Saturday, December 30, 2017

Watch for Eonia Year End Spikes

In the last two days of November, the Eonia, which is the one day Euribor rate, spiked 6.1% and 6%, which is very unusual.  Bloomberg gave, as an explanation, that the National Bank of Greece had excess liquidity of 450 million euro which it loaned in the last two days of November to peers in its country, but would that cause two days of 6% spikes?  Was something else going on with eurozone bank liquidity?

The two regional Italian banks Carige and Creval have been struggling for additional funding, along with four other small Italian banks, to meet the ECB balance sheet liquidity rules and lower allowable NPLs (non-performing loans).  But any month end liquidity needs would have been relatively small.  However, new ECB bad loan rules will become effective January 1, 2018 despite significant opposition, particularly from Italy.  This will put additional pressure on Italian banks, because, while eurozone banks as a whole have 5% NPLs, Italian banks have 15% of that 5%.  The final compromise is to enforce the new NPL rules on a bank by bank basis, whatever that means.

Meanwhile, on 18 November Monte dei Praschi di Sienna, had to put $671 million (569.4 million euro) in reserve, before its new reorganization board meets for the first time in December, which

Friday, December 29, 2017

Job Losses Under New Tax Law Already Beginning

Under the new U. S.  tax law, corporate interest deductions are capped at 30 % of adjusted taxable income (ATI).  I have already seen a privately owned company (owned by a private equity firm) announcing major layoffs effective at year end and internally communicate the new tax law  will result in paying higher taxes. 

Saturday, December 16, 2017

Full Text of Final GOP Tax Bill

 It is the intent of the GOP Congressional leadership to vote on this bill as soon as possible to preempt any informed debate or public review or discussion.  The vote will purposefully be prior to any CBO fiscal analysis, despite an at least $1.4 trillion deficit impact, or any Joint Conference on Taxation analysis as normally required.  The Tax Bill is a huge economic blunder which will cut spending on infrastructure, education, make health insurance more expensive, do nothing to boost wages, and put a bullseye on Medicare and Social Security.

Here is a link to a post by a tax attorney/law professor providing a links to the full 1097 page bill and  a 570 page explanation.

The economic "benefits" are based on historically inaccurate assumptions of trickle down economics and false arguments to justify huge benefits to the very wealthy as opposed to little or no benefits (in some case even more taxes paid in future years)  for the the middle class or poor.  This bill will economically cripple the Affordable Care Act and increase American citizens without health care by 10-13 million.  It is direct attack on higher education and public education.

When the patently erroneously revenue assumptions prove systemically lacking, you may expect these GOP Congressional leaders to propose massive cuts in Social Security and Medicare to make up for their purposefully misrepresentation of the tax bill's revenue.

It pays to be a big money political donor.

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Wednesday, December 13, 2017

See How GOP Tax Plan Will Impact Your Taxes

Here is an interactive page where you can click on your state and then click your tax bracket and see if you benefit or actually pay more in future years.  You may be surprised what happens in 2019 and how different it will be by 2027.  People in lower tax brackets are going to see how they will pay for the benefits thrown at the the highest tax brackets.

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Thursday, November 2, 2017

Daily Research Links for Week #388 (August 14 - 21, 2017)

Here is the link (which is a private page) to The Pursuit of Financial Happiness(TM) Daily Research Links for Week #388.  I am now working on Week #399.  The Week #388 is a Pdf which is ten pages long with active links for you to follow.  You may want to bookmark the above Daily Research link and visit as you have time.  These links are available on a current Daily basis by e-mail (just those days links) to subscribers to The Pursuit of Financial Happiness(TM) Daily Research Links.  To request a subscription, contact me at

These links contain differing viewpoints which are worth reading and, therefore, do not connote my approval or disapproval.  They are articles, audio, video, Pdf documents, studies, etc. on macroeconomic and financial issues of value in understanding what is going on in various countries, the world, and the markets.

You might also want to check out the home page of my professional website

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Monday, October 16, 2017

Daily Research Links for Week #387 (August 7-13, 2017)

The Pursuit of Financial Happiness(TM) Daily Research Links for Week #387 are 12 pages long and can be found here.  I am presently working on Week #397.  The Daily Research Links contain a variety of viewpoints worth reading and digesting; it should not be assumed I agree or support any particular viewpoint, particularly when I am presently a variety of viewpoints on an issue or subject.

These Research Links are in the original language, may contain audio, video, long studies, etc on macroeconomic and financial issues   These help me understand what is going on in the world, in different countries, market sectors, companies, and economies.

These Daily Research Links can be sent by e-mail world-wide on a current daily basis if one wishes to subscribe by contacting me at

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Monday, October 2, 2017

Daily Research Links for Week #386 (July 31 - August 6, 2017)

 Here is the link to The Pursuit of Financial Happiness(TM) Daily Research links sent daily to subscribers world wide for Week #385.  It is 13 pages long.  I am now working on Week #395.

As I have indicated, the links do not reflect my agreement but only that they are worth considering.  The links may be audio, video, pdf documents, long studies,as well as news and other articles, and are always in the original language (not translated). 

This is research I do on a daily basis as a fiduciary fee only registered investment advisor.  No matter where you live in this world, if you wish to subscribe to The Pursuit of Financial Happiness(TM) Daily Research Links you may contact me at

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Friday, September 29, 2017

Data Breach: Lock or Freeze Credit

If you have had your credit information stolen or exposed to a data breach, such as Equifax, you need to monitor your credit and bank accounts.

