influence of resource utilization on
inflation is, at best, very weak at the moment. The fact that
wages have not accelerated is significant, but more so as an
indicator that labor market slack is still present and that
workers’ bargaining power likely remains weak” she said in an
Oct. 12 speech.

That’s a bit of a Copernican statement from someone at the
heart of the Fed and it remains to be seen if Yellen as pope can
take it on board or will press ahead as if it is not true.

“This is the most exciting speech I have read in forever,”
economist and Fed watcher Tim Duy of the University of Oregon
wrote just after Brainard’s speech. “Not necessarily for the
content. But for the politics.”

Those politics don’t seem to have gotten any easier to
parse. The data don’t seem to have moved decidedly in one
direction or the other, nor are they likely to in the next six
weeks. That may well argue for Yellen and Fischer temporizing at
the December meeting, pushing the decision further out without
fully engaging with the central argument Tarullo and Brainard
make. That possibility, of waiting until March or so, may
explain the comeback equities made later in the day.

Either way, the decision is problematic.

A hike with dissents sends a difficult-to-read message to
financial markets, which already may be feeling confused about
the central inputs to policy. A delay, without fuller
explanation, as opposed to a desire for more data, will do the
same.

The pressure is on for Yellen to deliver some response to
dissent when next she speaks in back-to-back appearances in the
first week of December.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

]]>
http://blogs.reuters.com/james-saft/2015/10/28/holiday-pudding-rate-hike-with-a-side-of-dissent-james-saft/feed/ 0
Investors hit snooze button on U.S. debt alarm: James Saft http://blogs.reuters.com/james-saft/2015/10/27/investors-hit-snooze-button-on-u-s-debt-alarm-james-saft/ http://blogs.reuters.com/james-saft/2015/10/27/investors-hit-snooze-button-on-u-s-debt-alarm-james-saft/#comments Tue, 27 Oct 2015 04:01:01 +0000 http://blogs.reuters.com/james-saft/?p=95975 Oct 27 (Reuters) – With less than a week to go before the
U.S. runs out of money to pay its bills, you’d be forgiven for
thinking that very few investors actually care.

Outside of remote corners of finance, like the market that
offers, arguably pointless, insurance against default, there
have been few sizable moves in prices traceable to the prospect
of the U.S. hitting the debt ceiling, something that absent a
deal will happen Nov. 3.

Short-term Treasury bills have been hit, sending minuscule
yields higher by commensurately small amounts, but even when the
Treasury last week cancel led an auction planned for Tuesday the
result was far from carnage.

Taking a broader look at risk assets, the debt ceiling issue
has coincided with a 7.5 percent rally in the S&P 500
over a month and the highest inflows into high-yield bonds in
eight months last week.

Granted, all of that may have more to do with the
expectation that the Federal Reserve will wait a while more
before raising interest rates.

Still, the very fact that the U.S. is now whistling its way
along as it approaches potential default for the third time in
four years tells us much about the world.

Investors may complain that the political system is broken,
but they fail to see how that is a problem for them. That’s in
large part because of the huge natural appetite for safe assets
– and even a week before running out of cash, the U.S. is as
safe as it gets.

Investors have also drawn a lesson from recent history: that
politics aside, policymakers, often central bankers, will pull
their fat from the fire. That belief, supported by events of the
Great Financial Crisis and the European debt affair, may be
naive but is now a feature.

It has also not escaped investors’ notice that although
markets have been hit with varying intensity in both previous
debt ceiling episodes, in 2011 and 2013, in both instances a
deal was done and chaos averted.

And so it likely will be this time.

Reports on Monday indicated that a tentative deal may be
close, potentially setting up a Wednesday vote. The Treasury has
warned the government will default if the ceiling isn’t raised
by Nov. 3, at which point the government may have as little as
$30 billion on hand, less than upcoming Social Security and debt
interest payments.

EQUITIES DOWN, TREASURIES UP?

