Posts by DockTreece:
The Financial Planning Fable
March 5th, 2015
By Ben Treece.
For decades, financial professionals have made a living by selling retirement plans to clients. These professionals claim that if you use their services that they will assess your risk tolerance, retirement goals and financial needs to determine the ideal portfolio for you and your specific situation. What we are about to discuss is not a popular sentiment in the investment world, but the concept of a customized financial plan is 100% fiction.
There is one very hard truth that investors need to understand when investing in a security or asset class; the market does not care about you. The market does not care that your first car was a Ford and that emotional sentiment is why you should buy their stock over GM, and the market does not care that you think buying a savings bond is a fantastic risk-free way to secure your future. The market does not even care what your retirement aspirations are; all actors and actresses that move to Hollywood aspire to win an Oscar one day, but wanting it does not mean that it will happen.
When it comes to meeting your goals for retirement, there are only 2 factors that matter; principal and rate of return. An investor’s risk tolerance or likes and dislikes have absolutely nothing to do with securing a successful retirement. Investments react to economic conditions, not your preferences. Just because you like a particular investment does nothing to increase its chances of going up.
For example, if a 38 year old has saved $100,000 for retirement and puts that entire life savings into government bonds for fear of a market downturn and to remain as risk averse as possible, that $100,000 will only be worth about $175,000 at retirement given where 30 year bond rates are today, and that is before investment costs.
As yet another example, if you were a supporter of green energy initiatives and put a substantial portion of your portfolio into the green energy sector, you would be in a world of hurt if you had chosen Solyndra as an investment.
The fact is that while the inner workings of the equities, bond, derivatives and commodities markets can be difficult to assess, proper investing for your future is a rather simple concept; study to determine which market segments or sectors you expect to do well given economic and geopolitical conditions, and diversify within that sector. To clarify, traditional diversification is spreading your money out across various market sectors, hoping something will go up. If you can determine a sector that will do well (real estate, growth stocks, debt, commodities, etc.), you should diversify within that sector. Mutual funds are a great way to accomplish that goal.
Everyone deserves a happy retirement, and there are factors that need to be addressed, such as your lifestyle needs, what goals you want to achieve for yourself by the time you retire, etc. However creating a custom plan that suits you specifically is not the answer.
If you take nothing else away, remember this; the only things that can truly impact how much money you will have at retirement are the amount of capital you add to your portfolio and the rate of return that you earn. Everything else is just a gimmick.
Ben Treece is a 2009 Graduate from the University of Miami (FL), BBA International Finance and Marketing. He is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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Holy-conomy
February 21st, 2015By Dock David Treece.
Of all the obstacles to economic growth, uncertainty is undoubtedly the most hindering. Uncertainty about policy, prices, armed conflict, even weather; the more uncertainty that exists in an economic system, the worse it is for growth.
When uncertainty is prevalent, business leaders can’t make decisions based on reliable forecasts. In some instances they can’t depend on consistent government policy (as is the case today); other times they can’t know whether they have dependable sources of natural resources. All of these things dictate the framework within businesses and their leaders must operate; and a shaky framework prevents leaders from having the confidence they need to grow.
Consider Obamacare only as one example. Like the concept or not, the Affordable Care Act has probably been the single worst-handled piece of American legislation in the past half-century. It has also been one of the most far-reaching, directly impacting more than 15% of the US economy along with every major employer.
Democratic-led healthcare reform (post-Bill Clinton Presidency) was first floated as a concept during the 2008 primaries, but business leaders were unsure whether it would be pursued. They were also unsure whether Obama’s plan or Hillary Clinton’s would be the one on the table.
After the 2008 Presidential election, Obama’s plan was fully formed and put to Congress, and business leaders had to wonder if it’d be passed. After passage, there were doubts as to whether the Supreme Court would uphold the new law.
Each of these steps has introduced another layer of uncertainty that has impacted business leaders’ thinking about whether healthcare reform would be a factor in their decision-making, and (if so) what the law would actually look like, when it would be enacted, etc. Many have been frozen with indecision about whether to expand, to hire or fire; since no one knows what another employee might cost six months after hiring.
And now, after all the uncertainty is finally subsiding, Congress is generating a new debate on whether to repeal Obamacare entirely.
Nor are business leaders the only ones plagued by indecision because of such rampant uncertainty. Individuals also have greater trouble making decisions. For instance, people can’t necessarily depend on a job to remain available indefinitely, or even if a company will survive a future downtown as the result of changing circumstances.
