The never ending parade of stock scandals seems to continue unabated, the stock lending scam being only the most recent. As history has shown us — from Madoff to Orange County to analyst banking crisis to Derivatives to etc., when the Street comes aknockin, best for you to hide your wallets.
For reasons we are all too familiar with, many of you rubes have no choice but to deal with the sharpies from the finance division of America. Whether its floating a bond issue to build a new bridge or hospital, managing a pension fund, or simply handling cash flow, for county, city and state execs, non-profit organizations, and private companies, you will eventually “get serviced” by Wall Street.
Those of you who have to interact with the sharks should learn the following rules:
15 Inviolable Rules for Dealing with Wall Street
1. Reward is ALWAYS relative to Risk: If any product or investment sounds like it has lots of upside, it also has lots of risk. (If you can disprove this, there is a Nobel waiting for you).
2. Overly Optimistic Assumptions: Imagine the worst case scenario. How bad is it? Now multiply it by 3X, 5X 10X, 100X. Due to your own flawed wetware, cognitive preferences, and inherent biases, you have a strong disinclination – even an inability — to consider the true, Armageddon-like worst case scenario.
3. Legal Docs protect the preparer (and its firm), not you: Ask yourself this question: How often in the history of modern finance has any huge legal document gone against its drafters? PPMs, Sales agreement, arbitration clauses — firms put these in to protect themselves, not your organization. An investment that requires a 50-100 page legal document means that legal rights accrue to the firms that underwrote the offering, and not you, the investor. Hard stop, next subject.
4. Asymmetrical Information: In all negotiated sales, one party has far more information, knowledge and data about the product being bought and sold. One party knows its undisclosed warts and risks better than the other. Which person are you?
5. Motivation: What is the motivation of the person selling you any product? Is it the long term stability and financial health of your organization — or their own fees and commissions?
6. Performance: Speaking of long term health: How significantly do the fees, taxes, commissions, etc., impact the performance of this investment vehicle over time?
7. Shareholder obligation: All publicly traded firms (including iBanks) have a fiduciary obligation to their shareholders to maximize profits. This is far greater than any duty owed to you, the client. Ask yourself: Does this product benefit the S/Hs, or my organization? (This is acutely important for untested products).
8. Other People’s Money (OPM): When handing money over to someone to manage, understand the difference between self-directed management and OPM. What hidden incentives are there to take more risk than would otherwise exist if you were managing your own assets?
9. Zero Sum Game: If I am winning, who is losing? And who wins if I lose? Does this product incentivize any gunslingers to make bets against my investments –or my firm?
10. Keep it Simple, Stupid (KISS): Its easy to make things complicated, but its very challenging to make them simple. The more complexity brought to a problem, the greater the potential for things to go awry – and not just wrong, but very, very wrong.
11. Counter-Parties: Who is on the other side of your trade? Any income/revenue/dividend hedging you do means there is a party that stands to win if you lose. Who are they, what are their motivations?
12. Reputational Risk: Who suffers if this investment goes down the drain? Who gets fired or voted out of office if this blows up? Who suffers reputational risk?
13. New Products & Services: The rules of consumer technology also apply to finance: Never buy 1.0 of anything. Before buying a new-fangled service, is there a compelling reason not to wait an upgrade cycle? Why not let some other schmuck be the guinea pig?
14. Lawyer Up: The people on the street buy the best legal talent on the planet, with money no object. Make sure you have damned good lawyers working for you as well . . .
15. There is no free lunch: Repeat after me: There is no free money, no riskless trade, no way to turn lead into gold. If you remember no other rule, this one wills ave your bacon time and again.
The list above will help prevent you or your organization from becoming financially disadvantaged by bad financial advice, excessively expensive services or inappropriate/unsuitable products.
Don’t say you were not warned . . .
Barry Ritholtz
-------------------
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Tuesday, October 26, 2010
Tuesday, October 19, 2010
O' Canada!: from “basket-case to world-beater"
There are those who say the US is doomed, that there is no way out from our problems with deficits, future entitlement promises, and a dysfunctional political system. And in my darker moments I worry that they are right.
I get the problems, probably more than most. But there is a way out. Hopefully, it does not entail collapse first, as some suggest. But it will require a lot of hard decisions. Some will be very hard.
For example, many point to the unfunded Medicare liabilities of some $70 trillion. I don’t worry about them so much, as they will never be paid, at least not under the current system. LONG before we get to that point, there will be a crisis that will force us to deal with the issues. Rule: if something can’t happen, then it won’t. We can’t pay the Medicare bill, so it won’t happen. Something else will happen in the meantime. It may not be good or pleasant, but something will come along to change the rules. More taxes? Fewer benefits? That is up in the air. But the system as it currently stands will not be allowed to prevail. Ask Greece how that is working out for them.
In today’s Outside the Box we look at a country where they had an even worse problem than we are faced with here in the US. They were on the ropes and their bond market was balking. Yet, their left-wing government made some very hard choices and turned things around. And now they are on top.
The country? Canada. Maybe we need to look north for a lesson. My friend David Hay, Chief Investment Officer of Evergreen Capital Management, was vacationing in Italy, where he reviewed a great new book on the Canadian turnaround of the mid-’90s. This week we get the short read of a remarkable story. May it happen in the US and in developed countries all over the world.
“Debt and deficits are not inventions of ideology. They are facts of arithmetic.”
– Paul Martin, Canada’s finance minister at the start of the country’s “Redemptive Decade”
Arrivaderci, Italia; Yo, Canada
It’s ok—you can be honest with me. Many of you on the receiving end of this newsletter were probably wondering if I had developed some kind of Italian infatuation, sort of like the young cyclist in that fun movie from the late 1970s, Breaking Away. You can rest easy. Although I readily concede it is a breathtakingly beautiful country (save for Naples, which we discovered is the Tijuana of Italy), my wife and I were thrilled to be back in the US of A, where the first thing I did was order a cheeseburger.
