Investment Portfolios: Diversification Strategies

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(filmed Feb 7, 2020)

Summary of Counter-correlation Strategies:

Chris Cole of Artimis Capital (the person being interviewed)  argues that most investors and pension funds are historically illiterate and use portfolios based on models of the last 40-years of market data, rather than longer-term market conditions going back to the 1920s.

Investment Eras:

  • Secular Decline (1929-1946)
  • Secular Rebirth (1947-1963)
  • Secular Stagnation (1964-1983)
  • Secular Boom (1984-2007)

Most people would be surprised to learn that most of the stock market growth of a 60/40 fund in the last 90 years occurred in the 1983-2007 era of Secular Boom.

90% of the returns of a 60-40 stock-bond portfolio came from the 22 years between ’84 and 2007.
Just 22 years drove 90% of the gains of that portfolio over 90 years.

The Limits of “Traditional” Portfolios:

Cole argues that approaches we think of as “traditional” have done well in the recent Secular Boom, but would not have done as well in other market environments:

  • 60/40 stock/bond fund: bonds don’t counterbalance a portfolio as well under zero interest rates.
  • “buy the dip”: would have gone bankrupt 3 times in the past 90 years

[Read more…]

What will Democrats have to pay Trump to leave?

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Rod Blagojevich
Rod Blagojevich

How do Transactional People Think?

After Barack Obama was elected President, Illinois Governor Rod Blagojevich had the power to appoint Obama’s successor to the senate.

Being a “transactional” sort of guy, Governor Blagojevich, wanted to use what he had to maximize his own interests.

I got this thing and it’s  f****  “golden”:

FBI agents recorded  Blagojevich conversing with an adviser:

I’ve got this thing and it’s golden and I’m just not giving it up for nothing

Blagojevich was seeking:

  • a salary for himself and ($250,000-$300,000)
  • a position on a corporate board for his wife (~$150,000/year)
  • campaign funds, with cash upfront
  • a cabinet post or ambassadorship

Pardoned by Trump:

After he was impeached by the Illinois Senate, he was indicted and convicted in Federal Court and sentenced to 14 years in prison.

Blagojevich was unrepentant and protested his innocence, serving 8 of those 14 years, before being pardoned by President Trump.

What will Trump want in exchange for him leaving office?

Now it is still possible for Trump to fairly win the upcoming election.  But if he doesn’t win legitimately, will he go quietly?

I assume that Trump does not intend to give up the Presidency for “nothing” if he loses and that a lot of the choices he makes are about strengthening his hand and developing a narrative.

How much will Democrats be willing to pay, in money and otherwise, to have Trump leave office?  And what will be Trump’s ask?  Here’s my guess:

Mount Rushmore
Mount Rushmore

What will Trump ask?

  • Legal absolution: scuttle all the sealed indictments and future court cases against him.
  • Stop damaging disclosures: If not already public, silence unfriendly attention regarding tax returns, etc.
  • Financial Bailout/fleecing   His hotels and golf properties haven’t done well financially lately.   I don’t know the state of his financial need, but he seems to take pride in finding creative ways to fleece the taxpayer.  Expect financial demands.
  • Honor: recognition of his status as a great President.  Maybe a monument, naming rights to a building, etc.
  • Attention: Trump would likely want to host his own show or own his own network.  He needs to see a future for himself after the presidency.
  • Nepotism: Donald wants his family name to remain relevant so he may want some benefit, particularly for Ivanka, his favorite child.
  • Victimhood: Trump will need an excuse for why he didn’t get a second term both for himself and his supporters.  If defeated, like Blagojevich, he can not admit it.  The only way he will agree to relinquish power is under the condition that he can still insist that he was a victim and the election was rigged.

What will Trump Threaten?

The basic idea to keep in mind is that Trump is less concerned about the peaceful transfer of power than the Democrats are.  Trump has an affinity for chaos and that he will use that as leverage.

What do you think?

Everyone expects that Joe Biden will concede if he loses.

But if Trump loses but not in a big way, will he readily accept defeat?

If not, what will Trump ask and what will he threaten?

 

P.S.  Why is it that this sort of politician seems to have a thing for having a full head of hair?

Why Did Corporations “Waste their Capital”?

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Hi Roger,
I’ve got a basic question about how the post-2008 “economic fragility” you mention in your May 13 briefing relates to the “wasted” leveraged buybacks Raoul Pal talks about in the May 15th briefing:
QUESTION:
Was the consumer too weak to support robust growth post-2008 and is that why corporations “wasted” their capital by buying back shares with borrowed money?
Background:
———————————————————————————————
 
