Clippings 2012

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skepticus
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Re: Clippings 2012

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"Might growth be ending?"

A professor of business at Northwestern U. asks this question in a provocative paper. The writer, Robert Gordon, suggests today's advances fall well short of those from earlier years.

But what about the Information Revolution?, we might ask:
...today’s information age is full of sound and fury signifying little. Many of the labour-saving benefits of computers occurred decades ago. There was an upsurge in productivity growth in the 1990s. But the effect petered out.

In the 2000s, the impact of the information revolution has come largely via enthralling entertainment and communication devices. How important is this? Prof Gordon proposes a thought-experiment. You may keep either the brilliant devices invented since 2002 or running water and inside lavatories. I will throw in Facebook. Does that make you change your mind? I thought not. I would not keep everything invented since 1970 if the alternative were losing running water.
There's more at:http://www.ft.com/intl/cms/s/0/78e883fa ... z2A16SsxHE

Should we consider remodeling our portfolio to meet this possible New Reality?
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Re: Clippings 2012

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The Reformed Broker wrote a blog post about massive inflows into bond mutual funds and ETFs.

33 Times, You Poor Dumb Bastards
There's going to be such a brutal bond investor slaughter at some point over the next decade that the streets of Boston's mutual fund district will run red with blood, the skies will be shot through with the lightning and thunder of unexpected capital losses and those who manage to survive will envy the dead.

<snip>

Let me show you something - this comes from Fidelity and it is the statistical equivalent of buffalo herd charging across the prairie toward an unseen cliff:

The below-average real returns for equities during the past 12 years, in combination with the near-uninterrupted 30-year rally for bonds, has led to a recent shift in investor preferences. Since December 2007, investors have poured more than $1.1 trillion into bond mutual funds and exchange-traded funds (ETFs) -- more than 33 times the amount allocated to equity funds and ETFs
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Re: Clippings 2012

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If the OTPP can make money on the Maple Leafs, the CPPIB should be able to make money on Formula 1.

CPPIB revs it up
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Re: Clippings 2012

Post by Park »

Good link from Samuel Lee (morningstar) on commodity investing. The article isn't favorable.

http://seekingalpha.com/article/401001- ... disappoint
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Re: Clippings 2012

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The first in a new series, Bargain-Addicted Investors Ignore Perils of Low Rates - Bloomberg
This is what I call the Grand Disconnect between weak and weakening economies worldwide, on one hand, and optimistic investors, on the other, who are hooked on massive monetary and fiscal stimulus programs.
I listened to an investment call last week that talked about there being a number of low probability but high impact events overhanging the market these days. I think there is some truth to both statements that investments should given consideration.

From the end notes of the article
A. Gary Shilling is president of A. Gary Shilling & Co. and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” The opinions expressed are his own. This is the first in a five-part series.
we know the article's author is literally talking his book.

Once again, I think the prudent action is probably stay-the-course and follow your investment policy statement. You might want to do some personal stress-testing of your plan during this period of relative calm to make sure your risk tolerance and plan are in agreement.
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Re: Clippings 2012

Post by Park »

This is for the novice investor. When one looks at the price/book, price/earnings etc of an ETF, one often finds different numbers. The following link from morningstar helps to explain the discrepancies (arithmetic weighted average versus harmonic weighted average).

http://corporate.morningstar.com/es/doc ... dology.pdf
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Re: Clippings 2012

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Morningstar has an excellent article from Fidelty. It looks at the effect of bear markets on a 60:40 portfolio, but also after inflation and taxes. For 1929-1938, the posttax real return was 4.87'%. For 1972-1981, the posttax real return was -4.68%.

http://news.morningstar.com/articlenet/ ... xml&part=1
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Sponging boomers

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http://www.economist.com/node/21563725

As a GenXer I enjoy a little boomer bashing. The interesting twist here is the suggestion that inflation is a solution to redistributing the unequal economic benefits that Baby Boomers have enjoyed. I can see how it might erode the spending power of the all that saved up boomer cash, but it might be a double edged sword for my Millennial friends who would like to buy things too.
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Re: Clippings 2012