Certainly, the Italian locals were consistently friendly and extremely gracious even as we mangled their lovely language. However, as they opened up to us, it became clear how fearful they are about their country’s economic future. Like so many southern European nations, Italy’s debt levels have soared to grotesque levels, even compared to our own current state of fiscal debauchery. Therefore, it was somewhat ironic that one of the two books I read while over there was about Canada and, specifically, the extraordinary financial turnaround that country has made over the last 15 years. Remarkably, if you were to roll the clock back to 1995, Canada was actually deeper in debt than Italy. In those days, the Canadian dollar was derisively known as either the Loonie (after the bird on Canada’s $1 coins) or the Northern Peso. The situation was so dire that the Wall Street Journal ran what turned out to be a pivotal article in which the authors asserted that Canada had become “an honorary member of the Third World in the unmanageability of its debt problem.”
This editorial set off shock waves around the world and, of course, within Canada itself. To its credit, Canada’s political establishment got fiscal responsibility religion in a hurry; it was almost like they went from being atheists to Southern Baptists overnight. And, get this: for the most part, it was Canada’s equivalent our Democratic Party that assumed the yoke of pulling the country back toward the high ground of financial solvency. Do you think that perchance we could learn a thing or two from Canada’s experience?
Canada High and Dry
It’s been a consistent theme of mine for a year or more that Americans are not going to passively accept the disastrous fiscal path on which our brilliant political parties have put us. It has also been my belief that politicians from both sides of the aisle would get the message. At this time last year, there weren’t many who agreed with me (in fact, when I put forth this theory to the CEO of a huge financial firm 13 months ago, he looked at me like I was suggesting the Mariners’ front office knew how to run a baseball team). But the public backlash against unsafe and insane fiscal policies is now unmistakable, and it’s very much a bipartisan movement. Politicians, being the generally feckless creatures they are, have scrupulously (or should that be un-) avoided putting forth much in the way of tangible solutions prior to the critical mid-term elections, now just a month away. Yes, I know, the GOP came up with the Pledge to America, and it’s a start—of sorts—but it strikes me as woefully unequal to the massive task. A far more rational way to approach the problem (I realize that rationality and politicians rarely converge) would be to make the book I just finished—The Canadian Century, Moving Out of America’s Shadow—required reading for all incoming members of Congress. It would be nice to demand this from incumbents as well, but let’s face it: most of them don’t even bother to read the legislation they put into law.
Many of you also know that I’ve brought up the remarkable Canadian renaissance more than a few times. Thus, I was truly excited to read the aforementioned book after seeing a review of it earlier this year. Though I was aware of the happy outcome, I really had no idea how Canada pulled off moving from “basket case to world beater,” in the writers’ own words. And there’s no exaggeration in that statement; Canada then was in far worse shape than even we are now in our headlong rush to fiscal perdition. For example, in the mid-1990s, one-third of all government revenues were being devoured by interest costs on Canada’s rapidly escalating debt. To illustrate how bad that was, in the US today interest expenses consume just 10% of tax revenues, excluding the non-cash interest accrual on Treasury debt held by the Social Security trust fund (more on that later).
By the 1990s, Canada had also become one of the developed world’s most socialized economies, with the government accounting for 53% of the country’s GDP. Economic growth was stagnating, while debt levels were inexorably and dangerously mounting. At its scariest zenith, Canadian federal and provincial government debt amounted to 120% of GDP, with roughly 70% at the national level and an outrageously bloated 50% owed by the provinces. Again, to put that in perspective, despite our debt binge over the last decade, US government debt is around 60% of GDP, while state debt is nearly 17% of GDP, or 77% overall (this is based on net, not gross, debt and excludes the Social Security trust fund holdings as well as intergovernmental liabilities). Moreover, unlike in our present situation, Canada’s interest rates were rising due to worries about the nation’s solvency. Its coveted AAA credit rating was yanked, and the market was treating it as an increasingly unreliable borrower. In other words, it was much like the situation a number of European countries find themselves in today—except that Canada didn’t have Germany to bail it out. As you can readily see, there’s simply no question that Canada was in some very deep doo-doo. Which begs the multitrillion-dollar question: How the heck did it get out of that jam?
Northern Composure
As I’ve given various speeches over the last year, it has become clear to me that very few Americans are aware of the extraordinary recovery Canada has achieved since the mid-1990s. When I bring it up, most people seem surprised that Canada could have gone from a laughing stock to the envy of the developed world in just a decade. But, actually, 10 years wasn’t the true recovery period. And that was my big surprise from reading The Canadian Century. The reality is that Canada achieved stunning progress in a mere three years. Further, this time frame was consistent at both the federal and provincial levels. In case you think I’m exaggerating the speed and magnitude of the rehabilitation, let me provide some specificity:
• Paul Martin, the finance minister for the national Liberal Party, unveiled a budget in early 1995 that shocked all the cynics accustomed to smoke-and-mirrors accounting. It reduced program spending by 8.8% over two years (and our politicos quiver over a mere hint of spending freezes).
• As part of this radical spending rationalization, federal government employment was reduced by 14%.
• Federal grants to the provinces were reduced by 14% as well, but the trade-off was that they were allowed to control how the money was spent. Provincial governments also needed to provide half of all funding (i.e., put skin in the game).
• While some taxes were raised (and, according to the authors, these worked against the recovery), spending cuts were 4 ½ times tax hikes.
• Canada’s welfare system was dramatically modified. Rather than just providing a blank check to the provinces (which administered the welfare programs), Ottawa incentivized them to put the funds to better use. Benefits were cut for single, employable individuals and aggressive efforts were made to get them back in the work force.
• Despite accusations from the far left that the poor would suffer due to these changes, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000. From 1997 to 2007, the percentage of Canadians classified as low-income plunged by over 30%.
• The tax structure was dramatically redesigned. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced.