(21:06) RAOUL PAL: So I’ve talked about this in the doom loop on Real Vision before as part of a whole thesis of mine, which is based around the maximum amounts of corporate debt in US histories now. That debt was driven by corporations basically wasting their own capital to buy back their shares, without putting it to more effective use and efficient and productive use. 
MY QUESTION:
What accounts for the use of buybacks rather than productive investments?
Why didn’t corporations use their capital for productive purposes?
(My suspicion is that consumers were too maxed out to afford substantially more consumption, so why invest in increased capacity?)
——————————————————————————————–
Here’s what you said about two days earlier about “economic fragility”:
06:57
ROGER HIRST: … That’s going to be what’s happening, and so it becomes all about balance sheets. It’s corporate balance sheets, it’s household balance sheets and it’s government balance sheets. Have they been impaired?07:16
I think the key to all of this is that there was the underlying fragility of the global economy prior to this. This was not a strong economy, and I’m not just talking about the last year where we saw some numbers deteriorate. I’m talking about the world post-crisis 2008 where there’s never proper recovery. We had anemic growth. We had the illusion of health because the equity market in particular and in particular in the US, rose to these astonishing heights, but overall, a lot of people, median wages took a long time– real median wages in the US took a long time to get back to the 2007 levels. I think it was ’15, ’16– 2015 and ‘16.07:52
The man on the street, the woman on the street didn’t see a pickup in wages for a long time. A lot of people are living paycheck to paycheck, 46% of Americans have less than $1000 of cash in their savings account.
——————————————————————————————–
MY QUESTION:
Did corporations think that their consumers were too maxed out to generate further growth in 2009 – 2020?
In other words, did they view their customer’s balance sheets and income growth potential so dimly post-2008 that they decided productive investments in additional capacity, etc were too risky and that it would be safer to take advantage of low-interest rates to use debt to buy back their own stock?
I understand interest rates were low and executives were looking to meet their bonus targets, but why did that entail so many share buybacks rather than productive investments?
 
SPELLING OUT THE IMPLICATIONS:
I figure the pros may already understand that this has taken place, but as a “citizen investor” I’d appreciate hearing this spelled out more explicitly.
If corporations were reluctant to invest before, what does that say going forward?

Why did corporations borrow to buy back their stock rather than invest it for productive purposes?

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Investment

Question:

Why do you think many large corporations chose to borrow money to buy back their stocks rather than invest it for productive purposes between 2012 and 2020? (pre-Covid-19)1 2 3

* (this is US-centric, but I’d be interested in a global perspective too)

 

Some Possibilities:

    1. Too much regulation to make investment profitable?
    2. Too high taxes?
    3. Too much political uncertainty? (2012-2020)
    4. Customers already have what they need?  Customers don’t want to buy more?
    5. Customers too maxed out.  Customers can’t afford to buy more?4
    6. Company has a mature market position- there is little room to grow. 5 Better to “mortgage their credit rating”67 and redirect the money to other companies with better opportunities?
    7. Outsourcing to foreign firms removes need to build own manufacturing capacity?89
    8. Executives don’t want to take a risk on innovation and growth when low-interest rates make significant debt-driven share price increase a low-risk choice?
      • Low interest rates tell you why borrowing is attractive but not why innovation and growth are less attractive than stock buybacks.

 

Vote in a Twitter Poll

Twitter  has a maximum of 4 options:

I’m interested in other possibilities too.  You can reply to this on twitter /reddit.

Obviously, the low interest rates were key in enticing companies to borrow. The question is why they didn’t invest more for productive purposes rather than buying back their stock.  I obviously haven’t investigated this fully, that’s part of the reason why I ask the question.

My hypothesis is that the biggest factor behind buybacks was that companies didn’t believe that consumers in the US could afford to increase their consumption level.

US Wages have been stagnant for decades and 40% of American’s can’t afford a $400 emergency, so who would want to invest heavily into selling to such a customer.

That doesn’t answer the question of global demand.  Further work will have to be done to research consumption potential and indebtedness in other countries.

Post your comments on twitter/reddit.

Read Background Info:

 

1) The Story of the Seven Dwarfs Mining Inc:

How the Coronavirus Masked the Corporate Debt Bubble

Seven Dwarfs at Table

Disney’s Seven Dwarfs team up to tell the story of corporate America (2012-2020)

 

2) Was Pre-Coronavirus Stock Market a Bubble Inflated by “Financial Engineering”? (2014-2020)

Wall Street Bubbles Cartoon, 1901
Read More

 

Follow-up:

If corporations were unwilling to invest then, what make you think that they will be willing to invest post-Covid?

 

by Tim Langeman

 

Footnotes:

  1. From 2014 through the start of 2018, corporate profits declined. The one-time spike in profits after 2018 was due to the corporate tax cut. Essentially, without the corporate tax cut, the corporate sector has seen virtually no profit growth since 2014.↩

  2. “It’s a fair critique of corporate earnings to say that earnings “growth” in 2019 is a bit deceptive as the value is being financially engineered by corporate finance departments, not organic, core-business growth,” wrote Tom Essaye, president of the Sevens Report, in a Wednesday note to clients. “Companies aren’t making any more money than in 2018—they just have a smaller share count to spread the money over, so EPS are rising.”↩

  3. Indeed, more than half of all buybacks are now funded by debt. And while there’s an argument that repurchases benefit share prices and investors, at least in the short run, it’s questionable whether highly indebted companies should be doing this. Sort of like mortgaging your house to the hilt, then using it to throw a lavish party.↩

  4. 40% of Americans can not afford a $400 emergency.↩

  5. Coca-cola has a harder time expanding market share than a startup company.↩

  6. NPR’s “Planet Money” show had an excellent episode explaining Why so Few Companies have a Triple-A rating.↩

  7. Many companies have had their credit rating downgraded to BBB – the lowest investment grade above “junk”.  50% of all Investment-grade debt is rated BBB.↩

  8. Why build manufacturing capacity yourself when you can contract with Foxconn/etc and have them build manufacturing capacity?↩

  9. This may relate to why they don’t invest, but it doesn’t answer why they choose to borrow to buy back their stock.↩