Montier vs. Inker

Here’s the link to James Montier’s post (in pdf form), which essentially rebuts a “this time is different” argument that Ben Inker made in GMO’s 2016 3rd quarter letter.

Both articles contain good points, and I agree with parts of each, although not really the conclusions of either.

IMHO, QE and the resulting balance sheet of the Fed is a major “this time is different” factor that neither of these articles addresses.  It impacts the bond market in continuing purchases to maintain the balance sheet as assets mature, and it has impacted the markets for all other assets as dollars are pushed out into the investment world and stay there.  Neither of these impacts are small or transitory in nature.  And it isn’t just our Fed, but many central banks around the globe. I wonder what these guys think about that.

Tax on Robots

Oh, Robert Shiller.

The idea of a tax on robots was raised last May in a draft report to the European Parliament prepared by MEP Mady Delvaux from the Committee on Legal Affairs. Emphasizing how robots could boost inequality, the report proposed that there might be a “need to introduce corporate reporting requirements on the extent and proportion of the contribution of robotics and AI to the economic results of a company for the purpose of taxation and social security contributions.”

The public reaction to Delvaux’s proposal has been overwhelmingly negative, with the notable exception of Bill Gates, who endorsed it. But we should not dismiss the idea out of hand. In just the past year, we have seen the proliferation of devices such as Google Home and Amazon Echo Dot (Alexa), which replace some aspects of household help.

So much to mock here. Bill Gates? He didn’t propose a plan to tax use of computers and software that put lots of white collar clerks out of work (not to mention adding machine manufacturers). And replacing household help with Alexa? Are there employers out there who hire people to turn on their stereo and place orders on Amazon for them? I mean, it might results in fewer CIA lackeys to place physical bugs in targets’ homes.  It kind of seems like these guys don’t really understand what automation is or what it looks like, or its incremental nature.  It’s not “I, Robot.”

I think dismissing the idea out of hand is the best plan.  Any attempt at actually doing this can only result in rent seeking.

I was wrong about Mark Perry

I thought Mark Perry was a sexist; see my 2015 post:  http://wp.me/p3RzvV-gK

Actually, he just hates women.  Here’s his latest, on the impossibility of a pay gap between men and women in the US.  It’s called

Evidence of employers paying women 20% less than men for the exact same work is as elusive as Bigfoot sightings

He lists a whole bunch of reasons why men’s pay *can’t* be higher than women’s, most ending with the words “not likely.”  As in, he is presenting no evidence.  That’s elusive.

Just as he can make up rationalizations for his case, anyone could  make rationalizations the other way as well.  So tempting.

Instead, how about some data.  Here’s an example, Mr. Perry:  JAMA article on nursing pay gap.  It even includes all those controls you long for.

It’s a shame about Professor Perry.  I agree with him on so much.  Just don’t get the hate.  Go Blue!

Edit 3/30/17:  Ivanka Trump just took a position at the white house paying $0.  Also, not sure if people consider Melania Trump a feminist but I’m kind of glad to see her turn down the unpaid full time first lady gig.

Andrew Sullivan on Terrorism

Andrew Sullivan is 100% correct.  How do terrorists win?  By terrifying us.  I, for one, refuse to be terrified.

Here’s the link to the full piece.

Here’s the bit on terrorism:

“We are not afraid,” declared Prime Minister Theresa May after the latest Islamist horror on Westminster Bridge. She went on about the importance of being “normal.” It’s a very British response to terrorism. It’s called stoicism — a quality unknown, it appears, in the home of the “brave.” Perhaps its highest moment of sangfroid was when the IRA bombed the very hotel in Brighton where the prime minister and much of her cabinet were staying while attending their annual party conference in 1981. Thatcher herself would have been killed if she had been in a different room in her hotel suite. A leading cabinet member had to be hauled out of rubble. Nonetheless, the next day, Thatcher, utterly undaunted, got up and gave her speech — almost as if nothing had happened. A few days later, she insisted: “We suffered a tragedy not one of us could have thought would happen in our country. And we picked ourselves up and sorted ourselves out as all good British people do.” Keep calm and carry on, and all that.