• The General Services Tax (basically a consumption tax or VAT) was instituted to pay for the tax cuts described above. While initially very unpopular, it was a key part of the rehab plan.
• The Canada Pension Plan (CPP), the country’s version of Social Security, also underwent major surgery. Instead of payroll taxes gradually rising to 14%, the increases were pulled forward but capped at under 10%. This produced immediate surpluses that were invested in higher-returning corporate securities. (As noted in past EVAs, this is a huge defect with our Social Security system; its many trillions are tied up in low-yielding US government bonds that simply add to our overall national indebtedness.) The CPP today is well-funded and actuarially sound.
• As a result of these actions, and many others I’ve left out, the federal budget was balanced within three years.
After achieving this remarkable feat, Canada went on to produce 11 straight budget surpluses. This allowed our northern neighbors to reduce their federal debt from 80% of GDP to 45%. Further demonstrating how quickly good policy can turn things around, the provinces enacted similar measures. Most of them also moved to balanced budgets or surpluses within just three years, though in the case of Ontario it took five years. However, that was still one year ahead of schedule (pronounced “shh-edule”, of course). By contrast, even Congressman Paul Ryan’s allegedly bold goal to balance the US budget will take decades to attain.
One of the recurring themes from The Canadian Century is the concept that not all taxes are created equal. Some have a much more negative impact on economic activity than others. This totally resonates with me and it’s why I believe estate taxes should be our version of the VAT. However, I would concede that possibly a combination of the two might be necessary and desirable.
Most of all, I have tremendous respect for what has worked in the real world and within a country so similar to our own. By the way, in case you think that Canadians universally supported these rational reforms as they were first enacted, consider how similar our northern friends are to us. They are every bit as fractious as we are. There was a cacophonous chorus of extreme Keynesians (those who believe government spending should never be cut) who predicted Canada’s grand experiment would be an abject failure. Yet, despite all those who were sure that downsizing government would do the same to their growth rate, Canada’s economy grew at 3.3% per year versus the developed-world average of 2.7%. Notwithstanding Canada’s undeniable success, should we decide to follow in its footsteps, be prepared for folks like NY Times columnist Paul Krugman to wax apocalyptic. Come to think of it, given his forecasting track record, that would be a good thing.
Quite an amazing story, eh? Unquestionably; and it’s interesting that today, most of Europe is essentially following the same game plan (without giving Canada credit—probably due to its legendary pride, bordering on arrogance). Yet there is one immensely important difference.
The Crucial Currency Tailwind
The aforementioned Wall Street Journal article from early 1995 that strongly suggested Canada was careening toward bankruptcy not only served as a national wake-up call, it also tanked the Canadian currency. While this collapse was highly embarrassing to its citizenry, it sowed powerful seeds of recovery. Canadian goods became very inexpensive on world markets, thereby stoking demand. And Canada’s real estate became irresistibly attractive to both American and Asian investors, drawing in massive amounts of hard currency. As mentioned in numerous past EVAs, this is the vital missing link for countries like Italy. The stunning rise in the euro from the depths early this summer is the worst thing that could be happening to the Continent, especially for the weaker countries—almost all of them except Germany.
Fortunately for us, our situation is much more like Canada’s was in the 1990s. The buck is once again seriously undervalued, not only against the euro but versus the yen as well (the dollar recently touched 15-year lows against Japan’s currency). This will greatly aid our exporters, who are already prospering.
Perhaps I’ve missed it, but I haven’t heard a single representative from either party bring up the notion of emulating Canada. Both parties seem to be infected with, among other maladies, an acute case of Not Invented Here-itis. Maybe it’s time for all of us who are deeply concerned about our country’s financial future to harness the power of the internet to influence the many fresh faces that will soon be moving to the other Washington. The good news is that this incoming class promises to be far less indoctrinated by their respective parties’ failed ideologies and much more open to innovative concepts. If they are, it’s not a stretch to believe that our finances can begin to track the Canadian path, as illustrated below.
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Role reversal time? The Canadian Century was clearly written for domestic consumption. As such, there is a fair amount of chest-puffing over Canada’s accomplishments, as well as some thinly veiled savoring of our own current predicament (the Germans have a perfect word for this: schadenfreude). Yet the authors also concede a few chinks in Canada’s armor. For one thing, they note that there is some serious backsliding going on when it comes to adhering to the fiscal reformation creed. A certain amount of this is attributable to combating the ravages of the Great Recession, even though Canada was not nearly as hard-hit as the US. But beyond this, the authors are seeing clear evidence that the resolve to restrain spending seems to be waning. Alas, this does seem to be the natural cycle of democracies: Governments spend recklessly until the situation is so bleak there is no choice but to drastically cut back. Once financial health is restored, there then seems to ensue a long, almost imperceptible erosion of fortitude until a crisis hits and debt levels rise so terrifyingly that corrective action becomes unavoidable. Often, as in Canada, it’s the more putatively liberal party that administers the tough but necessary medicine.
The book is also quite candid in its admission that Canada’s healthcare system is largely as dysfunctional as our own. The authors point out the immense challenge that lies ahead for both countries in bringing the wealth-devouring beast of healthcare under control. It’s hard to disagree with their belief that both the US and Canadian healthcare systems need a healthy injection of incentive-based economics, competition, and behavioral modification. Thus far, neither country has made much progress in that regard.
For me, though, the key message of this book is that the future does not have to be a depressing choice between accepting sub-par growth or committing fiscal suicide. Canada’s experience emphatically demonstrates that replacing bad policies with good ones leads to dramatic and rapid improvement, with the shift to financial soundness restoring confidence and actually boosting long-term growth. Some forty years ago, then US President Richard Nixon famously remarked, “We’re all Keynesians now.” To fully channel his inner Keynes, Nixon needed to take us off the gold standard, which he did in 1971. The keys to the perpetual printing press had been found. Soon thereafter a new economic term was coined: stagflation. These days, at least when it comes to fiscal policy, a far wiser statement would be: “We’re all Canadians now.” If we want to right our nation’s financial ship, we might be well-advised to swallow our pride and follow the lead of a country that has long been in our shadow. This is likely to be far more effective than further pursuing failed economic policies from our distant past. Page 6 Evergreen Virtual Advisor (EVA) October 8, 2010
John Mauldin, Editor
Outside the Box
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Saverio Manzo
www.saveriomanzo.com
I get the problems, probably more than most. But there is a way out. Hopefully, it does not entail collapse first, as some suggest. But it will require a lot of hard decisions. Some will be very hard.