The data breach at Equifax apparently compromised personal information in one of its credit monitoring programs (where consumers can "safely" have their credit monitored for unauthorized use) which included birth dates and social security numbers.  While they are now offering a free (and new) lifetime credit lock program where you control who has access to your credit information, I would be reluctant to trust them again.  Their initial response to the data breach was tardy and the initial data breach customer service website they set up looked like a phishing website.

If you have recently received notification that a debit or credit card is being replaced as the result of a data breach, you would be wise to assume it is probably Equifax related.

Immediately monitor your credit card and/or bank accounts twice daily.  You can use Credit Karma to monitor Transunion and Equifax and Credit Sesame to monitor Experian; both are free.  I would avoid any credit monitoring service which charges a fee.

For the most part, a credit lock program are designed to be continuing fee services and are marketed by credit reporting services, while a credit freeze involves an initial fee and a fee for each temporary lifting (should be $10 --- if you are over 65 years old, an active duty military, or a victim of identity theft it should be free).  The Illinois Attorney General provides information, including form letters for each credit reporting service, on what the fees should be for different individuals and I would expect other state attorney generals to also provide this information.  You should also be able to get non-state specific information from the Consumer's Union.

On the whole, you would probably be better off with doing a security (credit) freeze then getting netted by what is normally a more expensive credit lock marketed program.  Do the credit (security) freeze.

Update 10/3/17:

It may cost victims of Equifax data breach $4.1 billion to freeze credit.

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Saturday, September 23, 2017

Daily Research Links for Week #385 (July 24-39, 2917)

The Pursuit of Financial Happiness(TM) Daily Research Links for Week #385 are here.  They are 12 pages long.  All links are in original language and may include audio, video, or long studies.  They are macroeconomic and financial information worth reading and do not imply I agree or endorse them.  You have to be able to consider and apply critical thinking to anything you read.

I am presently working on Week #393.  If you are interested in an eamil subscription to The Pursuit of Financial Happiness(TM) Daily Research Links, no matter where you live in this World, contact me at

As website is constructed it will archive all past  daily research links (after 4 weeks of existence to non-subscribers) and research topics.    We will also have podcasts again as subjects deserve the attention.

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Tuesday, September 19, 2017

Daily Research Links for Week #384 (July 18-24, 2017)

Here is another week of daily research links for Week #384 for The Pursuit of Financial Happiness(TM).  I am now working on Week #393.

Week #384 is only 12 pages long.   As I have indicated previously, these links are being provided to not just inform, but to allow readers to determine the value of these economic and financial research links, that I use. 

If you would like to receive them on a daily subscription basis, wherever you live in the world, let me know at

We are in the process of designing website where we will archive past research topics and weekly links which are at least 4 week old.  We may also put together some past writings and form them cohesively into The Pursuit of Financial Happiness(TM)  e-books on investing, estate planning, and other relevant topics. 

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Monday, August 28, 2017

Fiscal Stimulus and Global Imbalances

 The Federal Reserve 2017 Jackson Hole Symposium had what I found to be two particularly interesting papers.  The Auerback-Gorodnichenko paper "Fiscal Stimulus and Fiscal Sustainability" which finds that fiscal stimulus in a weak economy, even in countries with high debt, can improve fiscal sustainability.  Jason Furman's remarks on the paper with many charts was very good.  For those of us who have long maintained that fiscal stimulus designed to put people to work, improve needed infrastructure, and stimulate growth in the national economy -- not wasteful political favoritism or handouts to large financial institutions and the rich and rentiers --  are necessary to effectively recover from deep economic recessions and depressions, this is a welcome paper.

Menzie Chinn's paper  "The Once and Future Global Imbalances?  Interpreting the Post-Crisis Record" which documents fiscal policy can and has had a noticeable influence on current account balances.  Chinn had additional remarks with graphs.  Maurice Obstfeld, chief economist at the IMF, also provides remarks detailing the differing economic viewpoints on global imbalances and the problems with resolving the debate.

Federal Reserve Chairman Janet Yellen's speech on financial stability was very subdued and reassuring, particularly in her defense of bank regulations, which many have taken as a subtle rebuke of the current Administration's desire to reduce and/or remove regulations on banks, despite the Great Financial Crisis of 2008.

Here are all the papers, speeches, and remarks at the Symposium.

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Sunday, August 27, 2017

Do ETFs Negatively Impact Portfolios?

In a recent paper studying ETF investors using data from a large German brokerage,the authors found that ETFs do not improve portfolios with the ETF portion of a portfolio underperforming the non-ETF portion of the portfolio by -1.16% and investors using ETFs used all investment products sub-optimally.  All investors in the study had refused free financial advice and were self-directed investors.  Poor timing in buying and selling accounted for .77% of the underperformance.   When compared to a market portfolio buy and hold strategy, the majority of the underperformance was due to security selection behavior. (See tables VII and VIII in the paper.)  The study found no investor distinct group benefited from, or increased diversification with, ETF use.  When trading costs were included with gross returns, the results were worse.

The authors suggest that it would be better to invest in a buy and hold strategy with a low cost diversified market investment.

