Posts Tagged Investing
As is often the case, during the Global Financial Melt-Down, which began in 2008, excess global cash flowed to the US Dollar. The dollar is widely perceived as the strongest reserve currency, and the US Economy as, by far, the most liquid. Some cash did flow to other reserve currencies—the Euro, Pound Sterling and Yen–as well. But, when it comes to significant market swings, the US is the only economy that can accommodate large currency movements, both on the in-flow and the out-flow.
In the intervening eight years, since the Recovery began, a large portion of that flight money has recently been transferring–both to other currencies, and other markets. In this blog post, I would like to suggest a somewhat simplified process for investors to add one more element of diversification to their investment portfolios—global investing.
Regardless of where you live, most people have their money primarily invested in their home country. They are more familiar with the companies, and to negate any concern for foreign exchange risk. But, it is worth noting that the European and U. S. economies each have only 25% of the world GDP. So, by diversifying the geographical range of securities, the overall investment risk can be reduced.
There has been a huge shift of investment transactions, at least in the U. S., out of actively-managed securities, and into either exchange-traded funds or indexed mutual funds. Some $1 Trillion has been added, mostly to ETFs, over the pst year alone.
Since ETFs are based on indices that rarely change, the expenses are quite minimal. Also, a number of economists have demonstrated that the stock markets are quite irrational. So, why pay to beat the markets when few managers do so, at least not on a consistent basis.
Diversification is one of the most basic concepts of portfolio investing. Distribute the risk among different types of securities: stocks and bonds; large companies versus small; both dynamic “Growth” as well as more stable “Value” companies; and invest in securities in, at least, several different industries. Global investing just adds one more dimension in the overall diversification process.
Although I have readers from a number of different countries, the overwhelming number are from America. Since ETFs are available on the stock markets of many nations, foreign readers may modify these idea, as you wish. My basic approach is still to suggest adding that global dimension to your existing portfolio. Also, even though you might only care to expand your focus, say to your local region, the benefits will still ensue.
I would first consider some type of global developed markets ETF, such as one that replicates the EAFE (Europe, Australia and the Far East) Index (Symbol: EFA). I have also added a Pacific-excluding Japan Index (EPP), since that is the fastest growing region of the world. And then, I have added a Diversified Developing Markets ETF (EEM). You might prefer different ETFs for these ideas, prefer to add more to Europe or Latin America, or individual countries.
To research for yourself, and I hope that you do, I would suggest two web sites as places to start. Obviously, there are many more ETFs and many more web sites. Those two sites are: iShares, by BlackRock, and Stock-Encyclopedia, which provides a wealth of knowledge on exchange-traded funds. Whatever you do, be sure to check the “Fact Sheet”, which provides a good summary, and get used to checking the ones that you do invest in, on a regular basis.
Following the Presidential Election, there has been an on-again, off-again rally in the stock market, which might have been partially attributed to Donald Trump’s victory, last November. Generally, the stock market performs best in the first and fourth calendar quarters, most years; however, some investors might have placed too much faith in Trump’s vague promises, raising the seasonal spurt even higher. Also, some CEO’s seem to have swooned over his proposals: the corporate tax-rate being halved; escalating depreciation on plant and equipment; eliminating most all regulations; and the “Border-Adjustment Tax”.
As of Friday, the Dow Jones Industrial Average rose 9.3% since Trump won, and the S & P 500 was up by 8.3%. There was little in the way of economic activity to have justified such a surge; however, some investors may have just followed the herd instinct. They wanted to believe! But like any other asset, when the price rises for no apparent reason, there might come a time where it cannot sustain that psychological momentum. Did the markets seem to sense that yesterday?
Ever since he announced his candidacy, in June of 2015, Donald Trump has been harping on two primary goals—the worthless Wall, and his vow to “…replace ‘Obamacare’: with something much better, and at less cost. Just trust me!” HA! Donald raised the stakes too high, before his American Health Care Act had to be pulled yesterday—for the second time—due to insufficient support from his own Republican Party!