For example, many point to the unfunded Medicare liabilities of some $70 trillion. I don’t worry about them so much, as they will never be paid, at least not under the current system. LONG before we get to that point, there will be a crisis that will force us to deal with the issues. Rule: if something can’t happen, then it won’t. We can’t pay the Medicare bill, so it won’t happen. Something else will happen in the meantime. It may not be good or pleasant, but something will come along to change the rules. More taxes? Fewer benefits? That is up in the air. But the system as it currently stands will not be allowed to prevail. Ask Greece how that is working out for them.
In today’s Outside the Box we look at a country where they had an even worse problem than we are faced with here in the US. They were on the ropes and their bond market was balking. Yet, their left-wing government made some very hard choices and turned things around. And now they are on top.
The country? Canada. Maybe we need to look north for a lesson. My friend David Hay, Chief Investment Officer of Evergreen Capital Management, was vacationing in Italy, where he reviewed a great new book on the Canadian turnaround of the mid-’90s. This week we get the short read of a remarkable story. May it happen in the US and in developed countries all over the world.
“Debt and deficits are not inventions of ideology. They are facts of arithmetic.”
– Paul Martin, Canada’s finance minister at the start of the country’s “Redemptive Decade”
Arrivaderci, Italia; Yo, Canada
It’s ok—you can be honest with me. Many of you on the receiving end of this newsletter were probably wondering if I had developed some kind of Italian infatuation, sort of like the young cyclist in that fun movie from the late 1970s, Breaking Away. You can rest easy. Although I readily concede it is a breathtakingly beautiful country (save for Naples, which we discovered is the Tijuana of Italy), my wife and I were thrilled to be back in the US of A, where the first thing I did was order a cheeseburger.
Certainly, the Italian locals were consistently friendly and extremely gracious even as we mangled their lovely language. However, as they opened up to us, it became clear how fearful they are about their country’s economic future. Like so many southern European nations, Italy’s debt levels have soared to grotesque levels, even compared to our own current state of fiscal debauchery. Therefore, it was somewhat ironic that one of the two books I read while over there was about Canada and, specifically, the extraordinary financial turnaround that country has made over the last 15 years. Remarkably, if you were to roll the clock back to 1995, Canada was actually deeper in debt than Italy. In those days, the Canadian dollar was derisively known as either the Loonie (after the bird on Canada’s $1 coins) or the Northern Peso. The situation was so dire that the Wall Street Journal ran what turned out to be a pivotal article in which the authors asserted that Canada had become “an honorary member of the Third World in the unmanageability of its debt problem.”
This editorial set off shock waves around the world and, of course, within Canada itself. To its credit, Canada’s political establishment got fiscal responsibility religion in a hurry; it was almost like they went from being atheists to Southern Baptists overnight. And, get this: for the most part, it was Canada’s equivalent our Democratic Party that assumed the yoke of pulling the country back toward the high ground of financial solvency. Do you think that perchance we could learn a thing or two from Canada’s experience?
Canada High and Dry
It’s been a consistent theme of mine for a year or more that Americans are not going to passively accept the disastrous fiscal path on which our brilliant political parties have put us. It has also been my belief that politicians from both sides of the aisle would get the message. At this time last year, there weren’t many who agreed with me (in fact, when I put forth this theory to the CEO of a huge financial firm 13 months ago, he looked at me like I was suggesting the Mariners’ front office knew how to run a baseball team). But the public backlash against unsafe and insane fiscal policies is now unmistakable, and it’s very much a bipartisan movement. Politicians, being the generally feckless creatures they are, have scrupulously (or should that be un-) avoided putting forth much in the way of tangible solutions prior to the critical mid-term elections, now just a month away. Yes, I know, the GOP came up with the Pledge to America, and it’s a start—of sorts—but it strikes me as woefully unequal to the massive task. A far more rational way to approach the problem (I realize that rationality and politicians rarely converge) would be to make the book I just finished—The Canadian Century, Moving Out of America’s Shadow—required reading for all incoming members of Congress. It would be nice to demand this from incumbents as well, but let’s face it: most of them don’t even bother to read the legislation they put into law.
Many of you also know that I’ve brought up the remarkable Canadian renaissance more than a few times. Thus, I was truly excited to read the aforementioned book after seeing a review of it earlier this year. Though I was aware of the happy outcome, I really had no idea how Canada pulled off moving from “basket case to world beater,” in the writers’ own words. And there’s no exaggeration in that statement; Canada then was in far worse shape than even we are now in our headlong rush to fiscal perdition. For example, in the mid-1990s, one-third of all government revenues were being devoured by interest costs on Canada’s rapidly escalating debt. To illustrate how bad that was, in the US today interest expenses consume just 10% of tax revenues, excluding the non-cash interest accrual on Treasury debt held by the Social Security trust fund (more on that later).
By the 1990s, Canada had also become one of the developed world’s most socialized economies, with the government accounting for 53% of the country’s GDP. Economic growth was stagnating, while debt levels were inexorably and dangerously mounting. At its scariest zenith, Canadian federal and provincial government debt amounted to 120% of GDP, with roughly 70% at the national level and an outrageously bloated 50% owed by the provinces. Again, to put that in perspective, despite our debt binge over the last decade, US government debt is around 60% of GDP, while state debt is nearly 17% of GDP, or 77% overall (this is based on net, not gross, debt and excludes the Social Security trust fund holdings as well as intergovernmental liabilities). Moreover, unlike in our present situation, Canada’s interest rates were rising due to worries about the nation’s solvency. Its coveted AAA credit rating was yanked, and the market was treating it as an increasingly unreliable borrower. In other words, it was much like the situation a number of European countries find themselves in today—except that Canada didn’t have Germany to bail it out. As you can readily see, there’s simply no question that Canada was in some very deep doo-doo. Which begs the multitrillion-dollar question: How the heck did it get out of that jam?