Based on past episodes, should a deal not materialize as we
approach the date, movements in financial markets will get
larger, though they are highly unlikely to be consistent with
anything other than temporarily missing payments.

Equities surely will sell off; after all the only balm in
the story for stocks is that the Fed surely won’t raise rates
while negotiations are ongoing, a position they likely have
reached anyway for other reasons.

Equities did fall sharply during the 2011 debt ceiling
crisis, and were especially hit hard when Standard & Poor’s
downgraded the U.S.’s credit rating. The stock market fell too
in 2013, but by less, perhaps taking heart from 2011’s ultimate
resolution.

“The other side of this is that, perhaps
counter-intuitively, long-dated Treasury yields could fall,”
Andrew Hunter of Capital Economics in London wrote in a note to
clients.

“Of course, investors might worry about a delay or temporary
default on coupon payments. But such fears would probably be
outweighed by an increase in safe-haven demand and growing
expectations that the Fed would remain on hold for longer.”

The salient fact isn’t that U.S. debt becomes more risky
during a debt crisis, it is that it is still the safest liquid
asset out there. Investors react to the U.S. becoming less safe
by lightening up on risk, which, as the U.S. remains safer than
stocks or foreign bonds, argues for selling stocks while buying
up Treasuries. To be sure, short-term rates spike in these
episodes, upsetting money markets.

It is probably true that the drip, drip, drip of U.S.
political dysfunction is having a cumulative effect on its store
of credit among investors. Eventually, the price of this may
rise, but certainly not at a time of stagnant growth when
central banks around the world are preparing to ease further
rather than hike.

Those, like Treasury Secretary Jack Lew, who bemoan the
risks that this process runs are quite right, but thus far the
actual butcher’s bill has been low enough to be safely ignored.

Whether due to a long track record of holding it together
politically, or the faith that the “grown-ups” like central
bankers will help cushion any blow, the U.S. has enough credit
to allow it to some day sleepwalk its way into real trouble.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

]]>
http://blogs.reuters.com/james-saft/2015/10/27/investors-hit-snooze-button-on-u-s-debt-alarm-james-saft/feed/ 0
ECB’s accidental euro devaluation: James Saft http://blogs.reuters.com/james-saft/2015/10/22/ecbs-accidental-euro-devaluation-james-saft/ http://blogs.reuters.com/james-saft/2015/10/22/ecbs-accidental-euro-devaluation-james-saft/#comments Thu, 22 Oct 2015 21:06:29 +0000 http://blogs.reuters.com/james-saft/?p=95973 Oct 22 (Reuters) – For a central bank not trying to drive
down the euro, the European Central Bank is doing a pretty poor
job.

That’s only fair, in that the Federal Reserve is doing a
flat-out lousy job of normalizing interest rates for a central
bank which says that that is its aim.

The euro dropped sharply after Mario Draghi and the ECB
indicated that more QE and even lower interest rates could be on
the way as early as late this year.

The euro fell more than two cents against the dollar
to $1.11, taking it back to levels it saw in August, when
markets actually believed the Fed would move in 2015.

The euro is down more than 8 percent against the dollar
year-to-date, and has fallen by 12 percent over the past year.

Nothing to do with Mario, of course.

“I’ve said it many times, for us the exchange rate is not a
policy target,” Draghi said at the press conference following
the ECB’s decision to stand pat.

“It’s important for price stability, for growth, but it’s
not a policy target. The movements in the exchange rate (over)
three years were the outcome of diverging monetary policy cycles
as well as divergent economic recovery paths between major
jurisdictions. They were not intended, it was not an action
geared to cause these exchange rate movements. They were the
outcome.”

In other words, it’s not that I meant to stab your hand,
it’s just that it was right over my steak.

Economists weren’t buying this either:

“They do want actually to drive the euro exchange rate
lower, even though history (above all the interventions of the
1980s and 1990s) shows this is totally ineffective, in fact all
too often a policy which backfires,” Marc Ostwald of ADM
Investor Services wrote in a note to clients, going so far as to
label Draghi’s disavowal “an outright lie.”

