Investment Insights Podcast – July 18, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded July 16, 2014) the subject matter pertains to the Congressional Budget Office’s release of their long-term outlook. It’s important to note that this forecast is a 75-year time horizon; so focus should be on the near-term debate in Washington:

What we like: Raised the long-term growth rate of the economy; lowered healthcare costs and interest rate costs which is a positive in the near term

What we don’t like: Healthcare and interest rate costs in the long term; interest rates likely to rise eventually; Social Security likely to rise in the near future; defense spending cutbacks

What we are doing about it: As citizens, being thoughtful when exercising the right to vote; keeping an eye on higher interest rates and impact on fixed income

Click the play icon below to launch the audio recording or click here.

Source: CNBC

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Investment Insights Podcast – May 13, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded May 12, 2014):

What we like: Bob Doll’s comments on favoring the economy more than the stock market; positive economic data post-winter

What we don’t like: Stock market no longer a bargain, now more fully valued

What we are doing about it: Focus more on larger themes and individual active managers; looking out for potential rise in interest rates during summer

Click the play icon below to launch the audio recording or click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Investment Insights Podcast – December 6, 2013

Miller_PodcastBill Miller, Chief Investment Officer

We are entering into a period where good news is bad news.On this week’s podcast (recorded December 5, 2013):

  • Good news: U.S. economy is better with many positive indicators (employment, housing starts).
  • Bad news: Markets are not reacting to the good news, drawing into question Fed policy.
  • What we are doing about it: Remaining bullish for 2014, keeping an eye on interest rates and Fed tapering.

Click the play icon below to launch the audio recording.

Financial Advisors Finally Confident in U.S. Economy, Q3 Brinker Barometer Finds

We have the results of our third quarter 2013 Brinker Barometer® survey, a gauge of financial advisor confidence and sentiment regarding the economy, retirement savings, investing and market performance.

For the full press release, please click here, but in the meantime check out the infographic below for some of the highlights:

BrinkerBarometer3Q2013_WebFINAL

Why Care About Housing Reform

QuintStuart Quint, Sr. Investment Manager & International Strategist, Brinker Capital

Housing is a major component of the U.S. economy and the largest source of wealth for many Americans. Despite the recent rebound, home prices in the U.S. have declined a cumulative -16% since 2006. That masks significant declines in Sunbelt markets hit by the housing bubble collapse (FL -37%, AZ -32%, CA -26%, NV -45%).
(Freddie Mac. September 2013)

Roughly 50% of the stock of housing in the U.S. is financed by mortgage debt. Consequently, the availability and cost of mortgage debt has a direct relationship on the value of housing. Indeed, the 2008 financial crisis exacerbated the downturn in housing as the financial system had sharply cut mortgage credit. The downturn in home prices also damaged consumer confidence for the two-thirds of Americans who owned their home. Many homeowners saw their savings reduced and consequently cut back on their consumption. Additionally, the housing downturn left nearly one out of five Americans underwater on their mortgage debt, (i.e. the resale value of their home in the current market would be less than the mortgage debt they owed). This resulted in higher credit losses for banks, which in turn reduced credit availability across the board.

One reason for sub-par economic growth following the 2008 financial crisis stems from the sub-par recovery in housing. Housing accounts for one out of every six dollars of economic output. (National Association of Home Builders)

9.27.13_QuintAdditionally, the housing downturn has impacted the job market. Approximately 2.5 million lost jobs between 2006 and 2013 were lost because of the housing downturn. Residential construction accounts for 1.5 million jobs including the financial sector and real estate. Housing-related employment amounts to as many as one out of every twelve jobs in the U.S. economy. (Bureau of Labor Statistics. September 6 and The Bipartisan Policy Center)

The issue of how to finance the largest asset for many Americans is of critical importance to future growth prospects for the U.S. economy.

Japan: The Sun Also Rises?

QuintStuart P. Quint, CFA, Brinker Capital

This is part one of a two-part blog series.

2013 has started out with a bang for the S&P 500, which has outpaced virtually all major developed world markets.  Yet there is one major developed market that has kept pace: the Japanese Nikkei.  As of April 9, the Nikkei has risen +11% in U.S. Dollar terms.  Is the sun also rising in Japan, or are we seeing yet another false dawn?

Why does it matter?

