Juggling Dynamite

There was QE 1, 2 and 3 euphoric rallies in risk appetite–2009, 2010 and 2013– then there was one measly .25 Fed hike last December and depression resumed again to early 2016 as stocks, corporate debt prices and commodities all slumped  (what diversification benefit ?) while investment grade bonds and the US dollar bounced once more.  In recent months, big financial and energy stocks have led a risk asset rebound to breath-taking heights once more, as investment grade bonds dropped.

Now as shown in this updated chart of the price change (stripped of income) for the high yield bond index ETF (HYG) versus the investment grade index ETF (LQD) since 2007, we are back at the upper end of the downward trend in risk appetite which has prevailed in fits and starts since 2007.  The verdict:  risk-off still in charge so far.  Will a second hike from the Fed today, be fuel or smelling salts for mindless trading algos?  Stay tuned…

Worthwhile discussion here on the new energy innovation fund Gates has founded with some other billionaires. He hopes that Trump ‘the business guy’ will see the obvious financial opportunity in this booming sector, whether or not his new administration chooses to acknowledge climate change as a motivation.

Bill Gates, Microsoft co-founder, and Breakthrough Energy Ventures co-chair, talks about creating innovative way to create clean, cheap energy, tariff, trade, Trump’s tweets and the stock market.  Here is a direct video link.

A Caveat: near the end of this discussion, Quick asks Gates about over-valued stocks and whether he changes his portfolio approach in lofty markets. Gates says he doesn’t worry about downside risks as he is a long term investor and as Warren Buffet says good companies tend to be good long term investments….yada yada. But one must never forget that most regular people are not in the same risk bracket as billionaires. Most people do not have hundreds of millions in excess capital above and beyond anything they will need to fund their lifetime expenses, and so bear market declines can be devastating to their capital given finite life spans to recover losses.  For most of us, extreme over-valuations are very dangerous to our financial stability and viability. We cannot afford to be blase about market risks to our life savings.  This is a point most often missed in all the investment sales hype and happy talk.

I have written many times about the reckless implosion of pension funds and the negligence of administrators, boards and financial managers and advisors to serve the best interests of the beneficiaries in controlling risk and maintaining realistic return expectations and sufficient funding levels. (here are just a few of my articles from the past few months).

This week the insolvent Dallas Police and Firefighters pension made news by freezing withdrawal requests and last week the City said it would seek to recoup capital from those who have already cashed out lump sums. The fact is that this and many other pensions have been run like a Ponzi scheme for the past two decades. Capital deficits born of  chronic under-funding, unfavorable demographics, too rich promises, and boom/bust financial markets, have been evident for all but the willfully blind.

We should expect an epidemic of similar revelations and law suits as workers awake to the reality that there is not enough money in the pot to fund expected benefits.  See:  Not Just Dallas, Fort Worth Employees’ Pension plan in deep trouble.

All of this is ironically coming to public consciousness just as the Trump administration is working with the financial lobby to reverse an incoming fiduciary standard for those giving retirement investment advice.  See:  Chamber’s CEO:  “Already working” with Trump to kill DOL fiduciary rule:

“The U.S. Chamber of Commerce is “already working” with Trump administration transition officials to “undo” the Department of Labor’s fiduciary rule, Thomas Donohue, Chamber’s president and CEO, said Monday.

In his Monday blog post, In Your Corner, Donohue said that the Chamber is “urging immediate action to undo” Labor’s fiduciary rule, because “if enacted, it would choke economic growth, increase frivolous litigation against financial advisers and make saving for retirement more difficult for hardworking Americans.”

Translation:  the financial lobby says we cannot afford ‘advisors’ to be honest and ethical and put the best interests of those relying on them for advice first, because doing so will result in lower sales and more litigation against advisors for the financial damage they help inflict.  It is mind-boggling that they can continue to advance these arguments without shame, embarrassment or public-revulsion.

It seems more pensions and retirees will need to suffer financial hardship before serious reforms and housecleaning can be done in this corrupt, self-serving industry.