Compare this with, say, the reaction to the Boston marathon bombing. An entire city was brought to a standstill and locked down, while the pursuit of a deranged, unarmed teenager continued. You can understand that, I suppose, given that the suspect was still at large. But to subsequently celebrate the event with the slogan “Boston Strong” was perverse. The truth was: “Boston Shit-Scared.”

The response of Americans to terror is to be terrified — 9/11’s trauma has never been fully exorcised. Until we get over that, until we manage to stiffen our upper lips like the Brits, jihadist terrorists will exercise control over the American psyche like no one else. We can do better, can’t we? If we want the Constitution to survive both Islamism’s threat and the potential response of a beleaguered Trump, we’ll have to.

 

Tax Loss Harvesting

James Osborne of Bason Asset Management published a piece about tax loss harvesting on 3/17/17.

Most of the robo-advisors claim that their aggressive TLH strategy will add nearly 1% per year (right now on Wealthfront’s website they are claiming a whopping 1.55% per year!) in additional risk-free return.

…

Okay, time for some math. I pulled a handful of client account that had been around for at least a few years and looked at what amount of losses were harvested. For the random accounts sampled, in 2015 I harvested between 2% and 4% of the account value, and in 2016 between 1.5% and 4%. The variance depended primarily on asset allocation and inception dates. So in each of 2015 and 2016 you could estimate that we were taking around 3% of account value in harvested losses ($3,000 on every $100,000 in the portfolio). If you want to use some of the ridiculous math supported by certain robo advisors, you can get pretty close to that translating to 1.5% in tax alpha. But I think that’s absurd.

What you really get is a $3,000 current year ordinary income tax deduction, which is valuable. Yay! And then you get to bank any losses over and above that amount to offset future gains. Gains that you might take from rebalancing or from freeing up cash in a portfolio for retirement expenses. Again, this is a very good thing. You’re creating tax deferral in a taxable environment. Big win. But we arrived at these figures without constant daily trading of ETFs to pick up $10-$15 losses, risking bid/ask spreads, portfolio drift, trade execution risks and paying brokerage commissions. These figures were the result of reasonable, intra-year harvesting of substantive losses. No 40 page 1099-Bs required. Tax loss harvesting is great, but the presumed benefits of aggressive daily loss harvesting over a more “traditional” strategy are likely highly overstated.

I have an additional comment on this, and I know it is an easy one to criticize.  None of our client accounts have taxes automatically withdrawn.  To the best of my recollection, once in the last 10 years has a client made a withdrawal from an investment account in order to pay a tax bill, and it was an amount far exceeding the tax bill generated by the investments (the withdrawal was due to a cash flow issue).  Additionally, clients are making contributions that are planned in advance, not based on on their tax bills.  My point is that, while the taxes paid are certainly real, they are not really having any impact at all on returns within the investment accounts.  Yes, this means that taxes impact consumption today, and yes, that is important also.  And I know that money is fungible and the client’s overall financial position is what counts, and that this tax adjustment to returns is the most fair way to look at the impact taxes have on the clients.  But it’s not an trivial point to make, that if no cash flows to the investment account are impacted, then all this churning in the robo accounts will actually incur a loss in the investment accounts compared to accounts that do not generate all these fees and other trading friction.  Even if the total cash flows are net positive to the client.  So clients will actually have less money in the investment accounts in the future when they want to use that money, unless they start contributing their tax savings into their investment accounts.

Advice

Posted 3/14/17 by Ben Carlson.  He works with Barry Ritholtz and Josh Brown.  If I were young and ambitious again, I would pound down their doors to work there.    I’m stealing the whole thing, because it’s short.

