Here’s a collection of readings I found interesting this week. I hope you do, too. Got any additions?
In his weekly, “Thoughts from the Frontline,” John Mauldin addresses a subject that has increasingly mentioned of late, that is, the possibility of negative interest rates as a tool of stimulating the economy. Of course, we’ve had ultra-low policy (i.e. Federal Reserve) rates for a while now, but as he says in the piece, “we’ve seen a clear tendency on the part of central banks since 2008: if a crazy policy doesn’t produce the desired results, make it even crazier.” Further in the letter, he suggests that the zero level of interest rates is akin to the zeroes in the change from 1999 to 2000; i.e. banks may have a different version of Y2K, as they may be unprepared—system wise—for negative interest rates.
The esteemed—at least in my opinion—firm of GMO released its latest “7-year Asset Class Real Return Forecasts.” The firm uses a valuation-based, reversion-to-the-mean approach. No asset class it follows comes close to the 6.5% long-term U.S. equity return that shows up in each month’s forecast. The highest forecasted return is for emerging markets stocks (emerging debt is second), while the worst is for hedged international bonds. If anywhere close to accurate, these returns have huge implications for financial plans and pensions. You can subscribe to the monthly asset class returns, along with other GMO publications, by clickinghere.
And although I was late getting to it (Feb. 4 publication date), I next read the firm’s Q4 Letter, which you should read (a subscription to it is free, too, and I think you should be able to find it here.) This letter is chock full of so much good stuff, that you really need to read it. Jeremy Grantham, the G in GMO, has relegated some writing to his associate, Ben Inker, but Jeremy writes the second half of it, in which he discusses what he thinks are true elements of American exceptionalism, which are its entrepreneurial spirit and its—Canamerica’s—resource basis, which makes for, as he puts it, Fortress Canamerica. As for 2016 asset classes, he’s troubled by January’s action and “quite significant statistical weight” in forecasting full-year returns. The first five days of January and full-month returns has been good in projecting full-year returns; that picture is not good. He thinks an equity bubble is not in the offing, so we should “reach Election Day more or less intact.” He thinks low oil prices are a big boon for the economy and sees no better “financial input” for a group that has been hurting for 30 years, “the median wage earner.” Good stuff; go read this piece.
Sentix is a German company that attempts to measure investor sentiment toward a wide range of global asset classes, and it recently produced a report—available to you if you agree to participate in its sentiment surveys—showing that investors were displaying the highest level of optimism toward gold in three years, and that it portended a further 5% increase in the yellow metal beyond its already heady 13% 2016 surge.
Behavioral finance and economics are fascinating to me, as I see so many ways that I and clients of mine can and do make bad decisions. This piece by Business Insider, “20 Congnitive Biases that Screw Up Your Decisions,” lists twenty of them (duh), along with a 1-2 sentence description of each. The first one listed,Anchoring, may be one of the most prevalent, and an example of it is with security prices, thinking there is something magical about, for example, the price we paid for a stock. Confirmation Bias, is one I constantly try to fight against, by trying to take in information that does not support my views. Quick read. Hugely helpful.
Graig P. Stettner, CFA, CMT
Financial Advisor & Partner
Strategence Capital
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
GMO forecasts are forward looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward looking statements.
GMO and John Mauldin are not affiliated with Strategence Capital nor LPL Financial.