Post by Park »

https://institutional.vanguard.com/VGAp ... stingStock

Nice paper from Vanguard on what predicts stock market returns best. They found that only valuation metrics had some predictive ability. One weakness is the only valuation metrics they examined were PE1 and PE10.
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Re: Clippings 2012

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Park wrote:https://institutional.vanguard.com/VGAp ... stingStock

Nice paper from Vanguard on what predicts stock market returns best. They found that only valuation metrics had some predictive ability. One weakness is the only valuation metrics they examined were PE1 and PE10.
Poor Tobin's q left out in the cold again.
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Re: Clippings 2012

Post by Park »

https://institutional.vanguard.com/VGAp ... gShortTIPS

Inflation indexed bonds are often included in a portfolio as an inflation hedge. The above paper from Vanguard shows that there really is no good asset class (inflation indexed bonds, gold, commodities etc) when it comes to hedging inflation. But 1-5 year (short term) inflation indexed bonds may be the best of a not so good bunch. However, 10+ (long term) inflation indexed bonds don't correlate with inflation well; I presume that's due to interest rate risk.

So if one is looking for an inflation hedge, short term inflation indexed bonds might be the best way to go. Should you go out and buy Canadian inflation indexed bonds (real return bonds)? Maybe, maybe not. Only long term Canadian inflation indexed bonds are issued. Even then, not many are issued, which raises liquidity concerns.

I think this is an important difference for Canadian investors. We get advice from American sources recommending inflation indexed bonds. That advice is intended for American investors. But American investors can buy short and intermediate term inflation indexed bonds, and have to worry about liquidity less.

IMO, inflation indexed bonds are not as good an asset class for Canadian investors, as compared to US investors. I think that Canadian investors have to look more carefully at other inflation hedging asset classes (very short term nominal bonds?).

Edited to include the following. The counterargument would be that if you buy and hold individual Canadian inflation indexed bonds (real return bonds, RRBs), then you do get a perfect inflation hedge. But if you're getting RRB exposure through a mutual fund or ETF or do not keep individual RRBs until maturity, then the above post is relevant.
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Re: Clippings 2012

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then you do get a perfect inflation hedge
According to another PDF posted by ig17 this is only true if your individual inflation rate is the same or similar to the CPI and you hedge the correct amount.

"What is the best hedge against inflation? CASH!!"
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Re: Clippings 2012

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Park wrote: But 1-5 year (short term) inflation indexed bonds may be the best of a not so good bunch. However, 10+ (long term) inflation indexed bonds don't correlate with inflation well; I presume that's due to interest rate risk.
Yes, there is real interest rate risk and RRBs don't cover it off. But that isn't due to inflation. It's due to the business cycle and all sorts of other (real) factors. Nominal bonds are subject to all those factors AND inflation risk
Only long term Canadian inflation indexed bonds are issued.
Yes. On the other hand, a certain amount has been stripped, and in theory you can buy just the coupons. (I say "in theory" because most of the coupons are being held to maturity by buy-and-hold investors and institutions.)

The shortest-term RRBs available, maturing in 2021, have a duration of some nine years (measured in real terms). That means that, if real interest rates increased by 200 basis points today, you would lose 18% of the market value of the bond. I would take that as the extreme scenario.

Even that assumes that you want, or have to, sell the bond today. If you hold to maturity, the interest rate risk gradually disappears and goes to zero. Most of the holders of RRBs do intend to hold to maturity, and so interest rate risk for us is not an issue.
Even then, not many are issued, which raises liquidity concerns.
Yes, this is a concern, especially with strips. Normally, however, the liquidity premium for RRBs over nominals is small and has been measured (however imperfectly) at about 10 to 15 basis points. I note that even at the worst of the liquidity crunch in the fall of 2008, when liquidity premiums skyrocketed, the total real return peaked at about 2.7% to 2.8%. Again, the duration of the 2021 bond suggests a loss in market value of less than 20% even during this kind of crisis.