Japan is the third largest economy in the world.  It has been mired in decades of stagnation: tepid economic growth, deflation, aging population, and high fiscal debt and deficits.  These challenges are compounded by a historically strong currency, which has pressured corporate profit margins, and a dysfunctional political system.  As an example, Japan has had seven prime ministers in the last seven years.  Yet in spite of its problems, Japan still retains some strengths, including world class companies and high wealth.  Additionally, the Japanese banking system held up well in the midst of the 2008 crisis.

Japan is the banker to the rest of the world.  If Japan suffers further problems, the rest of us eventually suffer.  For example, Japan is the second largest foreign holder of U.S. Treasury bonds.  Japanese companies continue to buy assets overseas.  If Japan were to curb its interest in foreign diversification, that could have negative ripple effects not just in Japan but even in our market and elsewhere.

JapanFinally, Japan poses a fascinating and relevant case study for the rest of the developed world.  How does a mature economy with an aging demographic and indebted economy solve its problems?  Or is it doomed to ultimate decay and/or default?  Japan has more experience than the U.S. and Europe in dealing with these problems.  For decades, Japan has experienced several decades of stagnation, a burst real estate bubble, and deflation.  Expectations have risen that Japan is making serious efforts to begin resolving these issues with the election of Prime Minister Shinzo Abe.  If progress is made, it could be a blueprint for how we in the U.S. might deal with our issues.  If Japan fails, it could mean that our issues will be difficult to resolve without a major economic shock.

Look for Part Two of this blog next week!

The Optimism for an Economy with a 7.8% Unemployment Rate

Dan WilliamsDan Williams, CFP, Brinker Capital

Currently, the U.S. unemployment rate stands at 7.8%, an improvement from the 8.5% a year ago and the 10% from the recent peak in October 2009. Still, compared to the consistent sub 6% rates we were used to seeing from the mid-1990s to mid-2000s, it is hard to feel good about this current state of employment and what this means for the health of the economy. There are those that argue that the “real” unemployment number is even worse (due to discouraged works exiting the equation and poor measurement methodology etc.). While it’s hard to show optimism for our economy, that is what I aim to do here.

A meaningful place to start is to define what an economy is. By its simplest definition an economy is a measure of the value of the goods and services the people of an area produce. Increase your number of people, increase the amount each person can produce, or produce more valuable stuff and the economy should grow. As you trade and cross-invest between economies, you can make further optimizations. In the short run, economies go through cycles and go by the whims of politicians, the media, central banks and consumer confidence. Still at its core, the economy is just a measure of what the people of a country are able to produce.

More Efficient Per EmployeeThe clear point here is that unemployment represents a failure to produce all we could. However, even with that fact, looking at GDP (expressed in 2005 dollars) we stood at $13.3 trillion at the end of 2011 (the highest year end number ever) and have seen continued growth such that 2012 will be even higher. So we have managed to become more efficient with what each employed person produces. This is the equivalent of a factory using fewer workers but producing more. If the real unemployment rate is actually higher than the 7.8% stated, that means we did it with even fewer workers. This seems like a good thing, right?

What makes the unemployment statistic different from a company having unused equipment is, of course, that people are not computers who can have their software updated over a lunch hour to be instantly redeployed to a new task. The fact is that many of those who are presently unemployed are trained for jobs that are no longer available. Also, people suffer when they are not able to work. There is no spin I can put on that other than to say things will get better given the time to retrain and redeploy. However, is this true?

A challenge to the idea of time healing this employment wound is the fear that technology efficiencies will replace more jobs such that even if the real GDP grows, maybe not all of us will get to be a part of it. Professor Andrew McAfee in a June 2012 TED Talk “Are droids taking our jobs?” echoes this sentiment when he references that in his expected lifetime, he believes we will see a “transition to an economy that is very productive but just does not need that many human workers.” He even notes that in the future an algorithm will be able to do writing tasks so a computer could author this blog. Basically, he sees no current job that we do as safe as these technologies accelerate.

This, however, does not mean that McAfee is pessimistic about our future employment. He is in fact quite optimist. He believes that these new technologies of efficiency represent the opportunity “to make a mockery of all that came before us”. (A phrase originally used by historian Ian Morris when he was speaking of the industrial revolution). What the industrial revolution did to magnify the productivity of our muscles, he feels the technology revolution is going to do to the productivity of our minds. To say differently, he expects we should expect an acceleration in our ability to innovate as technology improves.

