Follow up on voting rights

We note some important developments in the proxy voting process of late. We have previously commented on the matter of voting rights for ETF and mutual fund holders, a hugely important political and economic issue (here and here).

Lo and behold: subsequent to the termination of management contracts & withdrawals of more than $1 billion of pension assets, BlackRock and other managers are beginning to respond. Imagine that. In the FT today: BlackRock opens door for retail investors to vote in proxy battles

“BlackRock’s one-year-old Voting Choice programme already allows institutional investors holding $1.8tn in assets to decide how they want their shares to be voted, and the owners of $452bn have done so. The UK pilot marks the first time that BlackRock will offer the same opportunity to smaller investors... other asset managers are also trying to find ways to let retail investors vote. Charles Schwab’s asset management arm last month announced a pilot project that will poll investors in one mutual fund and two ETFs to gather their general preferences on core issues. Vanguard said on Wednesday that several of its equity index funds plan next year to “pilot a number of proxy voting policy options for individual investors to choose from”.

Year to date total returns: US & non US equity and fixed income

Year to date total returns on broadly indexed funds comprising US & non-US equities & bonds are grim. In crisis, perhaps an inappropriate word at this point, all correlations seem to converge to 1. In addition to the nominal losses in portfolio, the investor, also incurs loss in real purchasing power of wages, savings, and investments. Yes, it's a double whammy. The loss of purchasing power by inflation is seperate and in addition to any nominal loss induced by price declines. 

  

We're not done yet. We're at the front end of the process of wringing out two decades of errant monetary and fiscal policy, marked by massively increasing leverage, and cumulative mal-investment. Leverage increases our risk, and cumulative mal-investment is dead weight economic loss and decreases our ability to recover economically. The way forward will be neither pleasant nor over quickly. And the costs will be huge.

Something that neither the media, your advisor, nor any politician will tell you: there is not a good solution here. There is no happy song, no quick fix, only a grinding market solution which prices every mistake we make. And between the Biden administration and Congress that's a costly & vast universe. 

Absent prudent and co-ordinated policies that reform the complex crossing fiscal, monetary & regulatory domains, there may not any cure, just the long slow bleed of lowering our standard of living by consuming our capital until there is none. It will destroy our social fabric which has already shown itself to be thinner that we would like. And we're already in the danger zone as you can see below. Geopolitically our allies, if that's the proper word for them, are weak and generally in worse condition than we. So if we can't get it done... things might get chippy all over pretty fast.

 

One more time on voting rights

Shareholders get two things from ownership: voting rights (control) and equity claims (dividends). Index funds, for all their virtue as portfolio tools, withhold the voting rights. That is a significant and material cost to investors.

This holds implications for indexed funds, and the implications are neither well disclosed nor widely understood. Those who understand aren't talking about it too much. Here's why: the concentration of voting rights vested in indexed funds is huge. Vanguard, BlackRock, and State Street, in that order—own roughly twenty percent of the S&P 500’s outstanding shares. Now consider that the premium for corporate control in contested mergers & acquisitions can be ~20-30%, so the aggregate value of the indexed voting block here is non-trivial. And certainly these days BlackRock and Vanguard get their calls returned pronto from corporations, regulators, & congress alike.

Times have changed from the days of John Bogle, one of the Great Ones. The scale of indexing has grown beyond imagination, and what initially was a minor ministerial simplification has become something different in scale, form, substance, power and value. As an owner of indexed funds I neither want nor need them to control the votes which my investment has purchased. It is an arrogation of my ownership rights and a taking of the economic value of those voting rights... nor as a citizen do I want the influence & power of senior management of the indexers integrated into political & regulatory processes. It is an untoward concentration of power that is beginning to flex its muscles a bit too much.

The fix is to distribute to shareholders their voting rights, make them detachable, transferable & marketable. The perfect application for blockchain. Shareholders of the index funds could then 1/ vote as they choose; 2/ sell their rights for cash; or 3/ buy more rights to prevail on a vote or turn management out.

A 'tear down this wall' moment? Perhaps. Kudos to Mr. Munger for speaking out. Given the current environment there are very few people who can address this matter. No one can lay a hand on him, and that's precisely why reform is so badly needed.

Calling Out ‘Emperor’ Larry Fink

A letter on the faux ethics policies of Williamson County Board of Education: why it doesn't work

Date: Nov 10 2021

To: members of the Williamson County Board of Education

From: J Hunter Brown

I provide the attached documents which may be relevant to the discussion of ethics policy.