Always the person to find a scapegoat to blame–rather than blame House Speaker Paul Ryan, or the entire GOP–Donald blamed the Opposition Party. For a self-proclaimed “Negotiator”, how ludicrous was it to have over-sold the “certain” success of his AHCA, as he had often boasted, and then blame the Democrats…but, for what? He was trying to tear-down a perfectly good (first-step) of a comprehensive plan that could provide Affordable Health Care for all!
Many Americans, including investors, are beginning to wonder if Trump can actually govern! He boasted, before the election, about how many things he would do, beginning “Day One!” But so far, he has accomplished very little. On the negative side, however, the list of his idiotic moves is a mile long!
Consider the following problems that he has been entangled in: the failed raid in Yemen, which resulted in the death of one Navy DEAL and 24 Yemeni civilians; attacking the American Judiciary for rebuking his two Anti-Muslim Bans; his apparent desire to control the Media; threatening a pre-emptive attack on a nuclear-armed North Korea—in China’s back yard; Trump’s potential collusion with Russia, and so on!
A number of Americans who voted for Trump have been on TV stating that they are having Voter’s Remorse. It’s times like this when I wish that we had a Parliamentary System. That way, just one “No Confidence!” vote would place M. P. Donald Trump, in a back-bench seat, where he belongs. Oh, if only…!
When Trump stated yesterday that the GOP’s AHCA Plan had to be pulled, distancing himself from bad news as always, he proclaimed that the next item of business would be Tax Reform. But there are two problems with that strategy, which he is overlooking: a number of deep-pocketed conservative organizations, including the Koch Brothers, have come out again Trump’s Tax Plan; and the money that he was supposed to take from ACA customers was necessary to fund his large tax cuts for the Wealthiest two-percent!
Meanwhile, many institutional and individual investors are, no doubt, using this weekend to review Trump’s record—both positive and negative—and to decide what their next financial moves might be. Additionally, many overseas investors are also considering whether the recent Trump Rally is real, or just a market bubble! I sure wouldn’t be surprised it there is a pause, at least, in the rally–or perhaps a reversal.
Following last Tuesday night’s State-of-the-Union Address, Donald Trump just reiterated most of the usual things—Jobs, “Obamacare”, Dodd-Frank, Immigration, Terrorism, Regulations, Trade and Tariffs, Education, etc—which he has been talking about throughout his very short political career. But, after 40 days in office, he has accomplished absolutely nothing, except to infuriate a majority of Americans.
If any of the promises he has made were based on non-practical ideas, Trump would have had people working on his proposals and, perhaps, even submitted legislation to Congress on a few. For instance, if President Obama’s Affordable Health Care were really so “awful”, we would have seen a draft of TrumpCare by now. And, if Dodd-Frank, which reined-in the banks, after they took the nation to the edge of the Financial Abyss in 2008, was so terribly bad, wouldn’t Donald have presented an alternative plan by now?
But so far, Donald Trump seems to be spending his time: talking and tweeting; holding Command Performance meetings at the White House with people who seemingly would rather be anywhere else; and having his photo-ops boarding and leaving Air Force One, and always with Ivanka and the grandchildren in tow. I wonder if Trump spends more time at Mar-a-Lago now, since taxpayers are paying for it, than he did before he took office?
Market professionals, who had been expecting a Market Boom; because, Donald Trump vowed to: put people back to work; re-build the crumbling infrastructure; cut the tax rates for everyone; de-regulate all industries; and put more discretionary income in consumers’ pockets. But now, those investors are beginning to wonder how much of Donald Trump’s agenda is smoke, and how much is mirrors? They are also wondering if he can even get any of his plans through a Republican-Majority Congress?
When people look at the Trump Regime nowadays, the question most frequently asked is: Who’s in charge? Donald Trump has demonstrated that he is certainly not a detail man, whether that means understanding the most important questions facing the nation today, or in directing his staff in carrying out those most important responsibilities. Trump himself seems to be out more often than he is in, and most of his Cabinet and other key officers seem to be kept out of sight, and few deputies are on-board. With forty days in, and nothing accomplished: that’s despicable!
