Dan on April 23rd, 2016

Of late I have been seeing more and more reference to ‘Helicopter money’ as a fiscal stimulus tool.

Helicopter money is the concept of just printing extra money and giving it to citizens directly (i.e visualize a helicopter flying over a city dumping money out the windows).  Now that interest rates are near or below zero in some countries, people are getting tired of trying to stimulate the economy via interest rate manipulation.   The theory seems clear – with all this free money gained by the populous, demand for goods would increase, raising the inflation rate.

If you look at google trend – you can see an uptick of search interest – if that is any indicator.

helicoptermoney

Ben Bernanke, ex US Fed Chairman, just wrote an article about it, as a policy of last resort.  I agree with Mr. Bernanke – if countries do resort to helicopter money, it would be an admission that large scale manipulation of the economy and interest rates via the central banks is not effective.  So if this continues to be discussed, be aware we are down to a dangerous last resort.

Dan on April 9th, 2016

A year ago I wrote a post on why Nordstrom (JWN)  intrigued me.   Nordstrom’s online presence and growth was my thesis for making it one of my top holdings.

Last month I closed out most of my position in Nordstrom.  Why?  I have a stronger thesis:  Always fear Amazon.  And Amazon is getting into the online clothing business:

https://consumerist.com/2016/02/23/amazon-now-selling-clothing-under-its-own-in-house-brands/

From what I can tell, Amazon is going after the sweet spot of Nordstrom’s clientele.  No data yet on how successful this will be for Amazon, or how much it will hurt Nordstrom.   I still hold a position in Nordstrom’s as I think they are a great brand and well run, but I figure I should probably watch from the sidelines for a while.

On a related topic, online clothing sales is the biggest online sales category in 2015.  Conventional wisdom had been that consumers wanted to touch and try on clothes during the purchasing process, but apparently online convenience is more important.  Who would of thought that 5 years ago?

Is any bricks and mortar retailer safe these days?  That’s the question I continue to ask myself (that – and who is filling all these office buildings I see being built?).  For now the only other brick and mortar retailers I hold is Costco and Starbucks – companies I see as safe from the online revolution – for now.

 

Dan on March 24th, 2016

I guess I am  a sucker to click on any article describing the next Four Horsemen of the ‘economic apocolypse’ – but this article resonated with me not for the belief in an apocolypse, but for the economic analysis:

http://www.businessinsider.com/36-south-four-horsemen-2016-2

My favorite quote from this article (emphasis mine):

The central-bank economic models that worked in the past aren’t functioning properly, in part because of changing demographics and technology.

“You have the Four Horsemen of the Economic Apocalypse out there as well,” Limbrick said. “You have aging baby boomers, tech disruption, a globalized labor market, and massive debt.”

And if that’s not enough to spook investors, they’re realizing that the next bank crisis will most likely end in losses on bonds and deposits rather than another bailout.

So if you think about it, the Fed has a real uphill battle trying to spur growth in this environment.

  • Aging baby boomers are retiring, reducing spending and income, slowing the growth of the workforce
  • Tech disruption making everything more efficient –  squeezing margins and reducing costs, allowing product producers to lower prices to try to gain market share while still being profitable. Just look at how many free services we use on the web these days – and there is so much free software and information published to make it easier to create things.
  • A Globalized labor Market making it easier to have work done anywhere in the world.  Anybody, with the assistance of services such as Alibaba, can work with Chinese manufacturers to build a product – increasingly leveling out wages across the world.
  • Massive worldwide government debt has pulled forward demand – or ‘borrowed demand’ from the future.  Governments piled on debt to help us grow out of the last economic malaise, and while it softened the impact of the last recession, it may just have pushed the pain into the future.  Indicators such as negative interest rates hint that we are at the limit of that borrowing – and now we may have to flood the world of lowered demand with oversupply.

Throw in long term low energy prices (perhaps brought to us by the tech disruption horseman) and that adds even more headwind to increased growth.

Maybe economists should be working on financial stability, and quit trying to force economic growth when so much is lining up against it.  It’s been 8 years now since the start of the last recession – given historical business cycles another one cannot be too far away.While I am not predicting financial apocolypse, I do think the next one will be painful, perhaps with bondholders being the surprise victim as govenments around the world use strategy from the wrong era.