1/ my ethics complaint emailed and hand delvered to Garrett of July 2021

2/ response by Ausbrooks, General Counsel to WCS 9/16/2021

As you may or may not know the issue was directly raised in a prior working session of the BoE and that session was videotaped and is publicly available. It is morbidly fascinating, not without entertainment value, and linked immediately below.  The relevant exchange starts at the end ~ 2:57:30 and lasts about three minutes. It was not a particularly high water mark for quality of governance:

https://livestream.com/accounts/5076979/events/9795006/videos/224850058

The essence of Ms. Ausbrooks’ formal response is excerpted below:

The items listed in your letter relate to alleged violations of Policy 1.2021 (Code of Ethics for Board Members) and Policy 1.202 (Duties of Board Members). Neither policy provides a mechanism for review by an ethics committee regarding alleged violations of the specific provisions contained in those policies. Thus, I have advised Chair Garrett that your letter does not constitute a credible ethics complaint pursuant to the relevant Board policy.

Put otherwise, the violations cited in my letter to Garrett were dismissed not on the basis of facts or evidence presented, those acts remain unimpeached, but rather because of the absence of a mechanic for review.  Essentially, management of violations of Policy 1.2021 (Code of Ethics for Board Members) and Policy 1.202 (Duties of Board Members) is without control, process, or consequence: “Neither policy provides a mechanism for review...”

I would suggest there is a duty of BoE members to comply with policies which they approved and to which they are pledged. Evidently, Ms. Ausbrook and Garrett do not. That’s a tough argument to make particularly with things called a Code of Ethics and Duties of Board Members, but that’s the position of the Williamson County BoE.

The public would be shocked to learn that as well. The Code of Ethics and Duties of Board Members when examined in this light are toothless and present as deceptive.

J Hunter Brown

More on agency risk and voting rights

BlackRock to give clients the right to vote

Direct voting at AGMs is first step by major asset manager to give ultimate owners of votes the power to use them 

This is an important step towards reducing unnecessary agency risk, but recognize it excludes at this point individuals. Institutions can vote their shares of record, but individuals can not. This seems to me to be an substantial inequity worthy of a class action given that an individual's holding in any mutual fund would represent merely one more line in a glorified spreadsheet.

.

Institutional investors recognize how important and valuable this feature is, which is why they demanded it, and BlackRock is wise to lead the way to offloading the related responsibility and liability. Vanguard should wise up, but they seem to have become overly complacent with their penchant for cost structure at the cost of continued innovation. It is possible, although I doubt it, that they recognize the value, or power, implicit in their voting power and have chosen to retain it. More likely they are looking at the cost of the spreadsheet.

.

The next step, it would seem, would be to make voting rights detachable and marketable such that any investor would have the option to vote or sell their rights... et voila, you would have a market determined price of corporate governance, a direct vote in that which you own, or more money in you pocket, if you choose.

A look at the markets: a brand new day?

US Equity markets: overvalued by most historical standards. Pick your preference.

Source: a/o 1/21/2021 https://www.multpl.com/s-p-500-pe-ratio

Realized returns: the recent performance of equity markets globally seems to be completely out of synch with the real economy. Fine. We get repricing to the long view of value, but we also get the Fed juicing the markets like old race horses in Kentucky. We view the current levels with caution. 

Below we see the realized compound annual rates of return since March 23, 2020, to Jan 6, 2021. The Vanguard Total US Market appears in green; the Vanguard FTSE Developed Ex North America (foreign developed markets) is in blue; and Vanguard’s FTSE Emerging Markets in gold. They are supra normal returns, in our opinion, and place us at unsustainable price levels. The bid comes from the output of MMT: money has to go somewhere and fixed income presents it’s own special problems (see below). The problem with equity valuations is simple: they’re high and fragile with respect to real productivity, and they don’t have to stay there.

Source: https://www.etfreplay.com/charts.aspx

US fixed income markets & rates

10 & 2 year Treasury rates: the 10 yr shows upwards pressure and fixed income portfolios could be at risk in face of further increases.  Why buy negative real rates loaded with duration and run by reckless or feckless, as you like, governance that is continually increasing it’s risk profile?  Could the bid for Treasuries really back up? Yes, fast and hard, as we’ve seen before (c.f. Taleb on fragility and chaotic behavior of non-linear systems which translates in plainspeak to a string of obscenities followed by ‘no bid’).  We do know these things can happen but we don’t know which snowflake might cause an avalanche. Neither does the Fed. 