This means, in my opinion, that the self-directed investor approaching or in early retirement should look for a low Beta (1.00 or lower) and a high Sharpe Ratio (the higher the better) market investment as well as review cost and performance through the years.  An investor with a long time horizon might include Alpha (the higher the better) in the criteria.  There are several that should pop up on an ETF criteria screen for deeper analysis.  If you have a fiduciary, fee only, financial financial advisor, there might be more portfolio options in a buy and hold strategy which is allowed to slowly grow.

The study concluded: "We find that the portfolio performance of individual users relative to non-users of ETFs slightly worsens after ETF use. The loss comes mostly from buying ETFs at the “wrong” times rather than choosing the ex-ante “wrong” ETFs. Therefore, adopting a buy-and-hold strategy is more important than selecting better ETFs. The benefits from a buy-and-hold strategy are twofold. First, as our analysis reveals, a buy-and-hold strategy would prevent investors from trading ETFs at “wrong” points in time. Second, the positive effects on gross performance are amplified for net performance as trading costs in buy-and-hold strategies are naturally lower.

"Our paper thus points out that the wonderful innovation of passive ETFs, with its enormous potential to act as a low cost and liquid vehicle for diversification, may not help individual investors to enhance their portfolio performance if they actively abuse passive ETFs by buying and selling them at “wrong” times. Ironically, the low cost and high liquidity of these ETFs seem to encourage their trading, and this aggravates an individual’s temptation to engage in some sort of timing. Our finding should make regulators, consumer protection agencies, companies with 401k plans, and financial economists more cautious when recommending ETF use. From a policy perspective, therefore, promoting savings on well-diversified ETFs that simultaneously limit the potential to actively trade in them might be beneficial to individual investors." 

This is the fifth post is a series on ETFs.  The fourth post, which has links to the first three in its first paragraph, on synthetic ETFs can be found here.

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Tuesday, August 22, 2017

Daily Research Links for Week #383 (July 10-17, 2017)

For several years I have privately provided, from time to time, my The Pursuit of Financial Happiness™ Daily Research links on economic, finance, and investment issues and news to select individuals.

I am now working on The Pursuit of Financial Happiness™ Daily Research links Week #389.  Week #383 is twelve (12) pages long and can now be found publicly available at this website link.  Links are in original language untranslated, some contain videos, some are pdf documents, some are long reads and/or studies, most are period current but can contain related research from different periods on specific issues.  The links do not imply I agree or disagree with the content.  They are linked because they are worth reading and considering.  I use them to provide macro information, which I use as a Registered Investment Advisor, on what is going on in the United States and the world, particularly Europe and China.  The Research Daily links do not provide any comment.  Advice is available to United States citizens and residents.  Consulting is available to anyone.

We are now preparing to offer the Daily Research links on a subscription basis.  This will involve adding an international payment system and activating The Pursuit of Financial Happiness™ website to house the Daily Research links archive (for first four weeks Daily Research links are available to subscribers only) for the public and Daily Research links for subscribers only for four weeks, as well as other past research on specific topics.  We are also prepared to offer podcasts as we have time and a worthy topic.

If you have an interest in receiving The Pursuit of Financial Happiness™ Daily Research links by email at least six days a week (sometimes more often) by email.  You can contact me at

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Monday, August 14, 2017

How Risky Are Synthetic ETFs?

This is the fourth in a series of posts on ETFs with the first three focusing on potential liquidity problems in a financial crisis which was in response to a Noah Smith column, order completion in a rapidly down trending market, and difficulties of ETF market makers.

In 2012, Morningstar did an extensive global study of synthetic ETFs which is a good starting point to understanding the risks in synthetic ETFs. 

Synthetic ETFs do not track an index.  They use swaps with counter-party risk and/or futures contracts which are more difficult and expensive to manage.  They are usually commodities ETFs or

Thursday, August 10, 2017

The CFP Board's Duplicitous Fiduciary Standard

Here is a very good article on the duplicitous CFP proposed fiduciary standard which is really just a marketing tool to protect the millions of dollars in annual revenue on CFP courses, study materials, and testing fees.

I have written extensively on the need of a true fiduciary standard.  In fact, my "Beware"  blog post was linked by Abnormal Returns and Dan Solin.   I have refrained from criticizing the professional designations and organizations, but they are unavoidably a major part of the problem.  I started looking at the CFP in the 1980's when it was two competing organizations (which later merged) and have done so through the subsequent years and every time I looked at the CFP they had an ethical

Wednesday, August 9, 2017

Steve Keen's Behavioral Economics Lectures

My firm conviction that education through lectures is epistemologically inefficient but cost efficient, however poor the results, does not limit my openness to critically read or listen to different viewpoints, however new or old, accepted or not accepted.  It is important to understand other positions and ideas in order to know why you agree or disagree.

I first ran across Keen's 2009 lectures on behavioral economics years ago and found them interesting, but I refrained from linking to them, because one lecture was missing and I had hoped it would be

Tuesday, August 8, 2017

What Does the Seattle Minimum Wage Study Teach Us Followup

 On August 5th, I wrote a post on the Seattle minimum wage study data and methodological problems in response to a editorial in the Springfield, Illinois State Journal-Register newspaper.

Here is a new critical analysis published at EconoFact entitled: "What Does the Seattle Experience

Mark Thoma's Econometrics Lectures

Although educational study after study have found that students do not retain subject material, after presenting acceptable regurgitation qualifying as a passing mastering of the subject material as opposed to smaller discussion classes which require oral and written participation in which questioning is a fundamental element in the development of a critical thinking process, colleges and universities find lecture courses extremely cost effective.  You can see the result in the varying quality of professional expertise and competence.