None of this is new of course.  To quote from a copy of ‘Bankers Magazine’ in 1941:

“…like armies always training to fight the last war, our banking system is always merely setting up protection against past experiences.”

Dan on March 11th, 2016

I know America doesn’t have the money to waste on art projects (we need to keep adding to that defense budget) – but Iceland is providing a great example of alternative ways of spending money other than on a bloated defense budget.

Take an existing eyesore, add some ingenuity, and you get a piece of art:

icelandart

 

A great overview of the project here – the Choi+Shine architecture firm is responsible for this – but give Iceland kudos for spending a little more money on this project to provide something special.

Dan on February 25th, 2016

I was watching this Vine video of a Virtual Reality (VR) rollercoaster experience complete with mechanical enhancements:

 

Maybe VR will revitalize the movie and themepark entertainment experience, rather than keep people in their own homes for VR entertainment?

The addition of physical movement would be hard to replicate at home, and some venue featuring these experiences would be great group entertainment.   As to how to invest for this, that remains a question.  Will theaters adopt this new business model, or will new disruptive companies rise to replace theaters (think back to how newspapers adapted to the internet, and blockbuster adapted to streaming).

So don’t necessarily think VR will kill the public entertainment industry – maybe we all won’t be holed up in our house with goggles on.   This may be a trend to keep an eye on.

Dan on February 20th, 2016

A surprising frank interview with Ray McGovern – an ex CIA Analyst who appears to be spilling the beans on the ‘Deep State’ running American foreign policy:

http://www.salon.com/2016/02/07/intelligent_people_know_that_the_empire_is_on_the_downhill_a_veteran_cia_agent_spills_the_goods_on_the_deep_state_and_our_foreign_policy_nightmares/

The first half of this article is marginally interesting but provides some historical perspective – but the 2nd half picks up speed when discussing Ukraine, Syria and the ‘Deep State’.

Looking at Ray McGovern’s bio on Wikipedia shows that he was “a CIA analyst for 27 years (1963 to 1990), “routinely presenting the morning intelligence briefings at the White House” and “where he was responsible for the analysis of Soviet policy in Vietnam”.

He is clearly a student of Russian history, and maybe he could be biased towards the Russian point of view (And the interview took place while he was attending a global political conference sponsored by RT (Russia Today).

Having said that – even if the truth about American foreign policy is ‘somewhere in the middle’ of his version and the Russia/Putin perception propagated by American media, its a pretty scary revelation about how far out of control the CIA is.

This is perhaps the most damning article I have seen on the CIA from a pseudo – main-stream news source (Salon is rated the 38th most popular News Entity in January 2015 by unique visits).   If only more news sites would expose this kind of information.

PS.  the article references the leaked discussion between Victoria Nuland and Geoff Pyatt regarding the American strategy in the Ukrainian coup – this article has the transcript and analysis of the call providing more great insight into how foreign policy works.

Dan on February 6th, 2016

I have always been diligent about looking at past performance of mutual funds prior to investing, and consider it to be one factor when comparing mutual funds.  However a recent improvement I made to  the VFS Daily Investment contest caused me to look at historical performance in a different light.

Starting in 2016, I am providing a prize for the portfolio with the best 3 year cumulative return.   The purpose was to reward ‘long-term’ excellence, and assumed the top portfolios would be pretty consistent.  However, I was surprised when I saw the results for 01/31/16 – the rankings for the top 10 portfolios changed dramatically:

One Month Change

 

So this caused me to immediately assume my calculations were messed up – so I did a little analysis of the top two portfolios:

 