Northern Composure
As I’ve given various speeches over the last year, it has become clear to me that very few Americans are aware of the extraordinary recovery Canada has achieved since the mid-1990s. When I bring it up, most people seem surprised that Canada could have gone from a laughing stock to the envy of the developed world in just a decade. But, actually, 10 years wasn’t the true recovery period. And that was my big surprise from reading The Canadian Century. The reality is that Canada achieved stunning progress in a mere three years. Further, this time frame was consistent at both the federal and provincial levels. In case you think I’m exaggerating the speed and magnitude of the rehabilitation, let me provide some specificity:
• Paul Martin, the finance minister for the national Liberal Party, unveiled a budget in early 1995 that shocked all the cynics accustomed to smoke-and-mirrors accounting. It reduced program spending by 8.8% over two years (and our politicos quiver over a mere hint of spending freezes).
• As part of this radical spending rationalization, federal government employment was reduced by 14%.
• Federal grants to the provinces were reduced by 14% as well, but the trade-off was that they were allowed to control how the money was spent. Provincial governments also needed to provide half of all funding (i.e., put skin in the game).
• While some taxes were raised (and, according to the authors, these worked against the recovery), spending cuts were 4 ½ times tax hikes.
• Canada’s welfare system was dramatically modified. Rather than just providing a blank check to the provinces (which administered the welfare programs), Ottawa incentivized them to put the funds to better use. Benefits were cut for single, employable individuals and aggressive efforts were made to get them back in the work force.
• Despite accusations from the far left that the poor would suffer due to these changes, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000. From 1997 to 2007, the percentage of Canadians classified as low-income plunged by over 30%.
• The tax structure was dramatically redesigned. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced.
• The General Services Tax (basically a consumption tax or VAT) was instituted to pay for the tax cuts described above. While initially very unpopular, it was a key part of the rehab plan.
• The Canada Pension Plan (CPP), the country’s version of Social Security, also underwent major surgery. Instead of payroll taxes gradually rising to 14%, the increases were pulled forward but capped at under 10%. This produced immediate surpluses that were invested in higher-returning corporate securities. (As noted in past EVAs, this is a huge defect with our Social Security system; its many trillions are tied up in low-yielding US government bonds that simply add to our overall national indebtedness.) The CPP today is well-funded and actuarially sound.
• As a result of these actions, and many others I’ve left out, the federal budget was balanced within three years.
After achieving this remarkable feat, Canada went on to produce 11 straight budget surpluses. This allowed our northern neighbors to reduce their federal debt from 80% of GDP to 45%. Further demonstrating how quickly good policy can turn things around, the provinces enacted similar measures. Most of them also moved to balanced budgets or surpluses within just three years, though in the case of Ontario it took five years. However, that was still one year ahead of schedule (pronounced “shh-edule”, of course). By contrast, even Congressman Paul Ryan’s allegedly bold goal to balance the US budget will take decades to attain.
One of the recurring themes from The Canadian Century is the concept that not all taxes are created equal. Some have a much more negative impact on economic activity than others. This totally resonates with me and it’s why I believe estate taxes should be our version of the VAT. However, I would concede that possibly a combination of the two might be necessary and desirable.
Most of all, I have tremendous respect for what has worked in the real world and within a country so similar to our own. By the way, in case you think that Canadians universally supported these rational reforms as they were first enacted, consider how similar our northern friends are to us. They are every bit as fractious as we are. There was a cacophonous chorus of extreme Keynesians (those who believe government spending should never be cut) who predicted Canada’s grand experiment would be an abject failure. Yet, despite all those who were sure that downsizing government would do the same to their growth rate, Canada’s economy grew at 3.3% per year versus the developed-world average of 2.7%. Notwithstanding Canada’s undeniable success, should we decide to follow in its footsteps, be prepared for folks like NY Times columnist Paul Krugman to wax apocalyptic. Come to think of it, given his forecasting track record, that would be a good thing.
Quite an amazing story, eh? Unquestionably; and it’s interesting that today, most of Europe is essentially following the same game plan (without giving Canada credit—probably due to its legendary pride, bordering on arrogance). Yet there is one immensely important difference.
The Crucial Currency Tailwind
The aforementioned Wall Street Journal article from early 1995 that strongly suggested Canada was careening toward bankruptcy not only served as a national wake-up call, it also tanked the Canadian currency. While this collapse was highly embarrassing to its citizenry, it sowed powerful seeds of recovery. Canadian goods became very inexpensive on world markets, thereby stoking demand. And Canada’s real estate became irresistibly attractive to both American and Asian investors, drawing in massive amounts of hard currency. As mentioned in numerous past EVAs, this is the vital missing link for countries like Italy. The stunning rise in the euro from the depths early this summer is the worst thing that could be happening to the Continent, especially for the weaker countries—almost all of them except Germany.
Fortunately for us, our situation is much more like Canada’s was in the 1990s. The buck is once again seriously undervalued, not only against the euro but versus the yen as well (the dollar recently touched 15-year lows against Japan’s currency). This will greatly aid our exporters, who are already prospering.
Perhaps I’ve missed it, but I haven’t heard a single representative from either party bring up the notion of emulating Canada. Both parties seem to be infected with, among other maladies, an acute case of Not Invented Here-itis. Maybe it’s time for all of us who are deeply concerned about our country’s financial future to harness the power of the internet to influence the many fresh faces that will soon be moving to the other Washington. The good news is that this incoming class promises to be far less indoctrinated by their respective parties’ failed ideologies and much more open to innovative concepts. If they are, it’s not a stretch to believe that our finances can begin to track the Canadian path, as illustrated below.