The financial markets do not function well with uncertainty. In fact, Steve Bannon seems to be the only key advisor in the office, and working. And, that’s like having the fox guarding the chicken coop. Reports from the West Wing suggest a spirit of: disorganization; disruption, incompetence and disbelief. Even Reince Priebus, Trump’s Chief-of-Staff, appears to be lost, both in-space and in-time. Will he be ousted soon?
I believe that this sorry picture of our Nation’s Leadership—without experience, without leadership and without a clue—is why the stock market has paused, and backed-off from the blindly upward track that it had been on for the past couple of months. There has been more, and more, talk of a stock market pull-back; however, now it might take a “correction”, a ten percent drop, in order to adequately pass some of the false Trump euphoria out off the market.
Wall Street seems to have gotten its fingerprints all over Donald Trump’s plans to Repeal Dodd-Frank, and just eliminate the Department of Labor’s “Fiduciary Rule” outright. “Dodd” was passed to rein-in the Banks following The Great Recession (4Q07 to 1Q09). The Fiduciary Rule, on the other hand, applies specifically to Qualified Retirement Plans (IRAs, 401(k)s, 403(b)s, etc), and it requires financial professionals to place the clients’ interests ahead of the firm’s, and their own. Shouldn’t that rule apply to all securities accounts?
Back in November, I wrote about giving our combined personal investment portfolio its first major overhaul ever, because: I have on-going concerns about what havoc Donald Trump might wreck on our Economy; and I wish to simplify our portfolio, in the event that my wife and daughter might have to take over managing it at some point. And given Trump’s continued irrational behavior, these concerns still seem as relevant as ever.
Yale Economics Professor Joseph Shiller won the Nobel Prize, in 2013, for his empirical analysis of asset prices. Shiller concluded that the market is inefficient, and he has suggested that passive index funds can do just as well as actively-managed ones, but without the higher management fees. Warren Buffett, in his Letter to Berkshire Hathaway Shareholders, concurred, suggesting that an S & P 500 index fund, possibly with other stock exchange-traded funds, plus individual bonds or a bond ETF, would perform better in the absence of the management fees. John Boggle, founder of Vanguard Funds, agrees.
In May of 2012, I wrote a post, comparing mutual funds and ETFs. It provided a brief, but general comparison between actively-traded mutual funds and ETFs. Given what is happening now; however, I believe that the Advantage has certainly shifted in favor of ETFs.
Here are some sources for learning more about ETFs:
The CNBC (financial channel) web site provides news, plus market statistics. On the “Markets” drop-down box, the various global markets can be checked in real-time. At the bottom of the drop-down, go to “ETFs” for a list, prices, performance, and trading volume of the most popular ETFs, with the Sector SPDRs just below them.
Then go to the State Street web page for SPY, and that company also distributes the Sector SPDRs. On the SPY page, a Fact Sheet can be viewed, as well as other literature.
On the Sector SPDR page, there are Fact Sheets for each of the sector ETFs, performance and a list of all of the stocks, within each of the sectors of the S & P 500. There also is a Sector Tracker, which provides historical performance, for each sector, across various time-frames.
iShares provides a range of mostly overseas ETF, either globally, by region and for many individual countries. Some of the iShares ETFs that I used, when I wanted to put money into various overseas markets, are as follows: EFA for the EAFE (Europe, Australia and there Far East) Index of industrialized markets, EEM, for Diversified Emerging Markets, or EPP for Asia-Pacific, excluding Japan), among others.
Lastly, check the Stock-Encyclopedia ETF Guide to research any ETF, to include Fast Sheet and other research material,
There are hundreds of ETFs on the market. If your advisor suggests one, be sure to have him/her explain why that (those) particular one(s) would be suitable for your needs. I would suggest shying away from ETFs that invest in commodities and foreign exchange, because those markets are more oriented toward institutional investors. Similarly, be aware that ETFs that double or triple the upside of an index, will similarly increase the risk on the downside.