Karen’s Portfolio Greg’s Portfolio
Month Monthly Return $100 invested
1/1/13 to 12/31/15
$100 invested
/1/13 to 1/31/16
Monthly Return $100 invested
1/1/13 to 12/31/15
$100 invested
2/1/13 to 1/31/16
1/31/2016 -3.89%  $  190.29 -7.54%  $  181.96
12/31/2015 2.34%  $  197.24  $  197.99 -4.98%  $  206.56  $  196.79
11/30/2015 2.61%  $  192.73  $  193.46 5.99%  $  217.37  $  207.09
10/31/2015 19.97%  $  187.82  $  188.54 9.37%  $  205.08  $  195.38
9/30/2015 -2.58%  $  156.55  $  157.15 -4.11%  $  187.51  $  178.64
8/31/2015 -2.06%  $  160.70  $  161.31 5.02%  $  195.56  $  186.31
7/31/2015 8.10%  $  164.07  $  164.70 0.67%  $  186.21  $  177.40
6/30/2015 -4.63%  $  151.78  $  152.36 -1.96%  $  184.98  $  176.23
5/31/2015 1.59%  $  159.16  $  159.76 4.19%  $  188.68  $  179.76
4/30/2015 1.75%  $  156.67  $  157.26 5.40%  $  181.09  $  172.53
3/31/2015 -2.02%  $  153.98  $  154.56 -0.89%  $  171.82  $  163.70
2/28/2015 7.40%  $  157.15  $  157.75 5.35%  $  173.36  $  165.16
1/31/2015 -1.26%  $  146.32  $  146.88 7.62%  $  164.55  $  156.77
12/31/2014 -3.65%  $  148.19  $  148.75 -2.65%  $  152.90  $  145.68
11/30/2014 2.77%  $  153.80  $  154.39 2.32%  $  157.06  $  149.64
10/31/2014 5.12%  $  149.65  $  150.22 0.23%  $  153.50  $  146.24
9/30/2014 -2.45%  $  142.36  $  142.90 -1.79%  $  153.15  $  145.91
8/31/2014 1.93%  $  145.94  $  146.49 4.60%  $  155.94  $  148.57
7/31/2014 1.37%  $  143.17  $  143.71 -1.79%  $  149.08  $  142.03
6/30/2014 0.65%  $  141.24  $  141.77 3.03%  $  151.80  $  144.62
5/31/2014 5.11%  $  140.32  $  140.85 6.09%  $  147.34  $  140.37
4/30/2014 -0.33%  $  133.50  $  134.01 -0.15%  $  138.87  $  132.31
3/31/2014 -0.98%  $  133.95  $  134.46 -3.44%  $  139.09  $  132.51
2/28/2014 6.70%  $  135.27  $  135.78 4.00%  $  144.04  $  137.23
1/31/2014 -2.99%  $  126.78  $  127.26 -1.80%  $  138.50  $  131.95
12/31/2013 2.63%  $  130.69  $  131.18 4.74%  $  141.04  $  134.37
11/30/2013 2.86%  $  127.34  $  127.82 3.31%  $  134.65  $  128.29
10/31/2013 9.14%  $  123.80  $  124.27 7.58%  $  130.34  $  124.18
9/30/2013 0.90%  $  113.43  $  113.86 5.08%  $  121.16  $  115.44
8/31/2013 -1.22%  $  112.42  $  112.84 -1.51%  $  115.31  $  109.86
7/31/2013 4.78%  $  113.81  $  114.24 9.06%  $  117.07  $  111.54
6/30/2013 -1.71%  $  108.61  $  109.02 0.24%  $  107.35  $  102.27
5/31/2013 1.48%  $  110.50  $  110.92 1.08%  $  107.09  $  102.02
4/30/2013 3.26%  $  108.89  $  109.30 1.44%  $  105.94  $  100.93
3/31/2013 2.90%  $  105.45  $  105.85 2.15%  $  104.44  $    99.50
2/28/2013 2.87%  $  102.48  $  102.87 -2.60%  $  102.23  $    97.40
1/31/2013 -0.38%  $    99.62 4.96%  $  104.96

 

And I found my explanation.  Using the approach of measuring return in terms of ‘$100 invested 3 years ago now is worth x’ does really magnify recent performance.  Note that even though Gregs portfolio was down 7.5% in January, it knocked $15 off his hypothetical investment.  So losses for the leaders are magnified as they hypothetically have more assets to lose.

The other important point is the starting point makes a big difference.  Greg’s portfolio for the period 2/1/13 – 01/31/16 got hurt, because he had a decent month in January (highlighted in green), which no longer counted. Removing the 4% gain from the first month knocked $10 off the 3 year return, further causing the large drop in Greg’s portfolio’s value.

So the moral to the story?  Be careful when looking at mutual fund past performance – as the time period you are looking at may make a big difference in how the performance is measured.  Or better yet – maybe mutual fund expense ratio is a much better indicator of future fund performance, since past performance is a pretty fluid measurement.