Having said that, Mark Thoma has a series of videos of his whole econometrics course (19 lectures),

Monday, August 7, 2017

Douglas L. Campbell on "Breaking Badly: The Currency Union Effect on Trade"

Douglas Campbell has written a very interesting paper on the effects currency unions have on trade in which the analysis of the data comes to different conclusions than current economic literature.  He explains the paper in his blog post and his concerns that the paper will never be published, because he is going up against big names in the profession.  Basically, his paper tests whether omitted variables in past studies affect the analysis of a large data set.  He looks at each major currency union including the eurozone and appropriate control groups and finds according to the papers abstract: "As several European countries debate entering, or exiting, the Euro, a key policy question is how much currency

Sunday, August 6, 2017

J. W. Mason on "What Recovery?"

I believe J. W. Mason's recent Monetary Policy Report for the Roosevelt Institute entitled "What Recovery?" is a very important paper on employment, wages, productivity and GDP growth.  It should be read by as many people as possible.

The Executive Summary reads:"This paper critically examines the widely held view that the U.S. economy is today operating at close to potential. The paper makes five core arguments. First, GDP

Saturday, August 5, 2017

Seattle Minimum Wage Study Data and Methodologoical Problems

 Today, the State Journal-Register published a Guest Column editorial which cited a recent Seattle minimum wage study, which can actually be found in full at NBER via the link.  The Guest Column is a typical ideological, propaganda mish mash advocating against any raising of the minimum wage ($7.25 nationally, $8.25 in Illinois), which, if the national minimum wage had kept pace with inflation, would be $10.10, which is less than a living wage for one adult in Springfield, Illinois (Sangamon County), which is a relatively inexpensive metropolitan area, as can be seen with this Living Wage calculator from MIT (choose state then county).

While the University of Washington study has stirred attention and deserves consideration, it has also been the subject of critical economic analysis which has raised serious data limitation and

Sunday, July 30, 2017

ETF Liquidity: How Difficult is ETF Market Making?

When Goldman Sachs decided to quit as a lead market maker for ETFs, you have to ask just how liquid ETFs would be in volatile, declining market. Goldman Sachs was dissatisfied with a business that yielded fractional pennies on trades while, as a large bank, it was required to maintain strict regulatory capital requirements for liquidity.  This retreat from the ETF market maker business means that smaller, less regulated firms, which will not have strict capital requirements, will be picking up the Goldman Sachs  ETF market making business and be responsible for the liquidity of ETF trades.

In "ETF Liquidity: A Market Maker's Perspective" and "Understanding a Market Maker's Risk Can Help You Save on Transaction Costs" in this Vanguard publication, there is a discussion of the market maker process.  The articles also advise not attempting transactions at the opening or close of the

Sunday, July 23, 2017

Bond Trading Weakness in U.S. Large Banks

When Goldman Sachs reported its 2nd Quarter bond trading revenue had taken a nosedive, the news caught my attention because I had been reviewing the abysmal short term 2016 investment results, which would include bonds, derivatives, currency hedges, etc., of the three largest State of Illinois pension systems and the total negative returns (one eked approximately 2/10 percent).  This is not unusual for the Illinois pension funds which either have incompetent short term investment traders or contracted investment firms.  But when you see Goldman Sachs under performing, it gets your attention.

The Goldman Sachs loss of bond trading revenue was compounded by  large losses in commodities

Saturday, July 22, 2017

Central Banks Should Communicate`

In my response to Brad Setzer's post on central bank coordination, with which I have no real objection other than his citation of an article which continues the exceptionally false Target2 risks argument which is not even competent economics, I merely pointed out how difficult, and often impractical, it is to get central banks to coordinate given different situations within their country and that the ECB presents an  even more difficult problem, because it serves a monetary union without fiscal transfer processes and without a fiat currency.  With respect to Lael Brainard's speech on cross

Friday, July 21, 2017

Is Federal Reserve and ECB Monetary Policy Coordination Practical?

Brad Setzer has an interesting post on central bank monetary coordination based on Lael Brainard's recent speech.  I am not convinced the issue is so much correcting "imbalances" or the supply of high quality government bonds in the eurozone.  If eurozone banks are keeping deposits at the ECB at a negative 40 basis points charge, what does that say about the balance sheets of those banks?  The ECB does not publish excess reserve data on a monthly or weekly basis; therefore, we have no timely means to track stock and flows.  Additionally, the ECB Asset Purchase Program is providing bank liquidity, but its operation has created excess liquidity in some surplus countries where the liquidity is less needed and regulatory balance sheet problems in other countries where banks need to hold on to

Friday, July 14, 2017

Does Russia Fear Qatar's Natural Gas?

In April 2017, Qatar announced it was going to increase liquid natural gas (LNG) production despite a three year market slump, which was viewed as not likely to make its major competitor, Russia, happy. Then, in May, Qatar's state news agency website was hacked with a false flag news story attempting to portray the emir pro Iran and Hamas, a growing friend of Israel and of tensions with Trump.  All designed to inflame other members of the Gulf Coalition.  Despite U.S. Intelligence agencies quickly identifying Russian hackers, perhaps mercenaries, as the source of the false flag

Wednesday, July 5, 2017

Are ETFs a Potential Market Liquidity Problem?

