@dimartinobooth, Danielle DiMartino Booth, Fed Up: An Insider's Guide to why the Federal Reserve is Bad for America, Money Strong LLC, economy, federal reserve, William Safire

Channeling Safire: “If it’s broke, fix it.”

Bert Lance must have left office thinking his legacy was in the soup.

Instead, the wise words of one of the country’s shortest-serving Directors of the Office of Management and Budget would go on to first merit inclusion in Random House’s Dictionary of Popular Proverbs and Sayings and then today, Google status. The expression, “If it ain’t broke, don’t fix it,” achieved such acceptance, conservative legend William Safire would go on to crown Lance’s idiom, “a source of inspiration to all anti-activists.”

For Safire, a gifted word spinner if there ever was one, his acknowledgement of pith perfected in no way implied admiration of the source. Indeed, Safire’s crowning glory as a New Yok Times columnist arrived with his 1978 Pulitzer Prize for “Carter’s Broken Lance.” …

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DiMartino Booth, Big Boys, CRE, Money Strong, Fed Up

The Big Boys of Summer

Do you feel it in the air? Is summer out of reach?

Many of us came of age, or thought we did, the first time we heard Don Henley’s mega-hit The Boys of Summer, released in October 1984. But can a song be reincarnated to mean even more? Can one brush with destiny change everything? This week more than any other, it’s right and true to look back and answer that question in the affirmative.

For those of us in New York 16 years ago, September 12th and 13th stretched on for many more than the 24 hours the clock conveyed. It wasn’t until the early morning hours of the 14th, when Dick Grasso announced the New York Stock Exchange would remain closed through the weekend, that many of us were released, on many levels. Walking the beach that weekend, looking for signs in the sand, Henley’s mournful song stopped me in my tracks. “Those days are gone forever” forever took on new meaning.

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DiMartino Booth

“Okay, Houston, we’ve had an opportunity here.”

Who doesn’t know that past perfect verbs are passé? Especially where drama is concerned.

Hence the thrice-taken artistic license in recanting the fateful conversation that took place April 13, 1970. An onboard explosion had just rocked those manning the Apollo 13 mission to the moon. In the pitch-blacked-out module, some 200,000 miles from home, the astronauts radioed mission control. You know what happened next – ‘Houston, we have a problem.’ Except it didn’t.

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Bonfire of the Vulgarities, Danielle DiMartino Booth, Money Strong, Fed Up

The Bonfire of the Vulgarities

Among other historic Wall Street milestones, this October marks the 30th anniversary of the release of Tom Wolfe’s Bonfire of the Vanities.

If you’d prefer, it also marks the 520th anniversary of the original Bonfire that took place in Florence, Italy. Back in the late 1400s, the powerful city was under the rule of the Dominican priest Girolamo Savonarola, who like Wolfe, was taken, though not in the best way, with the outward ostentatiousness of the local glitterati. The good father thus ordered the burning of sinful vices such as books and arts deemed devilish and even cosmetics and mirrors that vaunted the vulgars, at least in his eyes.

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Sasquatch Syndrome

Commercial Real Estate: Sasquatch Syndrome

Things were tough for Moscovians back in the Ice Age day.

The Trans-Siberian Railroad was still about 20,000 years from construction completion. And dinner in the form of wooly mammoths had this nasty habit of migrating east, as in so far east, it landed in what would one day be the United States’ Pacific Northwest. Passage was arguably simplified via the Bering Land Bridge, which hypothetically connected the two continents.

Folklore has it that the mammoths were not alone, but were accompanied by the Gigantopithecus. In that Gigantopithecus fossils have yet to be found outside Asia, stalwart believers maintain that a small population managed to flourish in their new home.

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ECONOMICS101, Danielle DiMartino Booth, Federal Reserve

Economics 101: Divining a New Mouse Trap

If only we had more rhabdic force to go around.

Not familiar with the term? It is the Greek derivative for the word ‘rod,’ as in the ones used by Diviners to direct them to riches of the mineral or water variety in ancient days of yore. The key is placement, into the right hands, that is. Before the gifted few were scientifically overanalyzed out of existence or persecuted as witches and subsequently burned at the stake, Diviners were romanticized as the rainmakers of their day.