Some Lessons For Living From Older Generations

Posted March 14, 2017 by Ben Carlson

The Guardian recently ran a piece written by 94-year-old Harry Smith. Smith waxed poetic on his description of what growing old has meant to him:

People should not look at their approaching golden years with dread or apprehension but as perhaps one of the most significant stages in their development as a human being, even during these turbulent times. For me, old age has been a renaissance despite the tragedies of losing my beloved wife and son. It’s why the greatest error anyone can make is to assume that, because an elderly person is in a wheelchair or speaks with quiet deliberation, they have nothing important to contribute to society. It is equally important to not say to yourself if you are in the bloom of youth: “I’d rather be dead than live like that.” As long as there is sentience and an ability to be loved and show love, there is purpose to existence.

All of you, when young, will make your own history: you will struggle, you will betray some and others will betray you. You will love and lose love. You will feel profound joy and deep sorrow and during all of this you will grow as an individual. That’s why it is your duty when you get old to tell the young about your odyssey across the vast ocean of your life. It is why when death does come for me – even if it mauls me with decrepitude before it takes me – I will not lament either my old age or my faded youth. They were just different times of the day when I stood in the sun and felt the warmth of life.

After reading Smith’s piece I was reminded of the book 30 Lessons For Living: Tried and True Advice from the Wisest Americans. It’s been a few years since I read it but the ideas have stuck with me. Professor Karl Pillemer interviewed thousands of people over the age of 65 to glean some wisdom on all sorts of life lessons on things from kids to careers to marriage, money and much more. I found my notes on the book and really liked his passage on what this group didn’t say about their experiences:

No one – not a single person out of a thousand – said that to be happy you should try to work as hard as you can to make money to buy the things you want.

No one – not a single person – said it’s important to be at least as wealthy as the people around you, and if you have more than they do it’s real success.

No one – not a single person – said you should choose your work based on your desired future earning power.

Now it may sound absurdly obvious worded this way. But this is in fact how many people operate on a day-to-day basis. The experts did not say these things; indeed almost no one said anything remotely like them. Instead they consistently urged finding a way of earning enough to live on without condemning yourself to a job you dislike.

These ideas do seem obvious but it’s not easy to think this way when others around you put so much value on money or material possessions.

Everyone has regrets about things they wish they would have done differently if given the opportunity to go back and do things over again. Pillemer listed five things he learned from this group about regret reduction that can be applied to young people:

• Always be honest. Avoid acts of dishonesty, both big and small. Most people suffer from serious regret later in life if they have been less than “fair and square.
• Say yes to opportunities. When offered a new opportunity or challenge, you are much less likely to regret saying yes and more likely to regret turning it down.
• Travel more. Travel while you can, sacrificing other things if necessary to do so. Most people look back on their travel adventures (big and small) as highlights of their lives and regret not having traveled more.
• Choose a mate with extreme care. The key is not to rush the decision, taking all the time needed to get to know the prospective partner and to determine your compatibility over the long-term.
• Say it now. People wind up saying the sad words “it might have been” by failing to express themselves before it’s too late. Don’t believe the “ghost whisperers” – the only time you can share your deepest feelings is while people are still alive.

One of the best ways to plan ahead for the future, financial or otherwise, is to ask people who are older than you what they wish they would have done at your age to better prepare for what’s to come. Looking back on it now, what do you wish you would have done differently in your 20s, 30s, 40s, etc? I’m still relatively young but my short list includes things like saving for retirement at an earlier age, avoiding negative friendships, taking a few more career risks early on, not wasting my time on the last three seasons of Shameless and not stressing about things that were out of my control.

Some of the other timeless advice I’ve received over the years includes the following: time is more important than money, autonomy at work is highly underrated as is being nice to people, almost everything in life is a tradeoff, you have to have balance and splurge every once and a while, quit worrying so much about the past and the future at all times and try to enjoy the present.

It can be difficult to think this way in the heat of the moment. I know that’s true for me. But these types of lessons and wisdom provide a nice reminder to put things into perspective.