Traders and investors are similarly paralyzed because they’re left clueless as to what demand will look like in six months. It’s totally unknown what commodity prices will be, let alone will the geopolitical landscape will look like. Will Greece be on the Euro? Will Crimea belong to Ukraine or Russia? Will Cuba be open for business and investment?
Along with uncertainty, leverage and illiquidity comprise the three biggest threats for any developed economy. Today in the US, in addition to pervasive uncertainty, there’s far too much leverage and far too little liquidity. Margin debt is at the highest levels on record while at the same time market liquidity is extremely low because (1) most investors, thinking the market is going to continue higher indefinitely, are fully invested and (2) most major banks have backed out of trading, making it less likely they’ll prop up the market in another downturn.
The end result of these three threats is that, should market sentiment changes quickly, financial markets are going to suffer major moves lower. When increased levels of uncertainty, leverage and illiquidity exist all at the same time, there’s no such thing as small moves down.
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A Proposal For Putin
December 16th, 2014
By Dock David Treece.
The last several months Americans and engaged citizens around the world have played witness to Russian President Vladimir Putin making diplomatic mincemeat of the United States federal government. At every turn Putin has convincingly demonstrated our government’s weakness, lack of resolve, and utter incompetence.
The question we would pose for Putin is as follows: Why put Russia and her allies at odds with the United States? This is especially important to ponder when considering that far more can be gained through collaboration. While confrontation and discord are zero-sum games – one nation taking from another through negotiation or force – synergy and collaboration are not. Unlike the former, the latter can show a whole to be more than the sum of its parts.
For more than the past half-century our people have been almost continually plagued by a state of confrontation between our two nations; lasting roughly from the 1950s until the fall of the Berlin Wall. This antagonizing has done both economies far more harm than good; having sparked unnecessary spending and expanded borrowing for both our countries. Our disputes have strained our respective allies as well; we have divided the world.
This confrontation also caused the collapse of an entire political system and created the impetus for new Eurasian market economies. The best periods for both our respective economies was right after the end of our Cold War; a time that permitted us both to refocus our productive efforts and (incidentally) made many of your friends into billionaires.
And yet, now we’re backsliding towards the precarious state we had, in just the past 20 years, finally overcome. And why? For oil? Money? Power?
The United States government isn’t playing that game anymore; it’s boring. Our government has moved past the power jockeying that categorized our respective foreign policies of the era after the Second World War. We are focusing now on more high-minded goals – or at least we’re trying. Our efforts would be furthered greatly if you would join us. In the new game we’re playing, we could win if only we could get on the same team. Our government today has little interest in playing a game already won by their predecessors.
But make no mistake: If this old game of power diplomacy is the game you insist on playing, we will play it with you. There will be shifts in our government, and we will backslide right along with you. You will see a shift in tone coming from our side of the globe; we will elect leaders specifically to play the old game. They will play it well, and they will win. Our only hope is that they don’t go too far in doing so.
And so our appeal is this: Don’t push us – please. Our domestic economy is still trying to get back on track from the 2008 debacle. We’ve overextended ourselves during the past 40 years and are trying to sort out or finances. We’ve been trying to spur investment, even by way of promoting our investment visa programs. More recently, we’ve just left Afghanistan with our tail firmly between our legs. Many Americans are looking for an antagonist – anyone to blame but ourselves. Please, don’t let our leaders thrust you in that roll.
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Quite the Quagmire 8.27
September 1st, 2014
By David Dock Treece.
We, like many others, have been watching the increasing turmoil in the Middle East, contemplating the effects recent events have been having the financial markets, as well as their political implications. Looking back on US involvement in the region, it’s hard not to get a salty taste in our mouths. After all the sacrifice by American military families, we’ve accomplished little more than the destabilization of the region.
Yes, in the course of our intervention we eliminated some very brutal dictators, but we did so without adequate understanding of how that part of the world operates. This naivety has prevented us from installing a stable government since toppling regimes. In the end, it’s hard to argue that we’ve made life any better over there for the average person.
Militarily and politically, the United States should absolutely be withdrawing from the Middle East. While this would almost certainly escalate local strife to an event greater magnitude (in the near term), US involvement in these regional conflicts is beginning to resemble Vietnam more and more.
The only problem with a potential withdrawal is that currently the US economy is in such a state that it can’t support returning troops. There would be disastrous results from a sudden influx of labor when unemployment is already high; or of consumers when prices are already rising.
However, these are not justifications for leaving troops on the ground in the Middle East. Rather, it is further evidence of the lack of intelligence on the part of US central planners.
Frequent readers of our columns and listeners to our radio updates know that we often talk about the law of unintended consequences. This, however, is the law of unforeseen implications. The problem arises when power is concentrated among a small group of people who are incapable of seeing past next week.