If we judge intentions by outcomes then we can say two
things about the ECB’s performance today: they aren’t being
straight about their intentions, but they are, for the time
being, successful.

Not only did the euro fall, but so did bond yields, reacting
to what investors took to be indications that not only will QE
be extended, expanded or tinkered with in December but that we
may also see an even lower deposit rate.

When the ECB took the deposit rate to -0.20 percent last
year, Draghi, you may remember, said no additional rate cut was
possible.

NICE POLICIES, SHAME ABOUT THOSE RESULTS

So while it is nice to see policy-makers pushing the
boundaries of the possible, the main issues facing the ECB, and
for that matter the Bank of Japan and Federal Reserve, is the
striking lack of strong evidence that these policies work well.

The Fed itself, though understandably keen to get interest
rates up off of the zero bound before the business cycle, as it
must, turns south, has thus far been unable to turn the trick.
While September was once thought a done deal for a hike, March
is now only seen as a 50/50 chance.

There simply doesn’t seem to be much evidence that QE and
zero rates have done much to drive inflation higher.

Today’s market response was driven in part by the faith
traders have that QE is effective, if not in the real economy,
then at least in financial markets, particularly currencies.

Kit Juckes, strategist at Societe Generale in London,
disagrees: “I am doubtful that increased conventional QE
(bond-buying) by the ECB or the BOJ will weaken the yen or the
euro significantly further from their recent lows. Indeed, I’m
not sure how much of the weakness in either currency to date can
really be attributed to QE in the first place,” he writes.

While QE in the U.S. may have hurt the dollar by driving
flows to emerging markets, which in turn drove emerging market
central banks to both intervene and to buy Treasuries, elsewhere
other factors came into play. The ECB and BOJ achieved what
devaluation they have by, in Japan a switch to overseas equities
among savers, and in Europe the introduction of negative rates.

Still, the market salivates and sells euros when Draghi says
QE. If he doesn’t follow up with the meat of a further reduction
in interest rates, the response may fail next time.

As always, give more weight to what central banks do than to
what they say.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

]]>
http://blogs.reuters.com/james-saft/2015/10/22/ecbs-accidental-euro-devaluation-james-saft/feed/ 0
Trump shoulda been an index investor?: James Saft http://blogs.reuters.com/james-saft/2015/10/21/trump-shoulda-been-an-index-investor-james-saft-2/ http://blogs.reuters.com/james-saft/2015/10/21/trump-shoulda-been-an-index-investor-james-saft-2/#comments Wed, 21 Oct 2015 19:12:54 +0000 http://blogs.reuters.com/james-saft/?p=95969 Oct 21 (Reuters) – Donald Trump’s possibly market-lagging
stewardship of the fortune he inherited illustrates in a bizarre
way the attractions of active wealth management.

Property mogul, celebrity and presidential candidate, Trump
by some accounts, not his own, appears to have failed to keep
pace with market gains since he inherited $40 million in 1974.

While there is no definitive accounting of his net worth,
the outputs from his decision to build up a development
organization are clearly more than financial. What he’s
definitely garnered instead: a role, fun, influence, and the
illusion of control.

Those are four very important components in the active
management offering, and help to explain why so many choose to
plow money into a business or actively managed mutual or hedge
fund even despite comprehensive data indicating, at least when
it comes to investing, that they would probably be financially
better off with cheap index products.

A look at Trump’s experience shows that fun often, wait for
it, trumps boredom, and having an identity or purpose in life is
a good with a value. That’s as true for the guy betting on
small-cap momentum stocks as it is for a rich man backing a
macro hedge fund.

Here’s the thorny part: what Trump is actually worth. There
have been numerous estimates, all of which are just that, given
the private nature of his companies and holdings. Trump has a
long track record of hotly disputing every one as being
substantially too low.