I have previously written are about market liquidity potential problems in responding to a Noah Smith article and put forth the opinion that equity ETFs are more liquid than ETNs, although a financial crisis might cause market liquidity problems when everyone is trying to sell.  I also said they are a second choice to mutual funds holding same basket of stocks, because the transaction costs can be significantly larger for ETFs although their annual fees may be less.  Now, Bank of America is questioning whether large money flows into ETFs is distorting market price-earnings(PE) and  over

Wednesday, June 28, 2017

Michael Pettis on the Economics of Income Distribution

Michael Pettis has written an important article on whether cutting taxes on the wealthy leads to growth through an analysis, in different economic investment conditions, of the impacts it can have on economic growth and income inequality.  It is an important article, because the public discussion of this issue is obscured by the divisive ideological political debate of politicians

Tuesday, June 20, 2017

Waiting for Godot or Does Anyone Really Know What Is Going on with eurozone Banks?

I have been researching eurozone banks excess reserves and repo availability for a few weeks trying to work my way through muddled commentary and sort the reality from the assumptions and found myself questioning what I know.  In doing so, I have misstated to others what I am thinking and even the data, facts, and issues about which I am concerned.  Sometimes it is best to just stand back and look for the string that pulls the material together.

I have yet to write that article which will address whether eurozone banking rules to promote solvency of banks is creating a liquidity problem, because  the eurozone banking resolution authorities seem to have so badly mismanaged the Banco Popular resolution to the point of intensifying a bank run despite monitoring bank liquidity on a daily and hourly basis.

Banco Popular was Spain's 6th largest bank having been in existence since the early 20thCentury and one of the more profitable banks until about 2016.  In February 2017, it announced it had a 3.b billion euro loss on asset writedowns and Non Performing Loan sales while maintaining it still had more than sufficient quality assets on its balance sheet.

By the end of May and first days of June reports were circulating that Banco Popular had received only 3.5 billion euro on 40 billion euro collateral rather than the 9.5 billion euro it had expected one month previously and had applied to the Bank of Spain for liquidity support receiving only 10%

Monday, June 12, 2017

Even Bloomberg Fears Financial Advisors

I recently wrote yet another article on the institutional deception of the financial advisor services in the United States which contains links to prior articles of mine on the subject as well as testimony provided to the SEC when they studied the issue a few years ago and did nothing.  That article was linked by Abnormal Returns.

Bloomberg had an article last week on how bad financial advisers are multiplying, how they deceive investors, provide advice while having conflicts of interest, how the new Fiduciary Rule is merely a

Monday, June 5, 2017

Will ETFs Have Liquidity in a Financial Crisis?

Noah Smith has a decent column today asking if it is smart to worry about ETFs.   He appears to be concerned about the liquidity of ETFs which hold bonds, derivatives, and futures.  Personally, I think the concerns also apply to equity ETFs in a Crisis market. 

One means of avoiding liquidity risk is to avoid ETNs which not only are comprised of holdings with significant liquidity risk but also can involve default.

If a individual has an account at Fidelity, Vanguard, T. Rowe Price, etc., they will find that is significantly less expensive to buy/sell an ETF (such as a Vanguard ETF at Fidelity) than a no-load mutual fund (Vanguard fund at Fidelity) with no 12(b)-1 annual expense of another company.  If it cost $75  to buy a mutual fund and only $7.95 to buy an ETF, you are being purposefully discouraged from buying the fund.

It would be imprudent to not investigate ETFs as well as mutual funds depending on where you have your investment accounts. You will look at the bid/ask spread, because the larger the spread the less liquidity. You will look at volume, because the smaller the volume the less liquidity.  You will look at expense, because you want lower expenses.  You will look at the ETF's portfolio for questionable or potentially illiquid or risky holdings.  You would look at performance over different periods of market conditions.  You would look at risk statistics.  You would look at current and historical distributions.  And that would just be the beginning of the investment decision process and choices of investment in comparison or its role within a portfolio.

Obviously, the least expense purchase is done with a Limit Order, but do not be surprised if it fails and you have to decide whether to make a Market Order.   Investing is a methodical process.  The best portfolios are holding portfolios which have elements which go up and down in different market conditions, because most people buy and sell at the wrong times when reacting to a market and lose return over time.  A knowledgeable investor will have buy/sell rules which they rigorously follow.

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Saturday, June 3, 2017

Beware Financial Advisors Who Are Not Conflict of Interest Free Fiduciary Fee-Only Advisors

On June 9. 2018, the new "fiduciary" rule will take effect requiring financial advisors to "act in the best interest" of the client with respect to retirement account advice.  Unfortunately, in the United States financial advisors are allowed to say they are fiduciary if they attempt to "act in the best interests" of the client despite being financial salespeople  and/or having conflict of interest relationships with financial service companies from which they receive software, services, and incentives or compensation to use them.  A real fiduciary financial advisor is a fee-only financial advisor who works only for the client,. sells no financial products at any time in any capacity, and has no conflicts of interest.

You are going to see media recommendations that you use Broker Check, which is only going to tell you you are finding a licensed salesperson.  They may be able, under current US law, to call themselves fiduciary despite conflicts of interest, but a true fiduciary has NO conflicts of interest.  You will want to use the SEC Advisors page, which will tell you if the individual is just an investment advisor or an Investment Advisor and Broker (salesperson).  You only want an Investment Advisor who is not a Broker. 

