Putting the pieces together...

A Blazing Star

Bill Gross has just written one of the best descriptions of current investment limits and possibilities, and he has done it calmly and with seasoned wit. It's a mood or feel analysis but informed by his decades of successful experience: http://www.pimco.com/EN/Insights/Pages/Credit-Supernova.aspx

Gross describes what many of us are feeling about and trying to do. To be sure, his firm has products to assist us, and I think his firm does a great service thereby to the investing public as well as to themselves. As you may know, this site is totally non-commercial. I don't even get credits from Amazon for books I like. So if I like something, it is MY personal opinion and not paid for.

 

Follow Up on Simple Portfolio Management

I wrote briefly about WealthFront recently, and appreciated the comments made here as well as emails and conversations and comments elsewhere. It's cheap for a reason, and that reason is simplicity and very basic marketing and operating plan. It assumes that the capital asset markets ARE priced correctly all-in at every instant and that most attempts to predict are fruitless. So they want to put clients all into the markets all at once no matter what relative asset valuations may now be. This is obviously geared to a very young investment client audience which is a good idea both for the client and the marketer, but not for mature clients.  

Another real issue is with their ETF selections. Using a commodity ETN is silly, dangerous, and has been widely criticized. They don't wish to deal with K1's so they are avoiding the single best and most tax-advantageous ways to buy actual commodities, such as the Deutsche Bank futures ETFs or, best of all, GCC (Greenhaven). (Van Eck also has three classes of a commodity mutual fund, but they don't fit into an ETF world, are expensive, and are hard to buy.) 

Likewise, using Vanguard's Total Bond Market BND is not well thought out for such a large portion of most portfolios. It's a fine fund, and quite cheap, but it is far too  heavily weighted to US Treasuries which are about in the position that stocks were in 1929. Bonds are too subtle and too complex and varied to use a "cap-weighted" index. A much, much, much better ETF would be Pimco's BOND which is very similar to Bill Gross's flagship PTTRX Total Return Fund.

The concept of an inexpensive packaged management system has great allure for us all. WealthFront has competitors now and will have a lot more in the future who will do it in a more sophisticated and profitable manner than the current lineup.

 

 

 

 

 

 

Three Reasons Inflation Is Coming

First, and best known here and scarcely anywhere else, is the economic Long Wave of N. Kondratieff. This wave's last disinflationary phase ran from the prior inflationary momentum peak in 1974 to the nominal and inflation-adjusted lows of 2002. Copper is one important key to inflationary trends as Steve Saville demonstrates in this inflation-adjusted chart from his post on Gold-Eagle in 2010.

Gold's nominal price pattern--I see little value in inflation adjusting gold- in my 2003 post is similar in wave counts but starting from 1980.
Copper and gold and nearly every commodity and finished product has risen in price over the past decade. The Long Wave has been resting or consolidating since 2008, but it has cycle uplegs to about 2030.

The second reason for inflation is that US banks alone are sitting on nearly a trillion dollars in excess reserves held at and earning only 0.25% (one quarter of one percent) from the Federal Reserve who wants it deployed into the economy. The ways for banks to multiply reserves into the economy are by making loans and by buying financial assets. Inflation is coming since banks are begining to deploy.

Forbes contributor Michael Pollaro outlines this development in a recent post explaining that many trillions of dollars will likely cascade into the markets. There is widespread optimism that the Federal Reserve can manage that flood by adroitly backing out of the Quantitative Easing expansion of their balance sheet. This optimism, if it is such, was bolstered this past week with the release of the Federal Reserve Open Market Committee's most recent minutes. The minutes showed several committee members urging a pullback this year by selling some of the bond and mortgage holdings it has bought since 2008. This is quite  a contrast with the chairman's recent committment to continuing easing until the first to occur of an inflationary limit of 2.5% or a much lower unemployment rate.

However, the third and potentially explosively inflationary factor fallout has been developed persuasively by John Hussman in Roach Motel Monetary Policy.
Hussman and others have shown that with short term rates so low it would take massive sales of Federal Reserve assets into the market to reverse even quite modest effects on rates, which are the mechanism for cooling off inflation in normal times. Thus would arise the specter of a "Havenstein moment" as discussed here recently. The Federal Reserve would face the dilemma of crashing the economy or accepting "a little more" inflation. Loss of faith in the government and the currency could develop very quickly and lead rapidly to major inflation due to capital flight.