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Danielle DiMartino Booth, Money Strong, Writing on the Wall

The Writing on the Wall

“Mene, Mene. Tekel, Parsin”

Appearing from nowhere came a disembodied hand. To the disbelief of a petrified King Belshazzar, the hand began to write words of unknown meaning on his wall. ‘Harried’ can’t begin to describe the king’s state of mind. He just had to know and promised the position of the third highest ruler in his kingdom to whom among his enchanters, astrologers and diviners could unravel the riddle of the seemingly indecipherable words. No such luck.

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The Smell of Dry Paint in the Morning, Danielle DiMartino Booth, Money Strong LLC

The Smell of Dry Paint in the Morning

Irish Playwright Oscar Wilde defied Aristotle’s memorable mimesis: Art imitates Life. In his 1889 essay The Decay of Lying, Wilde opined that, “Life imitates Art far more than Art imitates Life.” Jackson Pollock, the American painter, aesthetically rejected both philosophies as facile. We are left to ponder the genius of his work, which in hindsight, leaves no doubt that Art intimidated Life.

Engulfed in the flames of depression and the demons it awakened, Pollock’s work is often assumed to have peaked in 1950. The multihued vibrancy of his earlier abstract masterpieces descends into black and white, symbolically heralding his violent death in 1956 at the tender age of 44. Or does it? Look closer the next time you visit The Art Institute of Chicago. Greyed Rainbow, his mammoth 1953 tour de force, will at once arrest and hypnotize you. As you struggle to tear your eyes from it, you’ll ask yourself what the critics could have been thinking, to have drawn such premature conclusions as to his peak. Such is the pained beauty of the work. Rather than feign containment, the paint looks as if it will burst the frames’ binding. And the color is there for the taking, if you have the patience to slow your minds’ eye and see what’s staring back at you.

Perhaps it was the being written off aspect that drove Pollock to embark upon the final leg of his tour de force. We’ll never know. Renaissances to sublimity are the preserve of those with gifts beyond most our grasps. Hence the curious hubris driving so many pensions to reinvent themselves to full solvency by taking on undue risks. Heedless of what should be so many warning signs, so many managers continue to herd blindly into unconventional terrain hoping to find that perfect portfolio mix. The more likely upshot is their choices will drive them straight off a rocky cliff.

For now, the craggy landscape of pension canvases continue to be painted. Or in the case of the country’s largest pension, the stage continues to be set. This from Ted Eliopoulos, chief investment officer of the California Public Employees Retirement System (CalPERS): “We will be conducting quite elaborate choreography, looking at asset allocation, our liabilities and the risk tolerance of our board in conjunction with our expected rates of return for our various candidate portfolios.”

Oh, but for the days of antiquated notions such as matching assets to liabilities. But that’s so 80s. Today, a given public pension’s portfolio is anything but dominated by the Treasury bonds once held to satisfy its future liabilities. Rather, half of a typical portfolio’s assets are invested in stocks, a quarter in bonds and cash, and the balance in ‘alternative investments,’ including private equity, hedge funds, real estate and commodities. (Yes, we are still on the subject of matching current and future retiree paychecks to appropriate investments.)

To CalPERS credit, this ‘elaborate’ mix turned in stellar performance in its most recent fiscal year ended June 30. The $323 billion fund generated a net 11.2 percent return buoyed by a 19.7 percent return on its stocks. Returns of 14 percent on its private equity holdings and 7.6 percent on real estate rounded out the outperformance.

Eliopoulos stressed that, “as pleased as we are with this one-year return, our focus is always on the long-term. We invest for decades, not years.”

As pointed out in Barron’s, it’s been touch and go for the past few decades. CalPERS returned 4.4 percent compared to the S&P 500’s 7.1 percent, and over the past 20 years, 6.6 percent vs. the market’s 7.1 percent. Neither achieved return, it should be pointed out, exceeds the fund’s currently assumed rate of return of 7.5 percent or the assumed rate to which it will be lowered, seven percent, by the end of 2019.

The ultralow interest rate environment engineered by the Federal Reserve and unattained return goals leave CalPERS 68 percent funded. That puts it just about in line with Wilshire Consulting’s most recent calculations, which found the average aggregate funding ratio for state pension plans to be 69 percent.

So very few pensions are where they need to be. And fewer still will ever get there. Pension managers are deluding themselves into believing creativity in asset allocation holds the key to greatness in the after-working-life.

Afraid to say the miracle of alternative investments cannot make up for the average four-percent differential required to make pensions whole – just this year. How so on the math? A blended portfolio of cash, investment-grade and junk bonds today earns 3.5-percent; this compares to pensions’ average assumed rate of return of 7.5 percent. Of course, this gap has been widening for years care of dim-witted central bankers who excel at calculus but can’t manage simple math.