The National Review in September did an analysis of his
wealth versus the returns he might have earned in an S&P 500
index fund and found evidence Trump might have done better by
sitting back and relaxing. (here)

When his father, developer Fred Trump, died in 1974, the
Donald’s share was worth an estimated $40 million.

Put that into index funds and you get $3 billion today. Put
the $200 million in wealth Forbes estimated Trump had in 1982
into those same funds and you have $8 billion today.

Trump’s current wealth has been estimated at $4.1 billion by
Forbes and $2.9 billion by Bloomberg. Trump himself in July said
his wealth exceeds “TEN BILLION DOLLARS” (his capitalization).

Believe whom you like, but what is clear is that there is a
substantial possibility that Trump would have been financially
better off sipping cocktails at the beach as his money
compounded in index funds. You can also argue that the gains
from an index fund would have come with less volatility, given
the four corporate bankruptcies associated with Trump
organizations.

WHAT MAKES DONALD RUN?

While Trump surely maintains that his wealth has beaten the
market, a look at some of the other benefits he’s enjoyed as a
result of actively investing on his own behalf shows both the
psychology and, perhaps, reality of steering one’s own ship.

Firstly, Trump has made himself famous, building himself a
very public role in the process. No matter how much money you
put into an index fund they are not going to put your name up on
a building, nor is anyone likely to buy the book you write. For
someone as given to self-aggrandizement as Trump this is
important, but you don’t have to have an insatiable appetite for
publicity for this to give a payoff.

Rich people pay over the odds for trophy assets like sports
teams and even newspapers for very much the same reason. What is
the point of being rich if you don’t get to enjoy it? It is fun,
at least for Trump, to run for president, being an influential
big shot, and this is a benefit he’d not have had if he had
stayed home in Queens depositing dividends.

Most forms of agency investing, from active mutual funds up
to the most clubby alternative investments, also play on this
desire, working hard to make their investors feel like they are
smart, insiders – people whose wealth is easy to explain given
their discernment in choosing the Brazil Un-Hedged Leveraged
Long/Short Credit Fund.

Some of this falls under the rubric of the illusion of
control, our human tendency to overestimate the extent to which
we can predict and control what happens. Few things can be more
pleasurable, and self-reinforcing, than thinking that you, a
person above the common run, have skillfully built a business,
picked an asset class or hired a private equity manager.

To be sure, many people take capital and do fabulously by
building businesses or hiring agents to manage it actively. And
it would be silly to count as valueless the other benefits of
having a purpose, being a big shot or thinking you are in
control.

Whatever your ideas about the good life, there is more to
it, as Trump demonstrates, than simply maximizing returns.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

]]>
http://blogs.reuters.com/james-saft/2015/10/21/trump-shoulda-been-an-index-investor-james-saft-2/feed/ 0
Trump shoulda been an index investor?: James Saft http://uk.reuters.com/article/2015/10/21/markets-saft-idUKL1N12K16520151021?feedType=RSS&feedName=everything&virtualBrandChannel=11708 http://blogs.reuters.com/james-saft/2015/10/21/trump-shoulda-been-an-index-investor-james-saft/#comments Wed, 21 Oct 2015 19:12:54 +0000 http://blogs.reuters.com/james-saft/?p=95968 Oct 21 (Reuters) – Donald Trump’s possibly market-lagging
stewardship of the fortune he inherited illustrates in a bizarre
way the attractions of active wealth management.

Property mogul, celebrity and presidential candidate, Trump
by some accounts, not his own, appears to have failed to keep
pace with market gains since he inherited $40 million in 1974.

While there is no definitive accounting of his net worth,
the outputs from his decision to build up a development
organization are clearly more than financial. What he’s
definitely garnered instead: a role, fun, influence, and the
illusion of control.

Those are four very important components in the active
management offering, and help to explain why so many choose to
plow money into a business or actively managed mutual or hedge
fund even despite comprehensive data indicating, at least when
it comes to investing, that they would probably be financially
better off with cheap index products.