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Role reversal time? The Canadian Century was clearly written for domestic consumption. As such, there is a fair amount of chest-puffing over Canada’s accomplishments, as well as some thinly veiled savoring of our own current predicament (the Germans have a perfect word for this: schadenfreude). Yet the authors also concede a few chinks in Canada’s armor. For one thing, they note that there is some serious backsliding going on when it comes to adhering to the fiscal reformation creed. A certain amount of this is attributable to combating the ravages of the Great Recession, even though Canada was not nearly as hard-hit as the US. But beyond this, the authors are seeing clear evidence that the resolve to restrain spending seems to be waning. Alas, this does seem to be the natural cycle of democracies: Governments spend recklessly until the situation is so bleak there is no choice but to drastically cut back. Once financial health is restored, there then seems to ensue a long, almost imperceptible erosion of fortitude until a crisis hits and debt levels rise so terrifyingly that corrective action becomes unavoidable. Often, as in Canada, it’s the more putatively liberal party that administers the tough but necessary medicine.
The book is also quite candid in its admission that Canada’s healthcare system is largely as dysfunctional as our own. The authors point out the immense challenge that lies ahead for both countries in bringing the wealth-devouring beast of healthcare under control. It’s hard to disagree with their belief that both the US and Canadian healthcare systems need a healthy injection of incentive-based economics, competition, and behavioral modification. Thus far, neither country has made much progress in that regard.
For me, though, the key message of this book is that the future does not have to be a depressing choice between accepting sub-par growth or committing fiscal suicide. Canada’s experience emphatically demonstrates that replacing bad policies with good ones leads to dramatic and rapid improvement, with the shift to financial soundness restoring confidence and actually boosting long-term growth. Some forty years ago, then US President Richard Nixon famously remarked, “We’re all Keynesians now.” To fully channel his inner Keynes, Nixon needed to take us off the gold standard, which he did in 1971. The keys to the perpetual printing press had been found. Soon thereafter a new economic term was coined: stagflation. These days, at least when it comes to fiscal policy, a far wiser statement would be: “We’re all Canadians now.” If we want to right our nation’s financial ship, we might be well-advised to swallow our pride and follow the lead of a country that has long been in our shadow. This is likely to be far more effective than further pursuing failed economic policies from our distant past. Page 6 Evergreen Virtual Advisor (EVA) October 8, 2010
John Mauldin, Editor
Outside the Box
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Saverio Manzo
www.saveriomanzo.com
Wednesday, October 6, 2010
Is America bringing us down?
The U.S. is an anchor around Canada's neck, but our best bet might be to grasp it even tighter.
Canada's economy should be blazing by now. The country this year recouped nearly all the jobs lost during the recession, saw hikes in consumer spending and business investment and had some of the best economic growth in the industrialized world. Things would be going gangbusters, if not for those damn Yankees.
Canada currently finds itself tethered by its southern border to an economic anchor. The United States still grapples with near double-digit unemployment rates, surging foreclosures and sputtering consumer spending. America's travails slashed Canada's export market and blocked the chance for "an absolutely rip-roaring recovery," according to Douglas Porter, deputy chief economist with BMO Capital Markets.
Canada's largest trading partner is dragging it down. But the United States' economic woes don't just mean a weak market for Canadian goods. The dismal outlook has inflamed America's protectionist tendencies. It took more than a year for Canada to negotiate a waiver of the "Buy American" provisions contained in America's $787-billion stimulus package. Less than a month after that dispute was resolved, 28 members of Congress introduced a bill calling for the scrapping of the North American Free Trade Agreement. The situation is so worrisome that the Canadian Council of Chief Executives has enlisted Gordon Giffin, the former U.S. ambassador to Ottawa, as its envoy in Washington. The message from the U.S. is clear: Americans can't afford our goods right now. Even if they could, they'd rather buy American.
"It's that feeling of — I hate to say 'attacked' — but that the United States has to look inward for solutions," says Birgit Matthiesen, a Washington-based adviser to the Canadian Manufacturers and Exporters (CME).
As America pulls up its drawbridge, it seems an ideal time for Canada to pursue other trading partners. Everyone knows that emerging markets like India, China and Brazil are where the future lies anyway, right?
But for Canada, the inescapable fact is 73% of our exported goods go to America. Canada's annual trade with India represents less than two days of trade with the United States. Trade with the European Union, Canada's second-largest trading partner, is one-ninth of what crosses the U.S. border. Diversification is a good idea, but it doesn't offer a real alternative to the American market. "Nothing can replace our trading relationship with the United States," says Peter Van Loan, the federal minister of trade. "Growth in other places is a plus, but an American economic recovery is very, very important for Canada."
Canada's interests lie not in divorcing the United States but in wooing it again. There are still too many regulatory differences, too little policy collaboration and too few champions of trade liberalization, business leaders say. Canada can't cut away the millstone around its neck; it needs to hug it even closer.
In separate interviews on different days, both Manley and Van Loan said they expected America will remain Canada's top trading partner for the rest of their lives. The rhetorical coincidence emphasized how long-term Canada's thinking about the relationship must be. The United States economy is currently a drag on Canada; its policies decidedly protectionist. But by geographic imperative, the relationship will far outlast the few years of an economic downturn. "We're not floating in the middle of the Pacific Ocean," says Manley. "We're joined at the hip with the United States." Canada can dream of rich new trade with distant lands, but our future remains linked to the United States. If not by choice, than by the imperative of geography.
By James Cowan, From Canadian Business magazine
www.saveriomanzo.com
Saverio Manzo
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.
In addition, I truly belive in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Canada's economy should be blazing by now. The country this year recouped nearly all the jobs lost during the recession, saw hikes in consumer spending and business investment and had some of the best economic growth in the industrialized world. Things would be going gangbusters, if not for those damn Yankees.