How unfair is it to leave out portfolios’ spice girls of equities and alternatives? Hate to turn down the party music, but starting points do matter. So do fees (hold that thought).

There’s nothing to say pensions won’t eke out another exceptional year of stock gains. The Fed could well be tantalizing investors with chatter of QE4 if the economic data continue to soften. But there’s no silver lining in that potential outcome. Remember that rocky cliff over which current reckless allocations can drive returns? Let’s just say the cliff gets taller, and the fall longer, for every year into which this aged-bull-market rally stretches.

As for those alternatives, for better or for worse, commodities are passé. Meanwhile, pensions have been abandoning hedge funds for years as passive investing takes victim active managers who dare value an asset and invest accordingly. And real estate is on fire. As in, valuations have never been this steep in the history of mankind. You can draw your own conclusions on that front.

That leaves us with private equity, that darling of asset classes and the issue of those pesky steep fees. According to the Pew Charitable Trusts, states bled $10 billion in fees and investment-related costs in 2014, the latest year for which data are available. Not only is this lovely line item funds’ largest expense; fees are up by about a third over the past decade, which conveniently coincides with the greater adoption of alternatives. Gotta love being a taxpayer!

But surely pensioners are privileged to have access to these tony private equity funds? Over the long haul, PE always outperforms those stodgy asset classes every Tom, Dick and Harry can buy online. So what if they’re illiquid. Right?

It’s hard to imagine the shivers sent down the spines of many pension fund managers when they heard the news that EnerVest Ltd, a $2 billion PE fund, had lost all its value. “Though private-equity investments regularly flop,” the Wall Street Journal reported, “industry consultants and fund investors say this situation could mark the first time that a fund larger than $1 billion has lost essentially all of its value.”

Well at least the oil bust is long over. Ill-fated, ill-timed, ill-valued energy investments are to blame for EnerVest’s demise. And surely that’s a comfort. It positively proves the fund’s evisceration is an isolated idiosyncratic incident.

Those other Wall Street Journal (WSJ) headlines don’t mean a thing. Why worry that, “Shale Produces Oil, So Why Doesn’t It Produce Cash, Too?” To wit, over the past decade, eight of the most established shale players have generated a respectable $414 billion in revenue but nary a penny in free cash flow. In fact, this eightsome has had negative cash flow of $68 billion.

Still think EnerVest will be a one-off event? Try this other WSJ headline from early July: “Wall Street Cash Pumps Up Oil Production Even As Prices Sag,” an article that went on to cite one analyst’s observation of, “insufficient discrimination on the part of sources of capital.”

Why, the question must be posed, bother discriminating when you’re sitting on $1.5 trillion in dry powder? Wait, are we still talking about energy? Well, no. That’s the point.

Go back to that last WSJ article for a moment, to what the reporters wrote: “Wall Street has become an enabler that pushes companies to grow production at any cost, while punishing those that try to live within their means.”

Set aside the fact that the analogy strikes closely to that of a drug dealer. Now nix the word, ‘production’ and fill in the blank with whatever your heart desires. THAT is the power of $1.5 trillion in private equity dry powder in all the forms it has the capacity to assume.

Again, starting points matter. That is, unless you are a deep-pocketed price agnostic buyer, one that collects fees for assets under management, regardless of how well the investment decisions fare. Being valuation-insensitive, however, also means you can incinerate your investors, especially pensions, and still walk away all the richer for it.

To its credit, Pew expressed particular concern with respect to desperate pensions playing the game of returns catch-up, as in those that have most recently plowed headlong into alternatives. No surprise, they happen to be one in the same with those sporting the weakest 10-year returns.

Ever heard someone tell you to not put all of your eggs in one basket? This rule of thumb applies in spades to pensions, or at least it should. While alternatives may provide a degree of diversification, Pew reports that that the use of alternatives among the nation’s 73 largest state-sponsored pension funds ranges from zero to over 50 percent.

Arizona tops the far end of that range, with 56 percent of its assets in alternatives. Missouri and Pennsylvania are not far behind with over 50 percent in this ‘basket,’ and Illinois, Michigan, Ohio, South Carolina and Utah stand out as having close to 40 percent in alternatives. Click for link to PEWTrusts.org report.