10 year less 2 year Treasury yields gives a better look at the upwards pressure:

Treasury Real Yield Curve Rates: real rates are negative across the yield curve and have been for a while. To the younger generation and pensioners: try to retire on these. Inflation, by most measures is positive. To corporate and sovereign borrows: investors will pay you to “borrow”, so back up the truck and enjoy the subsidy from investors. Oh, and same to home owners. Leverage, baby, put the pedal to the metal.  MMT makes it free. Well, perhaps more on that later.

Inflation: 

CPI, % change from year ago 

Forward 5, 5 year inflation rate (the expected inflation rate 5 years out, for the next 5 years). Ok, so if the market is expecting inflation of, on average, 2%+ in that timeframe, why would you buy a nominal 10 yr Treasury today at ~1.1%? Go figure.

Probabilities of Fed targets: a lot of blue paint below (indicating no change) on this one, as far as the eye can see, which one suspects in current conditions is not very far at all. 

Source: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Credit spreads: bear in mind the Fed has been buying credit products, including many of the largest junk & investment grade bond funds, and you can see the dramatic impact it had. We think it’s bad policy whether in the fixed income or equity markets. Investors need price discovery and it is now impaired.

Now think about what happens if the US$ weakens and rates rise. Will you wake up and learn the Fed kicked the crutch out from under the market? That might be an ugly too late. See the problem? Fear of and reliance on the Fed.

Our only observation is that it’s hard to know how much of the decline in spreads is synthetically driven by the Fed, but even so, a curated (for credit risk) portfolio of short duration investment grade bonds does offer a credit spread well in excess of the 10 year Treasury, maybe even a modest, though positive real return. Who knows? To be clear, this is not a investment recommendation: nothing here is.

 

US$ trade weighted vs advanced foreign economies: dropping like a rock.

Labor markets

Unemployment: still weak, but recovering. Youth unemployment peaked at ~ 32% in April of last year. Brutal numbers over the last year, but the rate of recovery was, and hopefully remains, relatively robust, if not improved by the advent of vaccines. The outlook is unclear at best.

Labor force participation: brutal. Look at the blue line Not in Labor Force.

Federal debt as % of GDP: read ‘em and weep. We hit the highwater mark of ~136% and that maintained likely by some very fancy bookkeeping. And we bear in mind that Federal debt is only a minor component of our debt problem as unfunded liabilities at all levels of government make these numbers look like small potatoes. We are in process of a massive liability transfer to the next generations. In our view this is financial gross negligence, and we refer you to The Grumpy Economist, John Cochrane for a more fulsome explication of the risks. In our opinion MMT is a destructive and dangerous fairy tale of a Big Free Lunch.

Velocity of money: Note the slight uptick starting in Q3. This is a positive sign indicating some recovery, but also realize this is a backwards looking view, significantly lagged. The changes on the margin occur very quickly and are translated instantaneously to global pricing of the rate markets.  So if we’re printing MMT money, and demand for money increases, one might envision the arrival of material inflation quite quickly, such that you read about it after it happens. 

Summary

In many ways this is a rehash of many of the issues we’ve raised in prior commentaries, but it’s a little different in that everything more cachetic, more leveraged with less capital, institutionalized & ossified while the degrees of flexibility accorded policymakers are getting limited. The window for sensible incremental changes seems to be closing slowly over time which provides, akin to a gambler in a poker game with fewer and fewer chips, greater incentives to go all in. MMT and the Great Green Subsidy come immediately to mind and media. Initiatives to raise real productivity do not.

We see overvaluation in both equity and bond markets. If so, a consequence may likely be the loss of the traditional view of bonds as having significant diversification value relative to equities. which is a very big deal to portfolio construction. If inflation & rates head north, then the traditional 60/40 portfolio of equity/fixed income may get a load of bird or buck shot, both barrels.

We also observe the level of faith by federal policy makers, and we mean precisely that word, now exceeds that of what few snake handling preachers seem to remain. The new budget and regulatory priorities to us seem to be fraught with opportunity for more rent seeking and mal-investment while the Fed’s MMT provides the framework to fund all of it, along with the mass of leveraged zombie companies who can survive only by grace of the low-to-no-to negative rate structure with the Fed at the window with a bid.