In a recent post, I warned against Donald Trump taking control of the Federal Reserve Board, our central bank, and then directing it toward his own politically biased agenda. The link for that post is: https://thetruthoncommonsense.com/2017/02/09/dont-mess-with-the-fed/?iframe=true&theme_preview=true. Since then, one Fed Governor resigned unexpectedly, thus giving Trump a couple of seats to fill, and then he can nominate his own Chairman, as of February 2018.
The manner in which Donald Trump and his Regime manages the economy, will indeed, have major effects on our Society, in general. Income-inequality, divisiveness and widespread frustration with the government, can have a major effect on Who and What America becomes!
The Role of the Federal Reserve Board, our central bank, is to foster economic conditions that achieve both stable prices and maximum sustainable employment. The optimum is referred to as the Goldilocks Economy, similar to the mid-to-late 1990s: “Not too hot, not too cold, but just right.” The Fed’s goal, in effect, is to manage for Balance.
Republicans in Congress have always wanted to have greater control over the Fed, which would, in effect, politicize it. If the economy were destined to fluctuate between the policies of one party, and then shift to the other party’s goals, the general results would surely be disastrous for the overall Health of the Economy.
Donald Trump has already announced that he will replace Fed Chair Janet Yellen, when her Chairmanship expires. With less than one month in office, Trump has already been trying to browbeat the Fed not to raise rates. There is a reason why democracies insist on their central banks remaining apolitical: wrong moves, especially on purpose, in either direction, or if postponed, may lead to an even more horrendous economic situation.
An interest rate increase, or cut, are usually made after careful economic analysis, based on comprehensive reports, collected from the twelve regional federal reserve banks. Those reports provide the rationale for monetary policy. Arbitrarily cutting the “Funds Rate”, or failing to increase it when appropriate, might result in an overheated economy—and high inflation—on the up-side. Improper moves in the other direction, could result in deflation—price implosion—and a similarly dysfunctional economy.
When the Fed’s monetary policy committee raised rates in December, to a range of 0.50%-to-0.75%, it estimated that a 0.25% rate hike was necessary to keep the economy from accelerating. Balancing the economy assumes that minor adjustments are best, rather than waiting for the economy to either over-inflate on the up-side, or to deflate or the down-side.
Now that Steven Mnuchin has been sworn-in as Secretary of the Treasury, Donald Trump might just turn his attention more toward the Fed nominations. The key question here, is whether Secretary Mnuchin will work smoothly with the Fed, or merely follow Donald Trump’s incongruous agenda. Hopefully, he will cooperate with the Fed, and focus on maintaining a stable economy, for all America!
Among the various governmental departments, which most definitely should not be politicized in any way, the Federal Reserve Board is among the most important! Recently, political influences may have influenced Donald Trump’s attacks on Federal Judge Robert, and the Judiciary in general, as well as the disastrous raid in Yemen, which might have been carried-out, before the plans were set, due to a sense of false bravado.
I am not aware of one foreign democratic government, in which the head-of-state is able to influence their respective central bank’s monetary policy—interest rates and the supply of money in circulation. On the other hand, governments do have direct control over their Treasury (or Exchequer), which are part of the government, and the President or Prime Minister implements fiscal policy—taxes and spending—through them.
Oftentimes, one political party or the other does try to suggest changes in Fed Policy, which are generally in that party’s best interest. In 1972, President Richard Nixon made some dumb changes in fiscal policy, which caused the devastating “Stagflation”—high inflation in a recessionary involvement—which lasted through most of the decade. The tools that would normally be applied to correct for a recession, unfortunately, are opposite to what is needed to fight inflation.
The Fed is mostly staffed by economists, or other financial professionals, who can work with the Board in implementing monetary policy. For instance, last week’s Jobs Report, which the Department of Labor released on Friday, was very strong. If it had reflected a significant decline in employment, and high unemployment: however, an over-reaching President might have tried to urge the fed to cut interest rates.