In the weeks to come, many pensions will excel in the back-slapping department, reporting double-digit returns for the fiscal year ended June 30th. Please keep your salt shaker handy.

For the third time, starting points matter. In late June, Moody’s ran some figures and scenarios to quantify where pensions are today, and where they’re headed. In 2016, total net pension liabilities (NPLs) surpassed $4 trillion. Looking ahead, Moody’s expects reported NPLs to fall one percent by 2019 in an upside scenario, but rise 59 percent in a downside scenario.

Perhaps the fine folks at Moody’s have contemplated what happens when, not if, pensions’ liquid equity and bond holdings lose 20 percent. Maybe they’ve even taken their scenarios one step further and envisioned the return implications for all of these elegant alternatives when a liquidity freeze takes hold amid plummeting valuations.

What’s a pension to do? Fraught managers are apt to throw more of your money at alternatives as tax revenues rise to compensate for what pensions cannot make up in returns. Know this: the more that $1.5-trillion store of dry powder grows, the more it devolves into that much napalm in the morning. The conflagration that spreads will not be containable, and you won’t be able to tear your eyes from it. As the tragic Pollock said of his paintings, and we will one day say of pensions, they have no beginnings or endings, they have lives of their own.

ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — July 15, 2017

Dear friends,
 
Janet Yellen headed for the Hill this past week for what could be her last appearance before Congress. Of course, that prompted me to grace sweltering Manhattan with my presence to chime in and opine on her viewpoint of the world. As you will see in more than a few of the links below, Yellen’s confusion left me scratching my head.
 
The job market continues to strengthen and wage growth still can’t get off the floor. The economy has withstood as much as it can in the form of interest rate hikes and it’s time to get busy shrinking the balance sheet ‘appreciably,’ to borrow her term? ‘Egregious and unacceptable’ practices have occurred on her watch and yet no action has been taken.
 
The sensation was akin to being swallowed whole by inconsistency itself. If you have a moment, enjoy my jaunt across media outlets. Some are longer than others. But those asking the questions had done their homework and that’s always a plus for the gal on the receiving end.
  
The TV Parade 

CNBC World Exchange — Janet Yellen returns to the Hill
  

Now that we’ve got your Saturday covered, add to your lazy afternoon at the beach Sunday reading the interview Economics Wire posted Friday. It’s a keeper.

In-Depth Interview
 
Economy Wire :  Is the Federal Reserve Bad for America? A Conversation with Danielle DiMartino Booth
 
 
Hoping your feet are in the sand and wishing you well,

Danielle

In Case You Missed It — July 10, 2017

Dear friends,

It is my hope that you received an email that looked like what I’ve pasted below. While it doesn’t resemble the communique you normally receive from me, I assure you I am the sender. Please login as directed and you will transition yourself onto new platform.

 

On 07/6/2017, you successfully activated your trial subscription to Money Strong written by Danielle Dimartino Booth. During your trial subscription, you will receive an email containing a link to the most recent issue of Money Strong published every Wednesday. You may also view recently archived issues of Money Strong at the subscriber website (Subscribers Home).

To access Money Strong, you may login via the link in our notification email or via the login button on our website. On the login screen, please enter the below username and password below for access. To avoid errors in the login process we recommend typing in your email address and then copying and pasting the password from this email:

E-mail Address (Username): _______________________

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In the meantime, we’ve got one more payroll report under our belt. The headlines made a splash with job growth appreciably stronger than expected as a surge of sidelined laborers rejoined the workforce. Wages remain soft, which is intuitive given the type of jobs created – home health care workers led the month’s gains, a demographic sign of the times we are in.

For more on the outlook for baby boomers’ retirements, please have a look at my latest Bloomberg column, which focuses on the implications of boomers’ increasing exposure to passive and so-called ‘alternative investments.’ Below the Blomberg piece are three of my earlier missives on the implications of the tremendous build in private equity dry powder and pensions’ prospects. Hard to believe I started writing on this subject two years ago.

 

Private Equity and Passive Investors Are on a Collision Course

Bloomberg View — Danielle DiMartino Booth, July 6, 2017

Money Strong Archive Pull

The Smell of Dry Powder in the Morning 

What if Charlie Munger is Right?

The Smell of Dryer Powder in the Morning

In other In Case You Missed It

The Lance Roberts Show — July, 6, 2017

FED Players Receive Special Treatment

FX Street — EUR/USD and Fed: Levels, Ranges, Targets

As many of you hit the road back home, wishing you well,

 

Danielle

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