Juggling Dynamite

As we have been noting all year, Chinese stocks remain in the midst of a cyclical downturn, last night closing below the psychological 2,000 level at 1991, down 10% year to date–the lowest close since October 2008 and just 15% above the ultimate cycle low of 1723 on October 27, 2008.

Source:  CNBC.com

Meanwhile most other developed world stock markets are so far still whistling past the graveyard with unrealistic growth hopes dependent on miraculous political gimmicks rather than pricing realistic demand in a post-credit bubble, de-leveraging global economy.

Yesterday I was doing a media interview where I repeated the self-evident truth that in order to be a valuable risk manager one needs to have measurement tools, execution discipline and allocation flexibility that allows us to constantly measure price risk and adjust capital exposure towards the the highest probability rewards for the least risk over a full market cycle.

The journalist pointed out that other money managers assure her that it is not possible to time markets and that constant passive allocations to commodities and equities is the only reasonable course. I pointed out that doing this over the past 15 years (as during every other secular bear period in the past 200 years) has brought negative returns with above-average capital risk and volatility. (Not to mention real life angst and suffering to the majority of investors (and pensions) who now find themselves under-capitalized and financially insufficient to meet their goals.) I further explained that the vast majority of managers and investors are not equipped to grow capital through a secular bear climate and that since most have harmed their followers now for more than 15 years, they are philosophically unable to admit their defects since that would admit that they have been unworthy of trust and compensation throughout. It would also require them to go back to the drawing board and come up with a different management discipline going forward. And yes it is not easy to do.  Nothing valuable usually is.  Rather than rising to the challenge, apparently most financial types prefer to regurgitate text book theories than confront the reality of one’s own facts.

So when this quote appeared in my inbox this morning, I thought it resonated perfectly about the asset management business.

“When someone tells you that you can’t do something, perhaps you should consider that they are only telling you what they can’t do.”  –Sheldon Cahoon, Author

That really says it all.

Warren Buffett’s Op-Ed in the New York Times this weekend offers some important historical facts and context on how incredibly low average tax rates are for the wealthiest Americans today. Policy rates are low even if the country was experiencing the best of economic times, but is especially indefensible given the past 12 years of mammoth military commitments and corporate bail-outs while average families have lost 40% of their net worth. Unfortunately, paying more to rebuild fiscal health over the next few years is a necessary investment for future strength. The good news is that the country has the resources in its population to do so. It would be a lot darker if this were not the case.

“Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent in extreme cases, I sold securities and did pretty well. In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70 percent — and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.

Under those burdensome rates, moreover, both employment and the gross domestic product (a measure of the nation’s economic output) increased at a rapid clip. The middle class and the rich alike gained ground.”

The whole article is worth a look, see: A Minimum Tax for the Wealthy.

Here is more of this discussion from The Daily Ticker.