The option to induce real economic productivity and grow the economy to mitigate the debt threat may work, but let’s recognize that contrary to the assumptions of Glorious Outcomes, the incremental juice to productivity in response to massive government spending can actually decline. In fact, it can go negative. There are such things as negative multipliers. The private sector will likely face higher taxes and more regulation hence less incentive on top of less capacity to make large scale investments given current uncertainty.

So what to do? Diversify. Ok but into what? Frankly, we don’t have an answer we’re confident in except for this: we're cautious about viewing the bond market, particularly longer duration, as a less risky asset. And we’re well past viewing US Treasuries as a risk free asset although we hope the world does not join us in that view. Perhaps Grandma should rethink longer duration and higher risk corporate spread product? How about a credit spectrum running from a minimum of high quality investment grade to Treasuries? And no structured stuff. Keep it simple.

We do have a thought born of our cognitive limitation and desperation: consider broadly the incentives which impact different forms of governance, for example corporate vs government. On a sober day we know neither is particularly your friend, but which knows how to make things better, faster, cheaper? And which is incented, gets paid to make it so?

The Fed, Congress or CEO’s and the boards they report to? 

And more abuse

Sharyl Attkisson Refiles Spying Suit, Exposes Big Deep State Players

Some, if not all, of this flock are guilty as sin, yet free as a bird. This suit details the glide path under the Obama administration that leads to our current systemic abuse of national security apparatus for political purpose and the inability of government to manage itself and that technical capability. Simply garden variety corruption with updated technology. One Constitution for me, another for thee. Time to end FISA.

The Gentle Reader will note the same players, same themes, and same technology.

“One federal court of appeals judge even called this dismissal of her lawsuit “Kafkaesque” given how well-nigh impossible it was for her case to proceed under our justice system’s rules and judicial interpretations rigged in ways that protect government lawbreaking.”

“In her lawsuit refiled on January 10, Attkisson relied on a whistleblower who was actually involved in hacking her computers. He identified some of the other government officials complicit in the very disturbing spying on her. The refiled complaint quotes government forensics experts as being “quite shocked,” demonstrating some within the government Intelligence Community thankfully have consciences.... [emphasis added]”

“Forensic details were derived from numerous investigations, leaving the conclusions unquestionable. The spying was conducted using government proprietary spyware and a mysterious United States Postal Service Internet domain. The latter fact is highly relevant, as government experts explained. A multi-agency government spying unit in Baltimore under Rosenstein’s supervision used these techniques, and they were even employed without court-ordered warrants....”

“The new suit alleges that Rosenstein ordered the spying on Attkisson after directives -- later exposed by Wikileaks -- showed Obama officials John Brennan and Eric Holder were neck-deep in targeting journalists who were reporting on leaks about Obama administration scandals and lies. Holder’s press secretary even went to Attkisson’s then-employer CBS News complaining that “she’s out of control” with her reporting on these Obama administration scandals.”

“ Another Defendant named in the lawsuit is Shawn Henry, who worked under Robert Mueller at the FBI and is now president of CrowdStrike Services. CrowdStrike is the company hired to review Democratic National Committee servers in a well-reported email leak scandal. Without actually examining the servers themselves, Mueller and the FBI curiously and negligently deferred to the findings of CrowdStrike that Russians hacked the servers despite assertions and evidence to the contrary.”

“The government sources with consciences told Sharyl’s lawyers that she is just one of hundreds of journalists or other American citizens who have been victims of such illegal spying...”

The abuse of FISA must stop

We now have a huge and continuing problem with no cure in sight. This is a tipping point for those who support the Constitution as the IC infrastructure has constructed a “I know nothing. I see nothing.” response to perpetuate lack the control and consequent systematic abuse. With the growth of technology this problem will only grow and citizens will lose the ability to turn it around by democratic process.