A look at Trump’s experience shows that fun often, wait for
it, trumps boredom, and having an identity or purpose in life is
a good with a value. That’s as true for the guy betting on
small-cap momentum stocks as it is for a rich man backing a
macro hedge fund.

Here’s the thorny part: what Trump is actually worth. There
have been numerous estimates, all of which are just that, given
the private nature of his companies and holdings. Trump has a
long track record of hotly disputing every one as being
substantially too low.

The National Review in September did an analysis of his
wealth versus the returns he might have earned in an S&P 500
index fund and found evidence Trump might have done better by
sitting back and relaxing. (here)

When his father, developer Fred Trump, died in 1974, the
Donald’s share was worth an estimated $40 million.

Put that into index funds and you get $3 billion today. Put
the $200 million in wealth Forbes estimated Trump had in 1982
into those same funds and you have $8 billion today.

Trump’s current wealth has been estimated at $4.1 billion by
Forbes and $2.9 billion by Bloomberg. Trump himself in July said
his wealth exceeds “TEN BILLION DOLLARS” (his capitalization).

Believe whom you like, but what is clear is that there is a
substantial possibility that Trump would have been financially
better off sipping cocktails at the beach as his money
compounded in index funds. You can also argue that the gains
from an index fund would have come with less volatility, given
the four corporate bankruptcies associated with Trump
organizations.

WHAT MAKES DONALD RUN?

While Trump surely maintains that his wealth has beaten the
market, a look at some of the other benefits he’s enjoyed as a
result of actively investing on his own behalf shows both the
psychology and, perhaps, reality of steering one’s own ship.

Firstly, Trump has made himself famous, building himself a
very public role in the process. No matter how much money you
put into an index fund they are not going to put your name up on
a building, nor is anyone likely to buy the book you write. For
someone as given to self-aggrandizement as Trump this is
important, but you don’t have to have an insatiable appetite for
publicity for this to give a payoff.

Rich people pay over the odds for trophy assets like sports
teams and even newspapers for very much the same reason. What is
the point of being rich if you don’t get to enjoy it? It is fun,
at least for Trump, to run for president, being an influential
big shot, and this is a benefit he’d not have had if he had
stayed home in Queens depositing dividends.

Most forms of agency investing, from active mutual funds up
to the most clubby alternative investments, also play on this
desire, working hard to make their investors feel like they are
smart, insiders – people whose wealth is easy to explain given
their discernment in choosing the Brazil Un-Hedged Leveraged
Long/Short Credit Fund.

Some of this falls under the rubric of the illusion of
control, our human tendency to overestimate the extent to which
we can predict and control what happens. Few things can be more
pleasurable, and self-reinforcing, than thinking that you, a
person above the common run, have skillfully built a business,
picked an asset class or hired a private equity manager.

To be sure, many people take capital and do fabulously by
building businesses or hiring agents to manage it actively. And
it would be silly to count as valueless the other benefits of
having a purpose, being a big shot or thinking you are in
control.

Whatever your ideas about the good life, there is more to
it, as Trump demonstrates, than simply maximizing returns.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

]]>
http://blogs.reuters.com/james-saft/2015/10/21/trump-shoulda-been-an-index-investor-james-saft/feed/ 0
Wynn Resorts, WalMart: One coin in the world economy http://blogs.reuters.com/james-saft/2015/10/16/wynn-resorts-walmart-one-coin-in-the-world-economy/ http://blogs.reuters.com/james-saft/2015/10/16/wynn-resorts-walmart-one-coin-in-the-world-economy/#comments Fri, 16 Oct 2015 20:01:40 +0000 http://blogs.reuters.com/james-saft/?p=95966 Oct 16 (Reuters) – Big fish Chinese gamblers afraid of a
corruption crackdown and poorly paid Walmart workers in the
United States might seem to have little in common.