Canada currently finds itself tethered by its southern border to an economic anchor. The United States still grapples with near double-digit unemployment rates, surging foreclosures and sputtering consumer spending. America's travails slashed Canada's export market and blocked the chance for "an absolutely rip-roaring recovery," according to Douglas Porter, deputy chief economist with BMO Capital Markets.
Canada's largest trading partner is dragging it down. But the United States' economic woes don't just mean a weak market for Canadian goods. The dismal outlook has inflamed America's protectionist tendencies. It took more than a year for Canada to negotiate a waiver of the "Buy American" provisions contained in America's $787-billion stimulus package. Less than a month after that dispute was resolved, 28 members of Congress introduced a bill calling for the scrapping of the North American Free Trade Agreement. The situation is so worrisome that the Canadian Council of Chief Executives has enlisted Gordon Giffin, the former U.S. ambassador to Ottawa, as its envoy in Washington. The message from the U.S. is clear: Americans can't afford our goods right now. Even if they could, they'd rather buy American.
"It's that feeling of — I hate to say 'attacked' — but that the United States has to look inward for solutions," says Birgit Matthiesen, a Washington-based adviser to the Canadian Manufacturers and Exporters (CME).
As America pulls up its drawbridge, it seems an ideal time for Canada to pursue other trading partners. Everyone knows that emerging markets like India, China and Brazil are where the future lies anyway, right?
But for Canada, the inescapable fact is 73% of our exported goods go to America. Canada's annual trade with India represents less than two days of trade with the United States. Trade with the European Union, Canada's second-largest trading partner, is one-ninth of what crosses the U.S. border. Diversification is a good idea, but it doesn't offer a real alternative to the American market. "Nothing can replace our trading relationship with the United States," says Peter Van Loan, the federal minister of trade. "Growth in other places is a plus, but an American economic recovery is very, very important for Canada."
Canada's interests lie not in divorcing the United States but in wooing it again. There are still too many regulatory differences, too little policy collaboration and too few champions of trade liberalization, business leaders say. Canada can't cut away the millstone around its neck; it needs to hug it even closer.
In separate interviews on different days, both Manley and Van Loan said they expected America will remain Canada's top trading partner for the rest of their lives. The rhetorical coincidence emphasized how long-term Canada's thinking about the relationship must be. The United States economy is currently a drag on Canada; its policies decidedly protectionist. But by geographic imperative, the relationship will far outlast the few years of an economic downturn. "We're not floating in the middle of the Pacific Ocean," says Manley. "We're joined at the hip with the United States." Canada can dream of rich new trade with distant lands, but our future remains linked to the United States. If not by choice, than by the imperative of geography.
By James Cowan, From Canadian Business magazine
www.saveriomanzo.com
Saverio Manzo
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.
In addition, I truly belive in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Monday, October 4, 2010
Proven formula in Stock Market investing
Today I want to address an issue many have asked me about in the past. They have a background as a fundamental trader and are discovering the benefits of applying or at least incorporating technical analysis into their trading decisions. The reasons are manifold. A few that come to mind are ‘fundamentally sound’ trades that didn’t work out, the desire to improve performance and the need to improve timing.
I consider myself a technical trader but I do lots of research in the background which also makes me a full-time researcher. I wouldn’t say the non-technical stuff I look for fits the fundamental approach description. I typically am interested in analyzing a trading opportunity from the psychological perspective. I need to know the market capitalization of a company, the country it is operating in and the people running the company. Then I basically try to gauge the price appreciation potential which is highly correlated with the stock’s potential to develop into a ’story stock’. There is much more to it but for the sake of brevity I’ll leave it at that.
So what to do if you have a background as a fundamental trader, want to improve your results but somehow doubt technical analysis? My recommendation in that case has always been the following: You need to find a way to trade that suits your personality. A stock’s personality needs to match your own. The same applies to the way you trade. The approach you use needs to suit your personality as well. Otherwise you won’t trust your method. This will make trading without hesitation impossible.
The solution is simple: Combine both methods. Make a decision regarding the number of stocks you want to hold when fully invested. Then select potential candidates using fundamental aspects exclusively. Assuming you go for a portfolio comprising 10 stocks I would build a pool of 20 – 25 stocks which you would be willing to own based on the fundamental criteria you applied. Now comes the hard part. Forget everything you ‘know’ about these stocks. Going forward strictly stick to technical aspects when it comes to initiating and closing positions.
Some great traders have devised trading rules that are dealing with this topic. The trading maxim I am referring to is part of Dennis Gartman’s Trading Rules.
Rule Number 10: To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.
A similar rule is the famous “trade what you see not what you think”. The essence of both rules is to eliminate hope and to objectively analyze a chart’s message. Simply apply discipline with your entries and exits. Then you repeat the process over and over. The ultimate stage a trader can reach is when trading itself becomes boring. You know what you are doing and you know the odds of specific patterns. You have then reached a stage where you execute trades and are emotionally detached. A stock then is reduced to its ticker symbol.
Everything that we see is a shadow cast by that which we do not see.
- Martin Luther King Jr. -
Article writen by Olivier on January 17, 2010
www.saveriomanzo.com
Saverio Manzo
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
I consider myself a technical trader but I do lots of research in the background which also makes me a full-time researcher. I wouldn’t say the non-technical stuff I look for fits the fundamental approach description. I typically am interested in analyzing a trading opportunity from the psychological perspective. I need to know the market capitalization of a company, the country it is operating in and the people running the company. Then I basically try to gauge the price appreciation potential which is highly correlated with the stock’s potential to develop into a ’story stock’. There is much more to it but for the sake of brevity I’ll leave it at that.
So what to do if you have a background as a fundamental trader, want to improve your results but somehow doubt technical analysis? My recommendation in that case has always been the following: You need to find a way to trade that suits your personality. A stock’s personality needs to match your own. The same applies to the way you trade. The approach you use needs to suit your personality as well. Otherwise you won’t trust your method. This will make trading without hesitation impossible.