===============

• “Within Judge Boasberg’s review of the 2017 activity he outlined an identical set of FISA violations from within the FBI units and “contractors” as initially outlined by Judge Collyer a year earlier. Judge Boasberg wrote his opinion in October 2018 and that opinion was declassified last October 8th, 2019)...
• Because the FISC-R’s conclusion regarding Section 702 required the Government to amend the FBI’s querying procedures, it declined to reach the issue of whether the FBI’s querying and minimization procedures complied with the requirements of FISA and the Fourth Amendment...
• Essentially it was the job of David Kris to deal with the violations being outlined, and then find process arguments to convince the FISA court to keep letting the DOJ and FBI use the system...
• both presiding FISC judges never ask the “why” question: why are all these unauthorized database searches taking place? Instead, both judges focus on process issues and technical procedural questions, seemingly from a position that all unauthorized searches were done without malicious intent...
• Accepting that neither judge, likely purposefully, had no information upon their FISA review, their lack of curiosity is not necessarily a flaw but rather a feature of a very compartmentalized problem...
• Boasberg and Collyer are only looking at one set of data-points all centered around FISA(702) search queries. Additionally, the scale of overall annual database searches outlined by Boasberg extends well over three million queries by the FBI and thousands of anonymous users; and the oversight only covers a sub-set of around ten percent..
• as Boasberg notes in his declassified opinion there is no consistent application of audit-trails or audit-logs; and worse yet, users don’t have to explain “why”, so there’s no FISC digging into “why”...
• If the DOJ or FBI want to turn on a surveillance switch against an American person, let them go to a standard Title-3 judge and request a search warrant for it.”

Read this article in full to gain a more fulsome perspective. 

FISA Court Selecting Surveillance State Advocate, David Kris, Shouldn’t Be a Surprise…

Update on Monday, January 13, 2020 at 11:28AM by hb

And impeachment is also directly related to the FISA abuse. Bannon is right.

https://youtu.be/TmQPi7dfvqY

Attorney General William P. Barr Delivers Remarks to the Law School and the de Nicola Center for Ethics and Culture at the University of Notre Dame

Bill Barr's comments on freedom of religion are perhaps some of the most important and least publicized social and legal commentary of our time.

Attorney General William P. Barr Delivers Remarks to the Law School and the de Nicola Center for Ethics and Culture at the University of Notre Dame

 ~ 

Friday, October 11, 2019

Remarks as prepared for delivery

Thank you, Tom, for your kind introduction. Bill and Roger, it’s great to be with you.

Thank you to the Notre Dame Law School and the de Nicola Center for Ethics and Culture for graciously extending an invitation to address you today. I’d also like to express gratitude to Tony de Nicola, whose generous support has shaped – and continues to shape – countless minds through examination of the Catholic moral and intellectual tradition.

Today, I would like to share some thoughts with you about religious liberty in America. It’s an important priority

Click to read more ...

Watson Wilkins & Brown, LLC, to cease investment management & advisory operations

Watson Wilkins & Brown, LLC, will terminate its investment advisory & management activities effective close of business Dec. 17, 2018.  The decision was motivated by various factors.

The regulatory framework will continue to become more burdensome, complex, and expensive. Additionally, the footprint and complexity of technology will expand and as a consequence of both innovation and regulatory requirement. While the cost of the technology may be more tame, the rate of change will only increase. Both are costly in terms of time & dollars, and both favor firms of larger scale. 

We thought about acquiring or merging with another firm, but it was a very short think. We are tempermentally unsuited to subordinate our judgement to others in respect of investment strategy for our clients, nor would we consider monetizing our client relationships. By experience and observation we were skeptical of acquiring potential legacy liabilities.

We found that as the business grew, so did our regulatory burden and key person risk, and no satisfactory strategic resolution eventuated. 

It has been a pleasure to have served our clients.

When X ≠ X

"At a seminar held last week in Philadelphia sponsored by the Institute for the Fiduciary Standard, several speakers slammed the SEC for what they say is a rule that favors broker-dealers over RIAs because the proposed regulation applies the term “best interest” to brokers without requiring them to abide by the fiduciary standard, the publication writes."

...

The best regulation money can buy.

RIAs Threaten Lawsuit Over SEC’s Best Interest Rule

We float uneasily along

Our first stop is the fixed income markets. Take a look at where we were a year ago & the movement of nominal and real rates.  Green is today, blue a year ago.

A natural tightening

Nominal rates are up across the curve with the biggest movement in the short end, looks like 2 years. Real rates are up significantly in the short end and no movement in the long end. We note again that the 5 year is as short as the Treasury choses to display (which strikes us as an odd and biased limitation on the information displayed). Nominal rates rose also, but we believe real rates drive the real economy.

If we focus a bit on the movement of the yield curve as presented below we see a trend of continued flattening (5 years data below, 10 year less 2’s), maybe some stub of an uptick.