But in the global economy, they are in some ways two sides
of the same coin, and to understand that is to understand more
than why the two disparate groups were blamed for horrendous
earnings at two very different companies: Walmart and
Wynn Resorts.

The globalization of the past 25 years has been kind to both
companies, as cheap labor from China became integrated in the
global economy, creating, among many phenomena, great new wealth
in China and a buyer’s market for labor in the United States.

Now we may be seeing the early stages of a partial reversal
of some of those trends, as China seeks a new economic model and
politics and economics in the United States are giving wage
earners more bargaining power.

Walmart’s stock is down more than 12 percent since it said
on Wednesday that earnings would fall 6-12 percent this year, a
decline it blamed in part on higher wage bills. The retailer
said in April it was bumping hourly pay up to at least $9 for
all U.S. employees, with another dollar-per-hour hike to come in
February. Overall, Walmart says it will spend $1.2 billion to
$1.5 billion on higher wages and training next year.

Wynn Resorts has a very different species of problem: too
few Chinese high-rollers willing to be seen betting fortunes on
the flip of a card. Not only are more gamblers now in fear of a
crackdown on corruption underway in China, but President Xi
Jinping’s efforts are creating a hostile environment for casinos
in formerly wide-open Macau.

“In my 45 years of experience, I’ve never seen anything like
this before,” Wynn CEO Steve Wynn said on Thursday, describing
the difficulty of what he called an “almost mystical” planning
process on the Chinese-administered island.

Wynn Resorts said profits fell more than a dollar per share
to just 86 cents, driven by a 38 percent fall in Macau revenue
and a near halving of the VIP junket business that brings rich
gamblers to the tables from the Chinese mainland.

Wynn shares, down more than 50 percent thus far this year,
fell sharply in Asian trading before recovering somewhat the
following day in U.S. hours.

BUSINESS MODELS

Gambling in Macau, to be sure, is particularly vulnerable to
a number of trends in China. Not only is an economic slowdown
hitting the cash flow of those who gamble, but the corruption
crackdown has taken particular aim at the industry. So-called
junkets, short trips to Macau, are seen both as a symbol of
corruption and a means for officials and others to launder cash
or simply to evade Chinese capital controls.

Still both businesses – Walmart and Wynn Resorts – had
business models that were part beneficiaries of and partly
predicated on long-running global trends.

As China rose, integrating its huge and underutilized labor
force into the global economy, its share of world trade rose
from less than 3 percent in 1990 to 12 percent today.
Great wealth was created, both in China and the rest of the
world.

Macau, gambling and Wynn all were beneficiaries of occupying
an intermediate space between tightly controlled capital and the
rest of the world. Gamblers had good reason not just to want to
live a little, but to want to get a bit offshore.

On the other side of the world, Walmart did well out of
selling goods, many of them made in China, cheaply to a middle-
and lower-income clientele whose incomes were being whittled
away in real terms as U.S. manufacturing jobs went offshore.
Those U.S. workers were both keen to find a bargain and, lacking
better-paid options, willing to work for comparatively little.

China now is at or past a demographic tipping point, with
little excess labor to absorb. The plan instead: to move toward
a more domestically focused, consumer-based economy. That change
ultimately may be successful, but in the meantime China sees the
need to crack down on arrangements and practices, like the
junkets, that it previously tolerated.

Walmart, conversely, finds itself also affected by the same
mega-trend of an aging China. Not only has U.S. unemployment
fallen, potentially giving workers more negotiating power, but
after decades of falling real wages, the U.S. political debate
has changed, with more pressure for higher minimum wages.

In other words, as surplus labor supply dries up in China
and elsewhere, largely for demographic reasons, business models
everywhere will come under pressure. Lower margins are likely
for labor-intensive U.S. companies, and the pie will be divided
differently, with different winners and losers in China.

(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by Dan Grebler)

]]>
http://blogs.reuters.com/james-saft/2015/10/16/wynn-resorts-walmart-one-coin-in-the-world-economy/feed/ 0