When you first see an Investment Advisor, you will first want to see their Form ADV Part II which explains how they do business and how they are compensated.  You want a fee-only advisor who never sale financial products, because the US Securities law allows Investment Advisors to call themselves fee-only when they allow the client to decide if they want products sold to them and not just advice.  Beware.  Watch out for fee-only financial advisors who have a relationship with any person, subsidiary, company, or firm which provides financial products, including insurance, whether commissioned or not for the product placement.  A relationship is a conflict of interest.

The United States is still a predatory frontier where the regulatory authorities only debate how wolves may dress themselves as sheep dogs and profitably feast.  In a civilized society like the United Kingdom, financial advisors must be fee-only with no conflicts of interest period as I have written before and as I have submitted testimony to the SEC previously.  As I have written, the educational and designation standards in the United States are inadequate and purposefully deceptive with no existing financial designation requiring enough education which would equal a true Masters Degree in Finance (the Financial Planning degrees are totally inadequate and designed to bring university revenue not well educated professional fiduciary financial advisors). Even NAPFA is intrinsically linked to the CFP, which is a designation predominately held by, and membership dependent on, salespeople, and just another designation requiring an professionally inadequate education. (Attorneys, CPAs, and medical doctors all require rigorous professional education as well as licensing.)  I have publicly written, as you can see in the links above, that fiduciary fee-only advisors need to be regulated by am independent regulatory body which is salesperson free to avoid the continued deception of who is truly fiduciary.  Meanwhile the SEC is again asking for comment on a fiduciary standard.  They will just ask and, if under enough pressure, design a new sheep dog uniform for wolves who have all that gold in their lairs.

 Look to the ADV Form Part II and ask pointed questions.

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Sunday, May 21, 2017

Understanding U.S. Private Debt Data

As I have written in the past, private debt is an important indicator of economic bubbles, but the data is not just nominal, but also historical, and  composed of trends.  While the recent U.S. private household debt report showed nominal debt levels higher than the 2008 Peak level, the debt level ratio is actually less when compared with disposable income and not deserving, when thoroughly analyzed, of scary debt level headlines.

The current report data does show continued upward trends in student loan debt and auto loan debt with a small uptick in credit card debt.  While delinquencies 90+ days are still above pre-2008 levels, the levels are actually historically low or close to historically low.  Auto loan delinquencies have been driven by subprime used car loan originators and more recently by auto manufacturers trying to move stock in a period of slowing motor vehicle sales.  The student loan problem is the result of poor governmental administration and financial aid support, rising tuition, and poor governmental oversight of private student providers who have been particularly predatory in trying to collect payments despite an established legal process.  All three private providers have similar complaints, but Navient (formerly Sallie Mae) is the largest, sued not only by the CFPB but also by two state attorney generals, and, as the largest, is currently favored by the Trump Administration to be the vendor in creating a single entry point website for student loan application and administration which would defeat the Obama Administration attempt to create a transparent, streamlined single entry point and form.  The student loan debt levels and delinquencies are a serious trend which has saddled the millennial generation with historically high student debt in a stagnant, low growth economy which has slowed marriages, home buying, and putting off having children. 

If you are going to look at household private debt, you also need to look at corporate debt and you will see the nominal levels are up, but lower when viewed as a percentage of market value and credit market debt as a percentage of net worth is also lower and close to pre-2008 levels.

There is no debt crisis.  The U.S. data is very available and current and, if you inspect the nominal, historical, and trend date, you see the student loan and auto loan trend problems which the U.S. government has failed to correct.  After all, the 1% do not have these problems, which may be why so many young adults, with respect to student loan debt, are not happy with government and the prospect they will not have the quality of life their parents have.  At some point incumbent politicians and political candidates are going to have to start listening to the current young adult generation no matter who is financing their campaigns and demanding their loyalty.

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Monday, March 27, 2017

U.S. Term Premia and U.S. Economy

An economics/financial writer recently expressed surprise that U.S. five year term premia nearly matches U.S. 5 year breakeven inflation.  To me, it seemed obvious, in this low interest, low growth economy, that the above would be true.  In 2015, Bernanke commented on how low term premia appears to be holding down  interest rates.  In the March 2017 New York Federal Reserve Bank Snapshot of the U. S. Economy, on page 14, you can see the term premia of the U.S. Treasury ten year nearly matches the 5-10 year inflation risk premia.  This is what one would expect in a period of low growth, no significantly surprising political instability in the world, and no financial instability.

I find nothing wrong in my disagreement with the writer, because he pointed to data, expressed his opinions, and ended up asking questions.  The fact that I disagreed caused me, as is my habit, to look and see if I was right or wrong.

Here is a good compilation of how the New York Federal Reserve Bank calculates term premia how it has been used and evaluated.

I have, in the past, pointed readers to the New York Federal Reserve Bank U. S. Economy in a Snapshot monthly report.  Put it in your bookmarks to review monthly. 

In New York Federal Reserve's analysis of the last 15 bond market sell offs, it immediately struck me that the last sell off in July 2013 was consistent with the Cyprus "banking" crisis.  As a country which is a member of the EMU and uses the euro as its currency, Cyprus saw its banks closed, deposits seized or taxed to fund a bailout, and monetary capital controls imposed to keep money in the country.  The bailout terms, banks resolution, and capital controls were imposed on Cyprus, a sovereign nation, by the EMU.