The solution is simple: Combine both methods. Make a decision regarding the number of stocks you want to hold when fully invested. Then select potential candidates using fundamental aspects exclusively. Assuming you go for a portfolio comprising 10 stocks I would build a pool of 20 – 25 stocks which you would be willing to own based on the fundamental criteria you applied. Now comes the hard part. Forget everything you ‘know’ about these stocks. Going forward strictly stick to technical aspects when it comes to initiating and closing positions.
Some great traders have devised trading rules that are dealing with this topic. The trading maxim I am referring to is part of Dennis Gartman’s Trading Rules.
Rule Number 10: To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.
A similar rule is the famous “trade what you see not what you think”. The essence of both rules is to eliminate hope and to objectively analyze a chart’s message. Simply apply discipline with your entries and exits. Then you repeat the process over and over. The ultimate stage a trader can reach is when trading itself becomes boring. You know what you are doing and you know the odds of specific patterns. You have then reached a stage where you execute trades and are emotionally detached. A stock then is reduced to its ticker symbol.
Everything that we see is a shadow cast by that which we do not see.
- Martin Luther King Jr. -
Article writen by Olivier on January 17, 2010
www.saveriomanzo.com
Saverio Manzo
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
Friday, October 1, 2010
What the scholars are saying
Academia produces a steady outflow of studies on investing and personal finance topics. The math and jargon scares many people off, which is unfortunate because there are often some interesting ideas to consider, like the ones on index investing in this paper.
I have a quantitative background myself, so often go browsing through the journals and working papers to glean some new perspectives and insights. Below are some brief summaries of recent papers that I found of interest. I’m thinking about doing this on a regular basis, approximately every two weeks or so.
1. Ageing and Asset Prices, by Elod Takats, finds demographic factors have affected real house prices significantly. His model projects “ageing will lower real house prices substantially over the next forty years.”
2. Intermediated Investment Management, by Neal M. Stoughton, Youchang Wu
and Josef Zechner, looks at how financial advisors and the financial industry are impacted by trailer fees. A common interpretation is that these fees are payments for financial-planning services, but the authors find they are better understood as tools for aggressive marketing by portfolio managers (and for price discrimination).
3. Linking Self-Esteem with the Tendency to Engage in Financial Planning, by Florence Neymotin, discovers a strong positive link between self-esteem and an individual’s decision to engage in financial planning. Better self-esteem leads to better financial planning, it seems.
4. Diversification and its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status, by Nikolai L. Roussanov, finds a link between social status needs and the share of risky assets in portfolios – those wanting to “get ahead of the Jones” tend to have higher concentrations in risky investments and encounter greater volatility.
5. Do Individual Investors Have Asymmetric Information Based on Work Experience? by Trond M. Døskeland and Hans K. Hvide, examines the tendency of investors to overweight stocks in the industry they work in (11% in the case of Norwegian investors). Finding these holdings (shares in employer were excluded) underperformed the market, the authors conclude that the ill-advised concentration of risk across human-capital and financial assets does not reflect an information edge but overconfidence.
By: Larry MacDonald, From Canadian Business Online Blog
www.saveriomanzo.com
Saverio Manzo
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham; Merrill Lynch Fund Managers Survey, Gordon Pape,
I have a quantitative background myself, so often go browsing through the journals and working papers to glean some new perspectives and insights. Below are some brief summaries of recent papers that I found of interest. I’m thinking about doing this on a regular basis, approximately every two weeks or so.
1. Ageing and Asset Prices, by Elod Takats, finds demographic factors have affected real house prices significantly. His model projects “ageing will lower real house prices substantially over the next forty years.”
2. Intermediated Investment Management, by Neal M. Stoughton, Youchang Wu
and Josef Zechner, looks at how financial advisors and the financial industry are impacted by trailer fees. A common interpretation is that these fees are payments for financial-planning services, but the authors find they are better understood as tools for aggressive marketing by portfolio managers (and for price discrimination).
3. Linking Self-Esteem with the Tendency to Engage in Financial Planning, by Florence Neymotin, discovers a strong positive link between self-esteem and an individual’s decision to engage in financial planning. Better self-esteem leads to better financial planning, it seems.
4. Diversification and its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status, by Nikolai L. Roussanov, finds a link between social status needs and the share of risky assets in portfolios – those wanting to “get ahead of the Jones” tend to have higher concentrations in risky investments and encounter greater volatility.
5. Do Individual Investors Have Asymmetric Information Based on Work Experience? by Trond M. Døskeland and Hans K. Hvide, examines the tendency of investors to overweight stocks in the industry they work in (11% in the case of Norwegian investors). Finding these holdings (shares in employer were excluded) underperformed the market, the authors conclude that the ill-advised concentration of risk across human-capital and financial assets does not reflect an information edge but overconfidence.
By: Larry MacDonald, From Canadian Business Online Blog
www.saveriomanzo.com
Saverio Manzo
Source: Abby Joseph Cohen ‐ Goldman Sachs, Morgan Stanley, Michael Hartnett‐ Bank of America Merrill Lynch, RBC Capital, Donald Coxe ‐ Coxe Advisors, BMO Capital Markets , David Rosenberg ‐ Gluskin Sheff + Associates, Barry Ritholtz - The Big Picture, T. Rowe Price, Federated Investors, Brain Fabbri ‐ BNP Paribas, Sherry Cooper – BMO, Kurt Karl ‐ Swiss RE, Investment Postcards, Barry Ritholtz, Peter Grandich, Nouriel Roubini, Marc Faber, Bill Gross ‐ PIMCO, Barton Riggs, Eric Sprott – Sprott Capital, Jeremy Siegel, Steven Leuthold, Jeremy Grantham; Merrill Lynch Fund Managers Survey, Gordon Pape,
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