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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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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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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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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Fed, FDIC, OCC Dodd-Frank Report: Merchant Bankers Beware

Last week there were some sketchy news articles on the multi-agency (Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) report required by the Dodd-Frank Act which highlighted possible financial risks, not covered in Dodd-Frank, which necessitate additional attention.

The Fed wants to limit merchant banking, which is where banks buy an equity position rather than lend money, and bank ownership control of  mining, warehousing, and shipping of commodities.  The OCC wants to limit Wall Street's investments in industrial metals, such as aluminum and copper.

All recommendations would require legislation and/or rules.

What was missing from the short news articles was a link to the actual Report which I am providing for your better understanding of what was proposed.

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Financial Weapons of War

While I do extensive daily financial and macro-economic research, occasionally I find something important which is  more than interesting. Tom C. W. Lin has written an important paper on the threats and uses of financial warfare in cyber space.  We can continue to software and access protect systems from hacks and intrusions as well as war game scenarios, but the means of attack will always be constantly evolving.

The recent attacks on the central bank of Bangladesh resulting in the loss of #101 million and similar attempts on other countries are not isolated incidences and such attempts are not just limited to criminals but include countries and organized terrorists/revolutionaries.

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Insurance Companies Profit from the High Cost of U.S. Healthcare

Why are healthcare costs so high in the United States compared to the rest of the modern, technological countries of the world?

The bottom line, historically and currently, is the health insurance companies in the United States are more profitable as healthcare costs increase.  While politicians have personal goals and motives, I find it inexcusable that any economist would consider the ACA market approach more politically preferable to a more cost efficient single payer system.   The public-private market-based approach of the ACA is an ethical minefield.

The fear that making the ACA a single payer system would invite political repeal of the ACA is nothing but an excuse for the failure to communicate, listen, and demonstrate political leadership over several Congressional elections.  The focus on one election cycle only is self-defeating to a government dedicated to the general welfare of its people.

Here are three Blogs which can give you information and views on healthcare in the United States:
True Cost of Healthcare, The Incidental Economist, and Healthcare Economist.



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Worst Misconduct Brokers Are Retail Brokers

In a recent study by the University of Chicago - Booth School of Business, the researchers found not only a pervasiveness of misconduct but developed a rating system to rank the worst misconduct brokers, who are all retail brokers (brokers who sell to the public as investment advisers).  The 30 worst are listed here.

While the U.S. Department of Labor has proposed a limited fiduciary rule, the financial services industry is is desperately trying to further limit the rule, kill the rule, or change it to continue the ability of salesmen to portray themselves as "advisors" implying fiduciary duty while providing "advice" which is conflict of interest based.

I have long maintained that fee only fiduciary advisors need to be regulated separately from the SEC and FINRA (I personally would prefer the Consumer Finance Protection Bureau regulate SEC and State licensed fee only investment advisors to separate them from the continual and purposely wolves in sheep's clothing of those who sell or act with conflicts of interest).

Even less appreciated is my belief that current educational requirements are totally inadequate and that no professional designation provides sufficient educational requirements.  Even the so-called Masters Programs in Financial Planning are merely CFP course material, which lack academic rigor, primarily designed to provide revenue to the universities which offer them.  I have indicated verbally and in letters that fee only fiduciary advisors should have a Masters in Finance.  It would have to be at least a two year program which covered macroeconomics, CFA material, CMT material, current research on investment allocation and portfolio construction, ethics and law, and retirement planning and distribution.  This does not make me professionally popular.

I intend to write more about Fiduciary Duty and the financial services industry's desire to continue some form of public deception (confusion), but I will want to create Goggle Doc containing the research. 

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Self-Delusion and Investing in Gold

Over the years as an advisor as well as during the years of the radio show, one consistent self destructive myth keeps surfacing, accepting no denial, and refusing to accept factual history: gold.  Gold has a repetitive history of going up and dropping sharply.  It is not a hedge against inflation, particularly in a period of low inflation.  In the unlikely scenario of economic and social collapse, bullets would be far more valuable than gold.  There are always marketing vultures preying on fear and economic/political prejudice.  It makes no difference how many times, or over how many years, they are wrong.

The fact is, with gold, if you did not buy between 1997 and 2002, you underperformed.

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Is Schauble Afraid of European Unity?

There has been a great deal of speculation that Germany's Finance Minister continues to desire the compulsory exit of Greece from the European Monetary Union (EMU).  Wolfgang Schauble has written how he believes Germany should be an essential player in the New World Order, because western democracy has failed to provide the leadership to go beyond political parties and boundaries towards the bigger picture of unity.

Unfortunately, his concept of unity finds western democracy, bank union, and fiscal union which would complete a democratic political union as far less desirable than an Order of Rules that dictate actions without regard to democratic elections and nationally elected governments.  Democratic political union would require shared responsibility and governance.

The Troika has shown an intense desire to make any agreement with Greece impossible or, at the very least, totally unsustainable by the Greek government.  The Blog, Mean Squared Errors, asks if Schauble is actually afraid that the EMU will have to assist Greece when the Single Resolution Mechanism (SRM) takes effect on January 1, 2016.  The SRM wold require liquidity support for Greek banks, while during the Troika negotiations with Greece and the Greek referendum, the ECB was used as a political war machine depriving Greek banks of liquidity.

Is Schauble desperate to enforce the Rules before Law takes effect on January 1, 2016, in order to avoid a de facto economic transfer union?


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