One of the primary benefits of free and open markets is that they have a smoothing effect. Radical swings are often prevented when millions of people are competing with each other in pursuit of their own self-interests, and things are far smoother than when power is concentrated among just a few market movers.
As an added benefit, the collective intelligence of crowds is almost always greater than small groups or individuals. However, studies have shown that when power is focused among just a few people, not only do those people demonstrate less intelligence than crowds, but they are also more confident in their abilities – even though that confidence is more often misguided.
We see examples of this all the time. In financial markets, the Federal Reserve is almost the only market participant that matters. Everyone else involved with the markets is constantly watching to see what the Fed does, even though they more often than not do precisely the wrong things.
Likewise, in recent decades political power has been more focused in the White House (as opposed to Congress or the courts). This has happened despite the inability of people who occupy the Oval Office to understand the dynamics of regions in which they meddle. The result has been that they do things that change the world without an adequate understanding of why things are as they are; obviously a poor recipe for positive and sustainable change.
Now, after years of unintelligent actions by poor central planners, the United States finds itself in a quagmire. We’re trapped in a series of conflicts, none of which we can win, with no clear set of goals or any end in sight. Our economy has suffered collapse and failed to see any significant rebound because those who guide our monetary policy have tried to keep inflation at bay, with the result that a whole new set of bubbles has formed in the meantime. This has placed our economy on the precipice of another collapse, except that we have nowhere left to fall and no tools left to stem the calamity, much less any ability to reabsorb the heroes we sent abroad to help a people we didn’t understand.
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Yellen hints at detrimental Fed action
July 21st, 2014
By David Dock Treece.
Over two days of Senate hearings, Federal Reserve Chairwoman Janet Yellen addressed a number of questions and concerns related to U.S. monetary policy and potential impacts on our economy and financial markets. Among the numerous items discussed was the potential for the Fed to react to further improvement in labor markets by raising short term interest rates.
This wouldn’t be the worst possible Fed reaction, but it’s nevertheless the wrong tack. Instead of raising near-term rates by adjusting the Fed funds or discount rates, the Fed should liquidate all or some of its excessive portfolio of long term U.S. treasury bonds.
The majority of this country’s major economic expansions of the past century have been preceded by a steepening of the yield curve (the line drawn along yield rates of U.S. treasury notes and bonds of various durations), not a flattening. With long-term rates currently just above short term rates – and offering almost zero return to long-term fixed income investors like retirees or pension funds – it’s far more important to see increases in long term rates rather than shorter term. After all, raising short term rates would serve to flatten the yield curve, which historically precedes a slowdown of economic growth, and with short term rates at or near zero, they simply can’t be cut any more than they already have.
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Admittedly, the Fed is correct in thinking that it should respond if labor markets continue to improve, and this has actually been occurring over the past several years. Yes, the stated employment rate is still over 6 percent, and yes, that is higher than its long term average; but that’s still far better than the 10 percent peak seen in 2009.
However, broader unemployment still has considerable room for improvement. The U6 rate consists of “unemployed, marginally attached workers, and the total employed part time for economic reasons” and is a relatively new metric – as economic indicators go. That number peaked at just over 17 percent in 2009-10, and stands now at just over 12 percent.
We still have a long way to go to get back to full employment, and the Fed’s proposed response is wrong if it hopes to see further improvement in the jobs market, let alone a resumption of real GDP growth. This can be best achieved not by raising short term rates, but by beginning to increase the cost of long term borrowing. Doing so would give U.S. companies an impetus to start borrowing now to pursue expansion projects – before costs rise further. This could kick the US economy back into high gear and begin a real recovery that has so far failed to appear post-2008.
Obviously these actions would have implications for the U.S. inflation rate. Money created over the past seven years in response to the financial crisis would start to work its way into the economy, ultimately leading to more dollars chasing a relatively fewer goods and services and resulting price increases. The Fed needs to recognize, though, that money’s been created; they can’t un-ring that bell. But at least if long term rates rise, retirees and other fixed income investors will be able to earn some kind of return on their money.
In order to see resumption of economic expansion in this country, we desperately need to see the velocity of money move back up. Money velocity – defined as GDP growth divided by change in money supply – is a much older economic indicator than U6, and in the past four years it’s moved into uncharted territory. It now sits at an all-time low.
In order for any real economic expansion to begin, it will have to coincide with a recovery of money velocity. This, we fear, will not occur if the Fed takes actions like those proposed by Yellen during her recent Congressional testimony. For the U.S. economy to get on track, the path we need to follow leads to a steepening of our yield curve through long-term rate hikes, not a flattening that will only continue to punish this nation’s retired population and pension fund investors.