Sources:
Don’t Dread Old Age (Guardian)
30 Lessons For Living

Further Reading:
The Jeff Bezos Regret Minimization Framework

On Saving Money

Morgan Housel has a great post dated 3-9-17 about saving money.

I tell the smartwomensecurities ladies at CMU and my class at Thiel that much of your emergency fund, or short term savings, is not for emergencies at all, but for expenses that are random in nature, though certain to occur.  Every car needs repair at some point.  Every person gets sick or injured, and it may be you or it may be someone you want to care for.  Your friends may decide to have a destination wedding.

One point I had not made to the young people was this:

…the best reason to save is to gain control over your time. Everyone knows the tangible stuff money buys. The intangible stuff is harder to wrap your head around, but can be far more valuable and able to increase your happiness. Savings gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. Every bit of savings is like taking a point in the future that would have been owned by someone else and giving it back to yourself.

That flexibility and control over your time is an unseen return on wealth. When time isn’t on your side you’re forced to accept whatever bad luck is thrown your way. But if you have flexibility, you have the time to wait for no-brainer opportunities to fall in your lap. This is a hidden return on your savings. Savings in the bank that earns 0% interest might actually generate a meaningful return if it gives you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate.

This is very true.  Savings is often referred to as a “cushion.”  This is why.  It allows a person to make a soft landing, to defer panic.

This time is different?

I’m a huge fan of John Hussman and his models.  Go Blue!

However, I’m wondering how he accounts for the Fed balance sheet. Probably everyone else in the financial world and economics has already noticed this, but I had somehow not made this connection.  I am only displaying my ignorance to the world here because I want to save these graphs.

Here’s a graph of P/S for the Dow, published 3/1/17 by Danielle Park:

Note the big spikes during 2009 and 2013.  This graph really doesn’t match up with the Shiller P/E graph all that closely.  Park noted in her article that P/S is a less easily manipulated ratio.

Now compare to the Fed balance sheet:

There’s some pretty good correlation of money flows.  Fed issues dollars, dollars go into stock market as straight value inflation.

The takeaway here isn’t that the stock market can’t go down, but that analysis based on historical valuations may not apply, or may need adjustments based on central bank balance sheets.  It might be a good idea to look at other central bank balance sheets as well.  Japan’s central bank buys Japanese stocks directly, so that would have at least an indirect impact on other global markets.

Another takeaway is that the Fed may never actually reduce their balance sheet, because it would decimate both the bond market and the stock market, while also forcing interest rates up.

Kitces nails it on Fiduciary Rule

Why Series 7 Brokers Legally CAN’T Be Client Fiduciaries Without DoL Fiduciary

Executive Summary

being a fiduciary matters, and Series 7 licensees technically CAN’T be full fiduciaries to their clients without the DoL fiduciary rule.The key issue is that the Series 7 exam is technically the “General Securities Representative Examination”. This name is important, because it indicates that ultimately, the licensee is acting as a representative of the broker-dealer. In other words, a Series 7 license allows an individual to represent the broker-dealer in the sale of securities products to clients. This is why Series 7 licensees are referred to as “Registered Representatives” of a particular broker-dealer.

And as a representative of the broker-dealer, the broker technically has an obligation to serve the broker-dealer, not the client. This is why a broker-dealer can terminate a broker for outside business activity, or for soliciting a client to move with them to a new broker-dealer. In fact, technically the client isn’t even a client of the broker’s; it’s a client of the broker-dealer’s, and the broker is just the sales representative. That’s why it’s illegal for the broker to take any client information when changing broker-dealers!

Of course, in today’s environment, the overwhelming majority of those working at a broker-dealer are dual-registered as a sales rep under the broker-dealer and working under a corporate RIA. Nonetheless, anytime the broker sells a product and earns a commission (i.e., using the Series 7 license), the broker is not a fiduciary, but a sales representative! Notably, these advisors are fiduciaries when they give under the RIA and are paid an advisory fee. But they are still effectively wearing two hats, and cannot be full fiduciaries while the Series 7 hat is on!

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