So here we are with 4.1% latest GDP, a continuing trend of flattening, and no movement whatsoever in the real 30 rate year from a year ago. Maybe the lack of movement in the 30 year real rate  is telling us that whole barrel of QE monkeys was a useless exercise?

Credit spreads seem stable notwithstanding some outstanding sovereign events like Turkey or Venezuela or coming attractions like Illinois or Connecticut. Small potatoes?

GDP Now expects another increase in Q3, about 4.3%, trade wars, Russians, and all:

Even VIX has gone into a state of deep relaxation, trading at 12.7 as of this writing.

Perhaps money velocity has seen a slight point of inflection upwards after almost a decade of decline. It’s quite possible. All the more reason to watch the inflation indicators.

And inflation, which is the fuse that can be very short and by that we mean change very quickly, seems to be holding, at least if we’re looking backwards. Below 10 year nominal less 10 year TIPS, constant maturity, followed by the 5 year, 5 year forward inflation expectation, a measure of expected inflation (on average) over the five-year period that begins five years from today.

Neither seem particularly lathered up.

Valuation ratios of the S&P 500 continue to be high by most metrics.  Pick your favorite:

• S&P 500 pe

• S&P 500 price to sales ratio

• S&P 500 price to book

• Shiller pe ratio

• S&P dividend yield

 We again return to the long view

Driven by habit and experience we take the long look back, about 10 years. We’ve selected four ETF’s which are broadly based to represent the respective asset classes. Do we really think the long green line is going to keep going up at a 14% annual compound growth rate? Perhaps. Or perhaps not.

 Source: https://www.etfreplay.com/charts.aspx

Take a look at the drawdowns which measure the greatest percentage drop from the high (based on Total Return). This we call sober risk assessment.

There are two ways an investor can see a drawdown: the quick way or the long slow grind. We’re not prepared to say whether a downturn will happen or not. Or if one does occur, whether it will be fast & furious kind or the death by a thousand cuts. We are suggesting investors should be prepared.

We stipulate our philosophy is that time in the market determines returns and risk, not timing of the markets, is foundational. In beta returns we trust, not in brokers or ‘smart’ products. We do not pretend that we or anyone else can predict the markets, so we do not try.

We also believe there is such a thing as a business and/or credit cycle. It has not gone away notwithstanding the efforts of the many central planners around the globe. These cycles can perhaps be modified, delayed, accelerated, disrupted or magnified by various policies, scientent or not, but they can not be eliminated. The markets win, central planners lose. 

And the whole notion of time in the market is true, provided, however, investors require the liquidity to ride out the full length of the cycle. This is the sober part of asset allocation, the risk budget. We despise the imbecilic, all too brief questionnaires that are so often presented to ~ “help you determine your risk tolerance.” Malpractice comes to mind... 

We encourage all to take a look at the data below which we hope will be more helpful. We’ve been looking at it lately. 

Source: https://www.schwab.com/resource-center/insights/content/retirement-income-planning-whats-your-risk-capacity

2017 Q4 Review & Outlook

Updated on Friday, January 5, 2018 at 02:25PM by hb

We really don’t know what the future holds, nor do we claim to understand all the moving parts of the present, but here are some of our thoughts and some of those we respect.  This is going to be quick & simple:

Outlook

Presumably, Vanguard is smarter than we are, so here are some excerpts from their recent economic review and market:

■ "For 2018 and beyond, our investment outlook is one of higher risks and lower returns. Elevated valuations, low volatility, and secularly low bond yields are unlikely to be allies for robust financial market returns over the next five years. Downside risks are more elevated in the equity market than in the bond market, even with higher-than-expected inflation."

Click to read more ...

Fed: now go do that voodoo that you do so well

The great Unwind of the Fed has now arrived, and we are grateful for it’s modest and seemingly benign form:

the Federal Open Market Committee directed the Open Market Trading Desk at the Federal Reserve Bank of New York to initiate, in October 2017, the program to gradually reduce the reinvestment of principal payments from the Federal Reserve’s securities holdings that is described in the Committee’s June 2017 addendum to its Policy Normalization Principles and Plans.  Specifically, the Committee directed the Desk to reinvest each month’s principal payments from Treasury securities, agency debt, and agency mortgage-backed securities (MBS) only to the extent that such payments exceed gradually rising caps.

The schedule of monthly caps consistent with the Committee’s September 20 decision and the June 2017 addendum is as follows:

Click to read more ...