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Curtailing Consolidation and Re-Invigorating Innovation
April 26th, 2014
By David Dock Treece.
The past two centuries – since the Industrial Revolution hit its stride – have seen consolidation among American businesses at an ever-quickening pace, with the result that the US economy has stifled innovation and depressed America’s entrepreneurial spirit. When this country first began, people almost all worked for themselves. Some ran their own small farms, producing enough food for their families and selling any excess harvest for revenue. Others – merchants – hung out their own shingles, under which they provided goods and services for members of their communities or transients.
Since then, the American public has played witness to consolidation in its private sector on a mass scale. The past century has seen large industrial firms transformed into large multinational corporations, conglomerates, and the like. It may be true that small business remains a major contributor to US GDP (46% of private-sector output according to SBA.gov) but the fact remains that entrepreneurialism has been curtailed in this country. Private businesses make up over 99% of employing US firms, but employ less than 43% of private sector workers – which means that the 0.3% of US companies that are not small businesses employ nearly 60% of American private sector workers (SBA.gov).
In other words, innovation in the United States is now relegated to large corporate R&D departments, academia, and the occasional odd-ball startup.
Perhaps the more interesting aspect of this phenomenon is that over the same time of US private sector consolidation, innovation has spurred dramatic increases in worker productivity. A more recent effect of this trend has been that growth in real household income has failed to keep pace with gains in productivity. The result is that workers have been able to put out more and more production, while their real incomes have stagnated; this has caused a gradual slide of middle class Americans toward the lower end of the economic spectrum and a widening wealth gap as earnings from higher worker production concentrate at the top of the corporate ladder.
These developments have also left Americans with an economy that relies, and will become increasingly dependent, on foreign demand, since domestic laborers are left with less and less discretionary income (relative to their faster growing productivity) with which to supply demand for the domestic producers which employ them.
The lesson to take away from these long-term trends and their results is that the United States needs to back away from the consolidation among private sector firms that has stifled small business and innovation. Rather, the US needs to actively encourage entrepreneurialism on a mass scale, much in the same way we have invented programs to attract new college graduates to government employment by offering relief of student debt. After all, people will always seek the maximum reward for their labor, so the challenge is to make entrepreneurialism a more attractive option.
It is true that, to some extent, entrepreneurialism will be encouraged indirectly by the recent stagnation of real household income. Americans, pursuing their own self-interest, will become discouraged by the leveraged results of their productivity ending up in the hands of lackluster executives or far-flung corporate shareholders, and will elect to leave employment at large firms and go into business for themselves.
However, the more we can do to encourage people to strike out on their own, the better. The sooner we can encourage a new trend, the quicker we will be able to spur dramatic economic growth in this country and the less economic pain we’ll be forced to endure. New innovation will allow us to address issues worrying hoards of people; among them energy independence, a widening wealth gap, corporate malfeasance, pollution, and genetically-modified foodstuffs required to sustain developed countries that have become overpopulated.
Economic prosperity can permit us to solve many problems in the world today, but America will not be led to prosperity by consolidated multi-national corporations led by nefarious executives or nameless shareholders. Entrepreneurialism, hard work, and a pervasive drive for innovation of any type or scale will do what they cannot.
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Stocks on the Slide
February 9th, 2014
By Dock David Treece.
Over the last few weeks – since just before the end of 2013 – the US stock market has been slipping steadily, though not so gradually, away from its all-time highs. In fact, the Dow Jones Industrial is already down more than 5% so far this year, while the S&P 500 is down almost that much.
Sadly, this is only the beginning of a much larger and more prolonged contraction in equities. They say no one rings a bell at the top, but… RING-A-LING!
Of course there will be rallies – some very tradable rallies; but the trend in the market has now changed. Though equities have spent the past half-decade on the rise, the market is now on its way down. The days of new all-time highs being set on a daily, if not hourly, basis are over.
This new development should come as no surprise to most investors. The market has been overvalued for quite some time – pushed ever-higher by the loose money policies of the Federal Reserve and helped further by a mild post-2008 recovery. After a decade of sideways markets and zero income growth, many people used the recovery of the markets to replace cars or homes, to splurge on new toys, et cetera.
But, alas, the honeymoon is over. Economic activity in this country has done worse than plateaued. In fact, it has actually begun showing serious signs of weakness.
Those who stay in the stock market now do so at their own peril. They are ignoring warnings which have become numerous, and they are ignoring many technical indicators which show the stock market to be overvalued; more so than in either 2000 or 2007. Indeed, the stock market has been overvalued for some time now, as we and other have written before, and investors who remain committed to positions in stocks now are committing themselves to losses.