A more skeptical reader would be right to ask that if innovation is accelerating, why are we still in the aftermath of the great recession? Thankfully Mr. McAfee is not alone in this technology optimism and has an economist among his group with an explanation. Joe Davis, Vanguard’s chief economist, in a December 2012 speech titled “Better days are in store” notes that the growth of industrial revolutions do not proceed in straight lines. The steam revolution of the late 1770s led to an economic overconfidence and collapse that occurred in the 1830s. The telephone revolution beginning in 1876 led to an economic overconfidence and collapse that occurred in the late 1920s with the Great Depression. In both cases Dr. Davis argues these tough times caused businesses to go through the required creative destruction to survive and took these technologies to a major inflection point of further growth. Today, we are in that inflection point of the microprocessor revolution that began in the 1970s. If history is any guide, this is the economic hiccup that will cause us to get to new technology heights.

Unused Human CapitalSo where does this leave us? Over the past five years, the U.S. has learned to do more with less, has additional unused human capital to deploy, and the efficiencies afforded to us by technology are likely to accelerate. While the near term may be messy, there is an undeniable potential for us to be so much greater and “make a mockery of all that came before us”. While the details of this future and what an economic blog of 2063 will read like are unknown, there does seem to be rational reasons for great optimism. With that let me say, Happy New Year!

Parable of the Broken Window

Neil Dutta, Head of U.S. Economics, Renaissance Macro Research

In thinking about the devastation caused by Hurricane Sandy, I’m reminded of the Parable of the Broken Window.  In the 19th century, French classical liberal economist Frederic Bastiat tells a story to draw the distinction between what is and what could have been. We can see how the money is spent to repair a broken window, however, we do not see how the money would have been spent otherwise.

The dilemma that is faced in Bastiat’s parable is one to ponder as we assess the economic fallout of Hurricane Sandy.

We do not believe that billions of dollars in property damage is a good thing. Still, damage to roads and bridges does not shave GDP while rebuilding activity helps boost GDP and employment. Dramatic weather events act as a temporary shock, weighing on growth in the immediate term then boosting growth over subsequent quarters. Economic activity is delayed or shifted. Taking a two quarter view, the entire event is essentially a wash.

A few quick points:

  • Recall the fallout from Hurricane Katrina. Growth moderated in Q4 2005 and then rebounded sharply in Q1 2006. Hurricane Sandy hit the most populated area of the United States during the workweek. The flooding the Hurricane has left in its wake suggest a more persistent drag on activity. A 0.5ppt hit to Q4 GDP growth would not surprise us though we would expect the activity to be made up in subsequent quarters. It may well be possible that the recovery is faster, spanning months, limiting the impact to quarterly GDP. Time will tell.
  • Some retailers will see sales decline while others will see sales improve. When a tree is blocking you from leaving your neighborhood, it is relatively safe to say that you will prioritize buying things you need immediately over things you don’t. Auto dealers, apparel retailers, and restaurant sales will likely weaken while spending on grocery stores and home renovation stores pick-up. The broader story is that consumers have already drawn down their savings quite a bit over the last three months, raising the risk to discretionary spending beyond the immediate aftermath of the Hurricane.
  • Residential construction and utilities production will likely moderate in the Northeast. There are a number of reports that refineries in this part of the country have been idled, and that means higher gasoline prices at the pump.

It is all about your time horizon. The near-term effect of the storm will be to make a weak economy that much weaker. Thereafter, we would expect the data to look strong relative to the underlying trend in the economy.

Economic Data Lifts Stocks, Market Commentary by Joe Preisser

Global equities resumed their upward march last week, reclaiming levels unattained since April, following the issuance of economic data from both the Eurozone and the United States, which largely exceeded expectations. The release of gross domestic product figures from Germany and France offered encouragement to investors as they revealed more favorable readings than analysts had forecast. Alexander Kraemer, an analyst at Commerzbank AG was quoted by Bloomberg News, “while not great in any way, German and French GDP numbers were better than expected, which adds to the scenario that there is no risk of an imminent euro break up. It shows that global growth is not collapsing, which also helps reduce investment risks.”

Following closely on the heels of the positive news from the Continent was a report of retail sales from the United States which surpassed expectations. In a sign that consumer spending may be on the rise, all of the major categories surveyed rose to post the largest increase in five months (New York Times). Adding to the optimism already present in the marketplace were better than expected readings on industrial production and consumer prices, as well as continued signs of stabilization from the labor and housing markets in the U.S. (Bloomberg News) released during the latter portion of last week.

