Bankers can make more money doing business in Asia than in the West-more projects to finance and more credit-worthy customers. And that’s likely where the capital will flow. Money tends to go where it is treated best. Our relative strength process is just a systematic way to help make that determination.
Go East, Young Man
October 13, 2009
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Posted by Mike Moody
Commodities Can Burn Your Fingers
October 13, 2009The Financial Times of London had an interesting article about commodities that pointed out that buy-and-hold is not a useful strategy to employ. Commodities, because of the frequent lack of correlation with other asset classes, can be an outstanding tool for risk diversification in a portfolio, but they cry out for use in a tactical fashion. For retail clients, being able to get commodity exposure through ETFs and ETNs has been extremely helpful, but it may be important to have some kind of systematic tactical process in place as well. Holding positions for long periods of time just to have exposure may not be the optimal strategy.
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Posted by Mike Moody
Dollar Relegated to Second Division
October 13, 2009In most soccer leagues, if a team performs poorly enough, they get “sent down” to the next division. (Clippers, Raiders, and Pirates take note.) The same thing is now happening to the U.S. dollar as world central banks decide in which currency to hold reserves. Since 1999, an average of 63% of central bank reserves have been held in dollars. Last quarter, foreign central banks added $413 billion to reserves, but only 37% went into dollars. The bulk of the reserves went into euros and yen, where central bankers felt more comfortable with fiscal policies.
As a matter of prudence, central bankers have to consider global macroeconomic factors when investing their billions. As a matter of prudence, maybe it’s time we all looked a little more carefully around the globe for investment opportunities.
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Posted by Mike Moody
Investor Overreaction
October 13, 2009Investors overreact to good and bad short-term results. So says Morningstar in their article “Why Your Results Stink.” A quote from the article:
Why do investors make such a mess of things? In short, because of volatility, emotion, and a focus on short-term results. Volatile funds push all the wrong emotional buttons. When they go way up, we get greedy and buy. When they go way down, we despair and bail out. And we read too much into recent performance.
Destructive investor behavior has been well-documented and yet it persists. Why? My guess is that it is because most investors are operating without any kind of systematic framework for decision-making. Creating a systematic process demands much more work. You have to start with a theory and then do extensive, rigorous testing to see if your hypothesis holds up. Even when it does, you will see quite clearly that your strategy is not always optimal-there will be certain quarters and/or certain market conditions in which it will perform poorly.
For some reason, investors have a hard time with this. They don’t just want to win over time; they want to win all the time. In their quest to avoid the psychic pain of occasional losses, they react emotionally with predictable long-term results.
With a systematic process in place, on the other hand, you’re not a loser just because you will lose periodically; you tend to be a loser if you quit before giving the process adequate time to work. There are no guarantees in investing, but reacting emotionally is usually a route to poor results.
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Posted by Mike Moody
Fund Managers Expect Bonds To Fall
October 13, 2009We’ve commented a few times about the interesting phenomenon of investors ramming cash into bond funds, despite some of the lowest yields ever. According to Mark Hulbert, the trend, far from being over, is still accelerating. Investors actually took money out of stock funds last month, while continuing to stampede into bonds.
Here’s a real mind-bender: a survey of bond fund managers indicates that they expect prices to fall! A recent Bloomberg article notes, ”a survey of investors by Ried, Thunberg & Co. shows fund managers turned more bearish on Treasuries. The company’s index measuring the outlook through the end of 2009 fell to 45 for the seven days ended Oct. 9 from 46 the week before. A figure below 50 shows investors expect prices to fall.” The bond managers surveyed handle $1.5 trillion in assets, so they are probably paying attention.
Maybe things will work out ok for bond investors, but does it seem wise to shovel money into an asset where even the person investing the money thinks you will lose it?
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Posted by Mike Moody
Lessons of the Past
October 13, 2009The WSJ warns of the ramifications of being in massive debt to China.
Most people are now aware that China is the largest creditor to a heavily indebted U.S. government. It holds close to a trillion dollars of U.S. Treasurys and has invested hundreds of billions more in private enterprises in America. Even though these facts are plainly acknowledged, policy makers and experts continue to underestimate the full ramifications of this relationship.
The U.S. appears to be on the same path that Great Britain followed. In spite of its global empire, a powerful military, and an enviable position at the center of world-wide commerce, in early 1946 the British government faced a serious risk of defaulting on its financial obligations. So it did what it had done at various points over the previous decade and turned to its closest ally for assistance. It asked the U.S. for a loan of $5 billion.
It quickly receded from its dominant global position and entered several decades of economic malaise. In the 1980s, Britain finally emerged as a prosperous country, but it was a shadow of what it had been in its heyday.
It seems prudent for investors to consider the lessons of the past (because I doubt that politicians will) and broaden their investment horizon to the entire globe.
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Posted by Andy Hyer
