This week we did a trade in all of our Global Tactical Asset Allocation (GTAA) portfolios.
What makes this trade of note is that it is our first swap out of one ETF into an entirely new ETF in the last year. While it's not a big trade, about 2% of our assets, it is an important trade.
We sold all of our holdings in an Emerging Markets Bond Fund, and replaced them with an equal dollar amount of another Emerging Markets Bond Fund. While this doesn't seem like much of a swap, one emerging market bond fund for another, there is one very important distinction between the funds. The ETF that we bought buys bonds denominated in local currencies instead of the US dollar.
Over the last several years one of my biggest concerns/fears has been the potential decline of the US dollar as the worlds global currency. Most of my life is tied up in the dollar. My house is priced in dollars, my cars, my income, and a large percentage of my financial assets are all priced in US dollars. If the US dollar declines, my standard of living declines. One of our main goals here at Rockhaven is to protect that standard of living, hence the development of our GTAA model.
In an interview last week, billionaire investor Sam Zell said, "My single biggest financial concern is the loss of the dollar as the reserve currency. I can't imagine anything more disastrous to our country. I think we could see a 25% reduction in the standard of living in this country if the US dollar was no longer the world's reserve currency. I'm hoping against hope that ain't gonna happen, but you're already seeing things in the markets that are suggesting that confidence in the dollar is waning."
For more information on this trade please feel free to contact me.
These are the words flashed across newspaper headlines all across Pennsylvania. Generally attached to a few more headlines like, "Governor Slashes Higher Education Funding By 50%".
This week Governor Corbett released his budget that shockingly cut spending by a horrifying 3.19%! Yes, he is faced with a $4 billion deficit and had the unmitigated gall to propose cutting spending from $28.2 billion to $27.3 billion, or $866 million. Now he is faced with a $3 billion deficit.
The outrage over these minor cuts in spending show just how far we have to go as a State and a Country to wean our citizens off of the entitlement teat. Lets just look at Penn State/Happy Valley. The papers are all aghast that the Governor wants to cut funding to Penn State by $182 million or 52%. While those numbers look large, lets put them in some context. The State, meaning you and I the taxpayers, contributed 8% to Penn States annual operating budget last year, now that number will be 4%. In other words, Penn State has just had it's operating budget cut by a "catastrophic" 4%. This from a University that has increased tuition by 5.7% a year for the last twelve years. Back in 1999 tuition ran $8,272, it is now $16,150, an increase of 95% or 5.7% annually. Over this same time period inflation (CPI) increased by 32% or 2.3% annually. So for the past twelve years tuition at Happy Valley has gone up at more than twice the rate of inflation.
What the University is most shocked about is that after decades of annual increases in their operating budget and tuition fees, someone finally has the nerve to say, "Enough." Shockingly the University may actually have to operate like a business and price its product at a level the market will bear. Have you ever worked at a company where you were told that you needed to improve efficiencies or focus on margins? Has your household ever had to live within its means? Well, it appears that our State Universities will now be subject to the same business practices that the rest of the world operates under, and that are supposedly taught in their business schools.
This is what "Austerity" looks like folks. We don't have the money, therefore those enterprises that are not viable will have to find a way to become viable, or they will close their doors. No different than what most individuals are faced with on a daily basis. Welcome to the real, real world.
Tsunami In Japan, Leads To Sovereign Defaults In Europe?
Just some early thoughts on the Japan's earthquake and tsunami. Earlier this year many of us were scratching our heads when it was announced that the worlds most indebted country, Japan, rode to the EU's rescue by buying up a bunch of Eurozone bonds. What we quickly learned was that this was not the Japanese government making these purchases, but rather their insurance and reinsurance companies. These insurance companies were simply seeking higher returns on their liquid assets. Fast forward to today, and we have one of the largest financial disasters to hit Japan, and Japan's insurers. These same insurers that were willingly investing excess liquidity in Eurozone bonds, now find themselves faced with the immediate need to raise massive amounts of liquidity. This can get pretty ugly, pretty quickly, for the EU.
Some More Thoughts On Japan, Namely Deflation:
Japan has been living with deflation for two decades now, and we are constantly told how horrible it is. But is deflation really that bad? It depends.
It depends on whether you are a debtor or a creditor. Deflation has been bad for the Japanese government because the "real" value of the debt they owe (mostly to their own frugal citizens) has gone up. But for the average Japanese citizen with little or no debt, deflation hasn't really had much of an impact on their standard of living. While their house prices are stagnant, a lot of their daily expenses have been falling. Even in Tokyo, a Starbucks coffee is $3.50, taxi rides are about $12 for 10 minutes, and a good lunch is around $15 per head. And more importantly their savings are worth more in "real" dollars (Yen).
As we know the price of computing power has been declining exponentially:
YEAR — Price of a Gigabyte
1981 — $300,000
1987 — $50,000
1990 — $10,000
1994 — $1000
1997 — $100
2000 — $10
2004 — $1
2010 — $0.10
So, what's so bad about DEFLATION?
Deflation scares the bejeebers out of our Fed, because our country runs on debt. In a deflationary environment that debt becomes worth more and more to the creditors, and becomes a bigger and bigger burden on the debtors. Inflation is just the opposite. Debtors love inflation, because in an inflationary environment the money they owe the creditors is worth less and less every day. That is why the Fed is working overtime to ignite inflation. Of course inflation hurts all of us who don't have an inordinate amount of debt. If you are a saver, your savings are worth less and less every day, inflation is a silent killer of your standard of living.
If you are a saver with little to no debt, than you should cheer against the Fed's re-inflationary mission. The Fed does not have your interests at heart.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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