The concern with which the Israeli government views the threat of the nation of Iran acquiring a nuclear weapon was on full display last week as a marked increase in bellicose rhetoric as well as highly publicized preparedness measures for its citizenry emanated from the country. Comments made by the Israeli Ambassador to the United States, Michael Oren, during a Bloomberg Government breakfast in Washington last Wednesday served to highlight the rapidly rising tensions. “Diplomacy hasn’t succeeded. We’ve come to a very critical juncture where important decisions have to be made.”

The distribution of gas masks to the public, as well as the testing of other civil defense measures last week accompanied the strong warnings from Mr. Oren and further revealed the precariousness of the situation. As the potential for a preemptive Israeli military strike continues to mount, and with it the possibility of a major disruption of the supply of crude oil to the global marketplace, the risk premium assigned by traders around the world to the per barrel price has contributed significantly to the twelve per cent rally seen since June, which if unabated will hold negative repercussions for the world economy.

As the data released last week continues to outpace expectations, the belief has grown within the marketplace that the economic improvement seen, although still only incremental, may reduce the chances of the Federal Reserve enacting additionally accommodative monetary policies in the near term. In a reflection of this growing sentiment among traders, prices of U.S. Treasury debt have moved significantly lower over the course of the last several weeks, sending yields, which rise when prices decline, to levels unseen since May as the bond market has begun to adjust to the changing environment.

Byron Wien, Vice Chairman of the Blackstone Group’s advisory services unit gave voice to an increasing belief among investors, in an interview with Bloomberg News, “housing is bottoming, gasoline is down from the beginning of the year. The European situation is getting better, not resolved, but getting better…there will be more good news than bad.”

Central Bank’s Sway Stock, Market Commentary by Joe Preisser

Aided by a broad based reassessment of comments issued by European Central Bank President, Mario Draghi on Thursday, and the release of better than anticipated employment figures for the month of July in the United States, stocks rallied strongly on Friday to reverse the losses suffered earlier in the week and reclaim their upward trajectory.

Following a meeting of the American Central Bank’s policy making committee this week, the decision to forbear enacting any additionally accommodative monetary policy at present was announced in tandem with indications that measures designed to stimulate the world’s largest economy may be forthcoming.  The Federal Open Market Committee said in its official statement that they, “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions.”  As the recovery in the world’s largest economy has continued at a frustratingly slow pace, hope has pervaded the marketplace that increased liquidity will be provided by policy makers in order to encourage growth should they deem it necessary.  In its most recent communiqué, the Federal Reserve has reinforced this belief thus offering support for risk based assets.  Brian Jacobsen, the Chief Portfolio Strategist for Wells Fargo Funds Management was quoted in the Wall Street Journal as saying, “They probably are closer to providing, as they say, ‘additional accommodation as needed’, but I still think that they want more data before they actually pull the trigger.”

Investors across the globe registered their disappointment on Thursday with the decision rendered by the European Central Bank, to refrain from immediately employing any additional measures to support the Eurozone’s economy, by selling shares of companies listed around the world.  Hope for the announcement of the commencement of an aggressive sovereign bond buying program, designed to lower borrowing costs for the heavily indebted members of the currency union, which blossomed in the wake of comments made by Central Bank President Mario Draghi last week were temporarily dashed during Thursday’s press conference.  Although Mr. Draghi pledged to defend the euro, and stated that the common currency is, “irreversible” (New York Times), the absence of a substantive plan to aid the ailing nations of the monetary union was disparaged by the marketplace and precipitated a steep decline in international indices.

Friday morning brought with it a large scale reinterpretation of the message conveyed by European Central Bank President, Mario Draghi the day before, as investors parsed the meaning of his words and concluded that the E.C.B. is in fact moving closer to employing the debt purchasing program the market has been clamoring for.  The release of better than expected news from the labor market in the United States combined with the improvement in sentiment on the Continent to send shares markedly higher across the globe.  According to the New York Times, “on Friday, stocks on Wall Street and in Europe advanced as investors digested the announcement alongside data showing the U.S. added 163,000 jobs.”  Although the absence of immediate action served to initially unnerve traders, further reflection upon the President’s comments revealed the resolve of the Central Bank to support the currency union and fostered optimism for its maintenance. A statement released by French bank Credit Agricole on Friday captured the marked change in market sentiment, “Mr. Draghi’s strong words should not be understated, in our view.  The ECB President made it perfectly clear that the governing council was ready to address rising sovereign yields…Overall, notwithstanding the lack of detail at this stage, we believe the ECB will deliver a bold policy response in due time”(Wall Street Journal).