Admittedly, no one can say just how the market will undergo its coming correction, nor how large losses might be. Recent activity has shown a great deal of contagion in global markets, particularly in currencies. Some days the US stock market will weaken, triggering a sell-off in the US Dollar. Within hours – sometimes minutes – currencies of developed countries around the world are almost universally lower.
This is when things get most dangerous – when no one knows just how things will interact or how many dominos may be lined up to fall. A stock market correction, even one of 20-30%, is one thing; a correction in stocks which triggers multiple currency crises ending in sovereign debt defaults, that would be something different entirely.
And therein lies the problem. The problem today is very much as it was in 2008 when the world’s largest banks were able to convince the world’s largest government and central bank that they needed the world’s largest bailout. Despite the assistance, many of the systemic problems were never resolved. The result is that, even today, no one knows just how deep the rabbit hole goes.
Dock David Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and is licensed with FINRA through Treece Financial Services Corp. He provides expert content to numerous media outlets. The above information is the express opinion of Dock David Treece and should not be construed as investment advice or used without outside verification.
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Selling out seniors
January 27th, 2014
By Dock David Treece.
During the tough economic times of the past six years, steps have been taken to stabilize the US financial system. Some may disagree with what, but virtually no one denies that something had to be done. During that time the Federal Reserve, in soon-to-be-former-Chairman Ben Bernanke’s words, “provided liquidity to the financial system.” By “the system,” Bernanke is referring to banks – big banks.
The Fed’s preferred method for “providing liquidity” over the past several years has been a combination of several steps. First, interest rates were pushed down to artificially low levels – and kept there. Second, the Fed provided liquidity through asset guarantee programs. Most recently, several rounds of quantitative easing provided more direct injections of “liquidity” to our nation’s financial system. (Note: The substitution of “financial system” for “economy” is intentional, as liquidity was provided to one but most certainly not the other.)
These steps, as many readers will note, have been discussed in this space numerous times. However, at the risk of sounding repetitive, let us summarize previous articles by saying that none of these steps was taken to benefit the American public; nor were they taken to benefit America as a nation. They were taken to help big banks.
In fact, this process has actually done a great deal to hurt Americans – most especially seniors. Most retired Americans provide for themselves through fixed income solutions; be they CDs, bonds, pensions, old 401ks, annuities, or any one of a number of various products. The majority of these structured products are tied to interest rates and consumer prices. When interest rates are higher, investors holding bonds are paid more on their investment – in other words, their incomes are higher. Most structured fixed income products behave according to this general principle.
This all means that, as a direct result of the Federal Reserve’s low-interest-rate policies, American seniors have suffered from a significant lack of income over recent years. For many who encountered losses, first in the tech bubble of 2000, then the more recently calamity of 2008, this income shortage has translated into a lifestyle change – and not for the better.
Mind you, this sacrifice by our nation’s seniors might have been avoided; or it might at least have been justifiable – if any of the problems which solved it had actually been resolved. Unfortunately, that’s not what happened. The policies listed above (and others which have surely been overlooked) were supposedly instituted to resolve the problems on big bank balance sheets.
Instead, the Fed didn’t fix the problem – they just made it bigger; they magnified it. In many regards, the American financial system today is more dangerous than it was in 2008. In 2008 we learned the system (as it was then) was too big to fail; now it’s almost too big too hiccup.
And what insight is to be gleaned from these unfortunate developments? Our best hope – what seems to be highest and best use (although still sad) use for all the suffering which has been endured – is that people finally learn that their votes matter. Whether on a local, regional, or national ballot, votes have consequences which go far beyond the immediate, foreseeable future.
In many ways, seniors today are facing problems (and will likely continue to face problems) due in part to votes cast decades ago. Just as Jimmy Carter’s policies led to runaway inflation and the unnecessary explosion of asset prices, George W. Bush’s foreign conquest spurred federal spending which grew the national debt and involvement in unstable regions.
Many of these policies have been continued by President Obama, but combined with a new progressive social agenda at a time when our country can least afford it.
Our country – and our seniors – will get through these problems. This is not the end of America, or of our economy. Nor is it the last of our debacles. All we can hope is to learn from our mistakes going forward, so that, perhaps instead of repeating those mistakes, we can move on to make new ones.
Dock David Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and is licensed with FINRA through Treece Financial Services Corp. He provides expert content to numerous media outlets. The above information is the express opinion of Dock David Treece and should not be construed as investment advice or used without outside verification.
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