Again, if you're holding to maturity, liquidity doesn't matter.

I think this is an important difference for Canadian investors. We get advice from American sources recommending inflation indexed bonds. That advice is intended for American investors. But American investors can buy short and intermediate term inflation indexed bonds, and have to worry about liquidity less.
The counterargument would be that if you buy and hold individual Canadian inflation indexed bonds (real return bonds, RRBs), then you do get a perfect inflation hedge. But if you're getting RRB exposure through a mutual fund or ETF or do not keep individual RRBs until maturity, then the above post is relevant.
Exactly.

Of course, I think that holding RRBs through a mutual fund is foolish. The last time I looked at the TD Waterhouse one, itys MER was over 1%. An ETF like XRB is slightly less foolish, and may make sense if you're investing small sums. Otherwise, I really don't see why one would not hold individual RRBs, with maturities tied to one's life expectancy or other spending needs.
BRIAN5000 wrote:According to another PDF posted by ig17 this is only true if your individual inflation rate is the same or similar to the CPI and you hedge the correct amount.
True.

Statistics Canada has measured the inflation experienced by the average Canadian senior. While the rate does diverge from the total CPI from year to year, over periods of five years or more, the two end up quite close for Canada. (Things may be different in the U.S. because of the way that their health care system is funded.) But those are still averages, and individuals do differ.

I haven't seen studies on this, but I suspect that other inflation hedges would track individual experiences of inflation much less closely than the CPI. Certainly that would be true for me according to my present spending patterns. (If you want to see how well the CPI tracks your spending patterns, look at the weights that Statistics Canada uses and compare them to your personal expenditures.)
"What is the best hedge against inflation? CASH!!"
I'm puzzled by this paper, which actually looks like a chapter for a forthcoming book.

Put aside that when the author says "Cash" he means U.S. Treasury Bills. And put aside that there are no references or sources for the claims or the data.

The author makes much of the fact that the correlation between TIPs and inflation was 0.10 from 1997 to 2011, and 0.16 from 2011 to 2011. But those seem to be pretty short time periods for any serious analysis, especially given that 2008 and 2009 were not exactly typical years. I call statistical abuse.

George
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Re: Clippings 2012

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I'm puzzled by this paper, which actually looks like a chapter for a forthcoming book.
No indication on how much cash to hold?
There must be a trade off between inflation protection (holding cash) and long term returns of holding other assets ?
Most charts in other books on what works to protect from inflation are now obsolete? (gold, commodities, real estate, tips)
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Re: Clippings 2012

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BRIAN5000 wrote:
I'm puzzled by this paper, which actually looks like a chapter for a forthcoming book.
No indication on how much cash to hold?
There must be a trade off between inflation protection (holding cash) and long term returns of holding other assets ?
Most charts in other books on what works to protect from inflation are now obsolete? (gold, commodities, real estate, tips)
No indication in the paper of how much cash to hold (unless one equates cash to T-bills). Even there I would summarize the recommendation as holding "some" T-bills.

Of course there's a trade-off between inflation protection and long term returns of other assets. Inflation protection or (inflation insurance as I refer to it) comes at a price. If your insurance is in the form of RRBs, the price is the spread between nominal bonds and RRBs. If your protection comes in the form of T-bills, the price is the spread between T-bills and long government bonds.

The main point of this section of the paper is to rebut Zvi Bodie's recommendation to hold close to 100% of one's tax-advantaged accounts in TIPS. Apart from Bodie, I've never seen anyone recommend this. In that sense, the section on TIPS (or RRBs) is very focussed and not very helpful.

As for commodities, real estate, equities and gold, I thought it was generally well known that these are rather poor inflation hedges.

George
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Re: Clippings 2012

Post by BRIAN5000 »

The main point of this section of the paper is to rebut Zvi Bodie's recommendation to hold close to 100% of one's tax-advantaged accounts in TIPS. Apart from Bodie, I've never seen anyone recommend this. In that sense, the section on TIPS (or RRBs) is very focussed and not very helpful.