Such pressure might be even stronger, if—like in 1972—a re-election was approaching. But as I suggested in a recent post, employment statistics can be flukey, due to a number of factors, and they are more reliable when reviewed in, perhaps, several quarters at a time.
Donald Trump will be able to fill an open seat on the Board, and has signaled that he would nominate someone to be the vice Chairman; however, that doesn’t give that nominee much power. Additionally, the Vice-Chairman of the FOMC is traditionally the President of the Fed-New York. The President of the Federal Reserve Bank of New York has a permanent seat on the FOMC is because His or Her bank carries-out Federal Reserve Monetary Policy.
Over the years, members of the Republican Party have called for such asinine changes to the Fed, as its: Elimination; Auditing; Control, etc. The Fed is already the most transparent department in the Federal Government. The Chairman testifies twice a year to both the Senate Finance Committee and the House Banking Committee. It holds a press conference immediately after each of the eight annual FOMC meetings, and the minutes are released ten days afterward.
The Fed Board, as well as each of the twelve regional, independent and shareholder-owned, banks release volumes of reports and studies throughout the year. With the GOP controlling all three branches of government, and given its past on-going aspirations to control the Fed, I’m concerned that there isn’t a strong group of Republicans to band with the Democrats, and control Donald Trump.
Stagflation is the coincidence of high inflation during a recession, and it has only happened once in the U. S., during the 1970s. There was a mild recession in 1972, and although the Fed and the Treasury had each provided stimulus, President Richard Nixon wanted to boost the economy, to enhance his re-election chances. But, when Nixon took matters into his own hands, he just made the situation worse—much worse!
President Nixon implemented wage and price controls and, simultaneously, took the
U. S. Dollar off the Gold Standard. Initially, the dollar surged in global markets; however, when Great Britain tried to exchange $3 billion, in dollars for gold, the dollar plummeted. As the global markets abandoned the dollar, the price of gold skyrocketed from $30 per ounce, to $120.
During a normal recession, as the economy slows, and unemployment rises, inflation is generally weak. In such cases, the Fed would flood the economy with cash, to stimulate the economy, and thus promote consumer spending and hiring. In a stagflation situation, however, stimulus measures intended to enhance employment, would just make the inflation problem even worse. And, that just leads to a sure case of: “Damned if you do, and dammed if you don’t!”
Businesses couldn’t pass the higher prices on to customers due to the price controls. So, the only alternative businessmen had, rather than to raise prices, was to cut its expenses by laying-off workers. But, that only made the recession worse. But, prices kept rising, even though they couldn’t be passed on. Demand also increased as people thought prices might rise even more in the future.
Paul Volcker, as Chairman of the Fed, finally solved the stagflation problem.
He raised the “Fed Funds” (short-term intra-bank lending) rate by two full percent in one day in 1981, up to 20%, and that slammed the breaks on the economy. Incidentally, the higher interest rates also strengthened the dollar, which helped alleviate inflation.
Now, I’m not predicting a return of stagnation to the U. S. economy; but, with Donald Trump’s bull in the china shop mentality, and his apparent ignorance of the issues; I can only wonder. He has also handicapped himself by appointing mostly inexperienced ideologues with which to fill-out his Regime. As I have been following the financial markets, and monitoring his attempt to micromanage the various industries, I sure have my doubts about positive economic outcomes ever becoming reality.
I would prefer raising an awfully scary issue, and being wrong; rather than not have suggested such an abnormal situation at all. In 2008, as America went through The Great Recession, we were extremely lucky to have had such a smooth transition, from the Bush Financial Team to the Obama Team. All experienced pros, who worked well together, took the political heat and did what was best for America. I’m surely not expecting any such thing from the Donald Trump Regime!
NOTE: If you use a financial professional in your investing, ask her or him what they think the chances of stagflation might be. Chances are, they have never even heard of the term.