Calling out mal-investment or worse

Exposing Government Favoritism

This is the new frontier that cries out for further analysis & disclosure:

“Tax abatements are a common tool used by governments to stimulate economic development, but the taxpayer costs of such agreements are often hidden. This is a problem, because the cost of such corporate handouts from state and local governments is estimated to be as high as $70 billion per year.”

An obvious inequity: a company that has been a lifelong resident of a state can see a competitor be granted an immediate & huge tax subsidy.  Equitable? Equal treatment under the law? Not likely.

Worse, tax abatements provide a formal market for rent seeking and political corruption.  Chicago or Connecticut come to mind. We need more data on & analysis of this broad phenomena for the benefit of taxpayers and the economy.

Massive unfunded pension liabilities: political malfeasance?

The absolute fraud of pension accounting of unimaginable scale. Citizens and businesses need to understand this is a massive generational transfer of liabilities. Current benefits have neither been adequately funded nor accounted for. They have been essentially hidden... and abused. Willful political malfeasance?

“Despite the introduction of new accounting standards, the vast majority of state and local governments continue to understate their pension costs and liabilities by relying on investment return assumptions of 7-8 percent per year. This report applies market valuation to pension liabilities for 649 state and local pension funds. Considering only already-earned benefits and treating those liabilities as the guaranteed government debt that they are, I find that as of FY 2015 accrued unfunded liabilities of U.S. state and local pension systems are at least $3.846 trillion, or 2.8 times more than the value reflected in government disclosures. Furthermore, while total government employer contributions to pension systems were $111

Click to read more ...

On the fiduciary rule

WWB strongly supports this position.

Regulations that facilitate conflicts and transacting under an overly complex body of regulation combined with poor but legalesed disclosure are what caused the problem. Together they enable, effectively, a regulatory safe harbor for operating under false color.  Its not complex... but gets so when regulatory capture holds the day. And that's where we are. 

"I do not believe a broker can act as a fiduciary to an investor seeking advice for his personal investments for one simple reason – he can’t serve two masters. A broker already owes a fiduciary duty to his client. It’s just that his client is not the public that buys his wares; his client is the issuer of securities, companies, municipalities, mutual fund companies and other investment product manufacturers. And frankly, Wall Street is already failing at fulfilling this duty. Any IPO that has a large pop on the first day of trading is a failure of the brokerage underwriter to meet his fiduciary duty to his client. What is needed is more education, not a blurring of the lines between advisers and brokers."

The Fiduciary Rule Educates The Public

An update on active vs passive management

The first graph from Indexes Beat Stock Pickers Even Over 15 Years explains the second.

Click to read more ...

LPL Financial No Longer Claiming to Be ‘Conflict Free’

Investors take note. This is a big deal. We've always encouraged investors to read & understand the fine print of advisory & brokerage agreements, particularly disclosure of conflicts. Of course, many have been written in legalese so as to obscure, if not misrepresent, the substance. The fog of advertizing under false color is slowly receding and with significant consequences for conflicted business models. And more will follow.  This from today’s WSJ LPL Financial No Longer Claiming to Be ‘Conflict Free’ .

“LPL Financial Holdings, the Boston-based independent brokerage, is moving to prevent its affiliated financial advisers from claiming they are “conflict free.”

On Monday LPL removed those words from its web site following a story in The Wall Street Journal showing that some advisory firms claim to be “conflict free” on their public websites even though they also list numerous potential conflicts in their disclosures to government regulators.

LPL also asked its advisers to review their websites “for any use of that language and address the concerns that have been raised,” said a spokeswoman for the firm...

LPL’s regulatory filings disclose several conflicts, yet a Journal analysis found that the websites of approximately 70 LPL advisers asserted they were conflict free. As of last week LPL’s own website said the firm’s “objective research” enabled advisers to “provide conflict-free advice and guidance.”

Now one wonders if any of LPL's or its advisors' prior disclosures were misleading? What changed from an operational or policy perspective? One suspects nothing but sunshine. No doubt litigators will sort that one out.

Q1 2017 Review & Outlook: first, the rear view mirror

Equities

It is difficult to convey the magnitude of the quarterly performance of the equity sectors, perhaps less so for the fixed income markets. Below are the total returns of exchange traded funds that we use to represent the total US stock market [VTI], all non-US equities [VEU], emerging markets [VWO], the aggregate US bond market [BND] and the short term investment grade sector of the US bond market [VCSH].

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