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Friday, March 24, 2017

China's Capital Markets, Pettis, and Balding

Here is a 93 page analysis of China's capital markets, from the Asia Securities Industry and Financial Markets Association, with three pages of recommendations with respect to equities, fixed income, FX, laws and regulation, market infrastructure, and market access. It is well worth reading. 

There are many places to look for what is going on in China and what it means for the world.  You are going to get a variety of opinions on debt, property bubbles, corruption, inequality, SMEs, currency controls, and the potential problems of deleveraging.  Bottom line, China is a very government controlled, closed society which has great power to force its will on the rich and poor.  The extent it might impact those who export to it, who have invested in China, and those who have bought its corporate stock and debt should be of concern.  It is large enough to have world-wide effect.

Michael Pettis  and Christopher Balding are good sources to follow for similar and differing views on what is going on in China and what i being done or might be done or should be done.  Both teach in China.  Pettis has a private monthly newsletter to which one can subscribe by e-mailing him at asking for a regular subscription as an investor or a complimentary subscription as a journalist, academic, or government official.  His blog posts are usually shorter versions of the monthly newsletter.  Balding also writes for Bloomberg View.

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Tuesday, March 7, 2017

Are ECB Target2 Balances Ever Risky?

Izabella Kaminska is a very talented and intelligent writer for FTAlphaville and I try to read everything she writes, because she makes you think.  I will continue to read what she writes.  When she wrote yesterday that ECB Target2 balances are a big deal, I was thrown for a loop and wondering what am I missing.  I even reached out to another financial and economic professional for a give and take discussion.

Kaminska cites the March BIS Quarterly which shows that Target2 balances have substantially increased as the result of the Asset Purchase Program but CDS spreads have remained stable.  She then concludes that the capital flight during the 2012 Greek crisis was a big deal which resulted in Target2 balances increasing and creating "financing" by Target2 credit National Central Banks, such as the Bundesbank in Germany.  She also concludes this was a failure of the transmission mechanism and cites a paper on the old Soviet Union's International Investment Bank in an attempt to draw a comparison of flows and a failure of the transmission mechanism.

I have written about Target2 twice in 2015 (here and here) and discussed it with economic and financial professional in the United states and other countries.  Additionally, as I have previously cited, Whelan published an excellent paper on Target2 and how it works in 2012.

I am going to try to keep this simple.

The stable CDS spreads with increasing Target2 balances show the Asset Purchase Program is working.  In fact Footnote 3 in the BIS March Quarterly cites the BIS November 2016 Quarterly which states, "The ensuing upward trend in TARGET balances largely reflects the settlement of these cross-border transactions by central banks and, therefore, does not signal renewed stress in financial markets."

Target2 credit balances are money created by the ECB and not by financing from the credit National Central Banks.  National Central Banks are only liable for losses at the ECB to the extent of their Capital Key ratio, which with Germany is 17.9973%.  With respect to the APP, National Central Banks are only exposed to 20% of any APP losses which would be distributed according to the NCB's Capital Key ratio. 

With respect to the study on the Soviet Union's International Investment Bank, its failure was from pricing, industrial capacity, governmental policy, access to international markets, and a weak Soviet ruble unsuitable for international trade.  It is an interesting study of a failure of the transmission mechanism.  However, the ECB and Target2 during 2012 demonstrates the success of a transmission mechanism.  While the ECB balance sheet shows spikes in 2012 and currently, they are from two different causes and both speak to the maintenance of financial stability. 

The IIB transferable ruble loans to Soviet Block countries creating foreign currency denominated debt for those countries has some similarity to every eurozone country having its debt in a foreign currency (euro), but the eurozone is a monetary union (without a fiscal transfer mechanism) with a central bank (ECB) exercising monetary policy.

When would Target2 levels constitute a risk?  Any risk to Target2 would be a risk to the eurozone itself.  This is why arguments against Target2 have been arguments against the credibility of the euro as a currency and attempts to argue the euro is on its way to a currency crisis.  While I have long maintained the euro is treading towards a currency crisis, the crisis is dependent on growing political risk fed by a defective monetary union without a fiscal transfer mechanism which uses destructive austerity to compensate and only creates negative economic growth, more unsustainable debt, and a growing eruption of political unrest which is swelling to possible political risks in Italy and France. 

People are suffering.  Greece, which is already at depression economic levels, is again facing demands for more destructive austerity from the EMU and has never recovered from the EMU enforced coup in 2012 or the monetary warfare waged by the ECB in 2015.  Spain has had a temporary government for so long it may have forgotten how a real democratic parliament functions.  Spanish and Italian banks need support.  Portugal was allowed to keep its government on condition it did what the EMU wanted.  Cyprus had its citizens bank deposits taken away from them. It is no surprise people are unhappy.  And nobody really wants to ask how strong German banks, not just the large international banks (like Deutsche Bank and Commerzbank) but the national, savings, and landes banks really are, particularly since Germany has resisted including all its banks in ECB stress tests.

How serious would the political risk have to be?  If you look at the CDS spreads of 2003 euro bonds and 2014 (which have CAC provisions) bonds, you can see the increased political risk with the spreads between the two doubling to 40 basis points.  This perceived political risk ignores the possibility of an eurozone country actually exiting the EMU, changing its countries bond laws and abrogating CAC's, and redenominating its debt from the euro to its own fiat currency.  Just using Target2 balances as a base example, it is easy to see that if Greece and Portugal both left the EMU, the EMU could easily survive with its monetary credibility tarnished.  However, if Spain and Italy left and defaulted on Target2 and redenominated euro debt, it would create a significant loss and change in remaining eurozone countries Capital Key ratio.  Even if France left, it would create a significant change in remaining countries Capital Key ratio and create damaged euro credibility.  A currency depends on its credibility to survive.