As for commodities, real estate, equities and gold, I thought it was generally well known that these are rather poor inflation hedges.
I was trying to compare (make sense of) what they were saying in that paper to a chart on page 13 Exhibit 10 of the below PDF. Overlay my portfolio an some ideas from Harry Browne's permanent portfolio and see what I could come up with. I guess it needs some work.
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Re: Clippings 2012

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Finally, some justice !!
Australia's Federal Court has ruled that credit ratings agency Standard & Poor's (S&P) misled investors before the global financial crisis.
--snip--
In what is regarded as a landmark ruling, the court ordered S&P and the bank which arranged the product, ABN Amro, to pay damages to investors.
http://www.bbc.co.uk/news/business-20216638
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Re: Clippings 2012

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A paper from Clifford Asness on PE10, and why the American stock market may have a real return of 0.9% in the next 10 years.

http://www.aqr.com/Portals/1/ResearchPa ... Asness.pdf
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Re: Clippings 2012

Post by Park »

http://seekingalpha.com/currents/post/656281

High yield bond issuance is at a record in both the USA and Europe. Companies raise capital by issuing stocks and/or bonds, with the choice depending on whether stocks or bonds are the cheaper source of capital. The record high yield bond issuance would suggest the bonds are the cheaper source for companies now. What's cheaper for companies is more expensive for investors. So stocks are a better deal than corporate bonds now for investors?
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Re: Clippings 2012

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Park wrote:So stocks are a better deal than corporate bonds now for investors?
Depends on how risky (however you define risk) stocks have become.

Corporations are certainly interested in raising funds through bond issuance at present interest rates. And investors, whether individual or institutional, seem willing to accept these bonds. That suggests to me that investors don`t think that bonds are that bad a deal, compared to stocks.

With the U.S. facing a fiscal cliff and Congress in deadlock. With China facing a slodown and its governing (and only) party in turmoil. With Europe still not having sorted out Greece, Spain, etc, and heading for recession (or perhaps already there). Hard to say that stocks are a better deal than bonds right now.

As usual, the answer IMHO is diversification.

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Re: Clippings 2012

Post by AltaRed »

I think a better deal in stocks will be when those things George mentions hit the fan in a big way. Could be a return to 2008-2009 though probably not as deep.
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Re: Clippings 2012

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I don't disagree with what either of you say. The link below shows a high yield graph from 1988. The absolute return on American high yield is at a low point. But the spread between American high yield and US 10 year treasuries has certainly been lower. What's dragging high yield down is not the credit risk premium, but the interest risk premium. Such a low interest risk premium will make high yield bonds more susceptible to inflation.

http://alphanow.thomsonreuters.com/2012 ... ield-debt/
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Re: Clippings 2012

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AltaRed wrote:Could be a return to 2008-2009 though probably not as deep.
One can argue that 2008-2009 wasn't deep enough. S&P500 was 10% below regression trend line at the bottom of March 2009. That's not very deep by historic standards. The most recent value is 49% above trend line.

http://www.advisorperspectives.com/dsho ... arkets.php
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Re: Clippings 2012

Post by Brix »

Wow, the steepness of the spike in nattering about the fiscal cliff is unquestionably very cliff-like.
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Re: Clippings 2012

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I don't know why they're (at least Republicans) are calling it a fiscal cliff, it's more like fiscal common sense. A few tax increases, spending cuts and the deficit drops from $1.3 trillion to $600 billion. Borrowing $1.3 trillion/yr could be called fiscal suicide. The GOP should have said 'let's drive over the cliff' instead they seem to be for trillion dollar deficits. It doesn't say much about the U.S. economy when it's right-wing party is afraid of the consequences if the debt is cut in half. The GOP should have said the 'fiscal cliff' is their starting point and a balanced budget in 4 years. They sounded like Democrats during the election, which is one reason why they lost, just like Hudak in the last Ontario election.
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