Dan on January 28th, 2016

Smart move by GM to invest in Lyft – perhaps they see the disruption coming to the car ownership model that self driving cars will bring, and are hedging their bets.  Interesting that Google gets all the press on self driving cars while Detroit is seemingly under emphasizing the future of self driving cars.  A great article here on  GM’s venture into the self driving cars.

The model for the future of cars is not only self driving – but renting on a per-trip basis.  Essentially automating Uber.  Statistics show cars go unused 94% of the time – sitting in the garage.   So my prediction?  Google (or some other ‘new-tech’ company’) will win the battle.  The self driving car ‘disruption’  reminds me of a number of times in the past 20 years I have voted for the incumbent, dominant company.  I recall a discussion with a co-worker – ‘why would you invest in Netflix when you can buy Blockbuster at a much bigger discount’.  After all, Blockbuster had the customer base, inventory and retail presence.  When Amazon went public in the 1990s at a huge premium, I thought ‘how can Amazon compete with entrenched booksellers – how hard can it be for booksellers to sell books over the internet?’

The problem is the entrenchment and lack of original thinking by the incumbents.  The market leaders have to worry about protecting their existing business model for as long as possible – hampering the adoption of the technologies and business models.

Detroit seems to be in that category – I am sure margins are much higher selling cars to individuals  and executives will fight to keep the existing model (and short term profits).   Maybe GM’s tiny investment in Lyft shows there is some chance that they can re-invent themselves – but I am skeptical.

Dan on January 16th, 2016

Interesting chart here from a presentation by Jeffrey Gundlach of Doubleline Capital  (see the complete presentation here):

 

Fed easing correlates to oil?

Fed easing correlates to oil production?

His thesis is the overproduction of oil in the US may have been driven by all the excess money the Fed pumped into the economy. All this low interest capital was put to work drilling and selling oil. An interesting hypothesis – at first glance it seems to be to unrelated graph lines that happen to correlate, but after thinking about it a bit I have to wonder.

This chart, showing the ratio of North American companies losing money vs the default rate, also sort of supports the theory:

nadefault

If you assume the oil production companies are backed by investment funds, rather than earnings, this chart would indicate they are still holding themselves up by draining investment funds.  But assuming oil prices stay low, the game will be over in a few quarters.

So if you are convinced there is some merit to this theory, then one way to invest on this thesis would be on overweighing international developed markets (EAFE):

eafesp500

Reading this chart (as found in this Goldman Sachs presentation) tells me international developed markets appear to be underpriced,   If true, and assuming they have invested less vigorously in the oil production space, they will be helped more by cheap energy prices  than the S&P 500.  Many of these markets are also in countries where their government is doing some form of QE, pumping money into the economy, which is bullish for stocks.  If history is any indicator, these countries will be investing all this low cost money on the next economic bubble.

Dan on January 12th, 2016

A quick rant – though I know this article is over a month old.

The latest foreign policy dilemma America is facing:

Air Force burning through bomb stockpiles striking ISIL

One would think this article is from the satirical site The Onion – but this is a serious new piece.   This quote from the article shows the emergency America is facing:

The Air Force has fired more than 20,000 missiles and bombs in the air war against the Islamic State, depleting its stocks of munitions and prompting the service to scour depots around the world for more weapons and to find money to buy them, according to records obtained by USA TODAY.

Wow – I guess we should throw a few more billion at the military budget.

usmilitaryspending

But wait – lets see how effective this campaign is:

USA TODAY reported earlier this week that Army Gen. Lloyd Austin, who oversees U.S. military activities in the Middle East, estimated that the air war has killed 23,000 ISIL fighters, raising the death toll by 3,000 in just over a month. However, the movement continues to recruit replacements, and the Pentagon does not release its estimates of the war dead.

Lets see… 20,000 bombs, and we have killed 23,000 ISIL fighters – yet the movement continues to recruit replacements.  So effectively once could calculate easily that each bomb produces under 1 enemy casualty (lets assume that for each casualty we recruit .5 replacements) – no statistic on how many innocent people are killed.

This is really our best strategy?  But hey – what else should we do with American tax dollars – its not like we need to save money or anything.