Could the eurozone survive as a monetary union without Spain and Italy if they defaulted on Target2 and redenominated their euro debt?

The political risks are growing and they are not supportive of democracy. 

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Tuesday, February 7, 2017

Financial Market History: Reflections on the Past for Investors Today

The CFA Institute Research Foundation and the University of Cambridge Judge Business School just published a long read study "Financial Market History: Reflections on the Past for Investors Today".

The First section "examines what we can learn about the trade-off of risk for return from an extensive analysis of historical returns on equities, bonds, and other assets" and "concludes with an extension to other financial markets."

The Second section "explores the historical evolution of how financial claims are traded."

The Third section "addresses the perception that financial markets are inherently prone to irrational exuberance and bubbles."

The Fourth section "addresses the history of financial innovation."

The Study " concludes with a contribution from Barry Eichengreen, who argues that the research frontier in financial history will be driven by current concerns motivated by the 2008–09 financial crisis. He points to a number of studies that reexamine the historical record on the basis of what we now understand about the role of banks and systemic risk. This research is now possible through low-cost and easily accessible historical data. There is the danger that access to these data may inappropriately frame research questions being asked. He concludes that looking to the past may not of itself allow us to predict what might happen in the future; however, it does allow us to understand the broader historical context and our ability to appreciate what is different about our current circumstances. This important observation helps establish why the study of financial history has such important practical significance in the current economic environment."

Understanding the market is not just for professional advisors and analysts; it is important for the investor.  It is information and factual information drives proper investing.

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Saturday, January 28, 2017

Investing Requires Reliable Governmental Economic Information

As a fiduciary investment advisor, I do daily macroeconomic and financial research which is very lengthy and time consuming.  If I could not rely on unbiased (ethically professional), independent (without political interference) U.S. governmental economic statistical data, all efforts at economic and financial research would be meaningless.  Whether any current fears and concerns regarding the future of U.S government economic and scientific data are legitimate does not remove the absolute need for reliable statistically unbiased economic data which must be vigorously protected in order to have a free, democratic society.  While no statistical model is perfect, the professional ongoing debate on the construct of statistical models which are data based rather than result oriented based is fundamental to ethical professional conduct.

A lot of misunderstanding of BLS data has been repeatedly manifested, to the point where is almost a meme, by politicians who do not care if they are ignorant or lie and "financial" talking heads or wanna be talking heads who make money taking advantage of people. 

There are always professional concerns about statistical models and how they might be better, but the data has to be independent of political bias.  Brent Moulton at Political Arithmetick has written an excellent professional critic and concern for the need of independent U.S. government economic data, particularly with respect to the BLS.

Mark Thoma of  Economist's View has written at CBSmoneywatch on the political economic concerns which result if economic data is not factual data based (documentable as independent)  without political bias.  To skew the data reporting to promote a belief rather than a factual data set analytical result would make it impossible for economists to know what is going on in the economy and impossible for investors to make investment decisions within a factually known economic environment and trend.

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Tuesday, January 24, 2017

Is the Gig Economy the New Feudalism?

 Isabella Kaminska at FTAlphaville has demonstrated the gig economy is rigged against the workers in a series of articles, while nakedcapitalism has run a series of articles by Hubert Horan on Uber's destructive business model which is dependent on having enough money to run an unprofitable business until the competition is forced to disappear.

The Gig Economy is reliant upon a defenseless workforce which signs up for opportunity and become dispensable units is a business model which does not acknowledge its workers much less value them.

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Monday, January 23, 2017

Are Soda taxes a Tax Regressive Health Failure?

From the Jayson Lusk, a food and agricultural economist, is a new post of his in which he points to new research by Emily Wang et al and in which he points out as he has again and again:

"First, even if we believe people suffer from various behavioral biases, higher prices almost certainly make people worse off.  Second, when we raise the price of one unhealthy thing, people might substitute to consume other unhealthy things.  Third, if the tax is just added at the checkout counter and not on the shelf display, it may not have nearly the effect on purchase behavior as assumed.  Forth, if people know the reason for the tax, some may "protest" and buy more instead.  Fifth, the projected weight loss from such taxes often relies on unreasonable rules of thumb like 3500kcal=1lb. Six, even when taxes have an effect, the causal impact may arise more from an "information effect" rather than a "price effect."  Seventh, such taxes may induce unanticipated effects because of how sellers respond to the policy.  Finally, soda taxes are regressive - having a proportionally larger effect on on lower income households (see also my co-authored paper on effects of "unhealthy" food taxes more generally)."

Cook County passed a soda tax in 2016 and the idea is being floated in the Illinois General Assembly.  I do not drink soda pop, because it contains high fructose corn syrup and I prefer brown sugar, although I have never been a fan of too much sugar in food and often cut sugar amounts in recipes.  Taxing "sugar", more likely high fructose corn syrup, will in crease tax revenue but it is unlikely to make people more healthy and the argument the tax will decrease obesity should be discarded as a political excuse to impose a regressive tax on lower income citizens.

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