Vol Is Here To Stay

“You will never fully convince someone that he is wrong, only reality can do that.” 

                                                                                                                                               -N. Taleb

The mystifying behavior of the capital markets is nothing new, at least over the span of my own involvement. However the current scenario generates all the more concern because how quickly information is passed via the internet. And if that’s not enough, much of that information is neither edited nor confirmed but nonetheless is embraced by media and subjected to literal analysis. So what happened to cause the volatility last month that seems to have evaporated this month? Nothing, but this is what happened that was ample evidence to lay blame.

Markets

Last month gave the broad indexes their first meaningful correction in exactly 2 years. While no specific piece of legislation, nor economic surprise caused the volatility the outcome was met with surprising order. The gap down of nearly 10% brought the broad indexes to flat on the year only giving up the gains which in my opinion are too often, too dependent on earnings results. 10% is a respectable correction by any standard, but it is not the same at 1000 points on the Dow Jones, blown out of proportion by pundits while representing barely 2% of the index. Nonetheless their goal was met and volatility spiked and within the unruly market active sellers were met with equally eager buyers and although some sense of stability was in the outcome the internet was primed for the next piece of earth shattering news. Should the market be volatile on this subject? Sure.

China Trade

By the end of last week the new poster child was the administration placing tariffs on steel and aluminum imports. I was somewhat surprised that so few pundits recalled that protectionism is nothing new to the US and has been even more frequently sourced by Europe and a handful of Asia Pacific economies. The difference here is that this administration likes to advertise its decisions with a sense of enthusiasm that many (including myself) don’t share. That aside, since the end of the last World War the US has been a leader in providing access to its rapidly expanding post war economy. In fact much globalization can be traced to the contributions the US has made sharing its economy to help nurture growing economies abroad. China was one of them and by the time they were provided access into the World Trade Organization the tag “Emerging” meant little in the grand scope. But that hasn’t stopped them from initiating protectionist motives of their own. Challenging the intellectual property rights of tech companies, coopting manufacture industry products and hindering the ability of foreign companies eager to set up in China 20 years ago to expand without compromise. All, in my opinion, begs for a new trade arrangement and maybe, although not the best strategy, this recent move by the administration might trigger some action. Should the market be volatile on this subject? Sure.

Economics

This week Job growth outpaced expectations by rising over 300k in the month of February, usually a seasonally less robust month. More recently Consumer Sentiment and Manufacturing data was released and both were near their highest since 2004. This is consistent with recent activity that still has the economy on track for a growth rate at or near 3% for the near term. This is supported by chatter from various central bankers and other voting members of the Federal Reserve who suggested that as data continues to show strength so too will the Fed continue to respond (i.e. higher rates). Should the market be volatile on this subject? Sure.

The Message

Volatility is not by itself a reason to buy the market. Often the unruliness can make the environment feel worse than it actually is. But likewise the opening for buying assets at lower prices than they were 3 months ago is compelling, so for now the volatility is a battle between a market that is craving to be understood and an investing public that is craving to spend some cash. The former acting in accordance to the latter?  Why not, markets are generally grounded in fact, investors are more compartmentalized. Should the market be volatile on this subject? Definitely.

Advice for the Young at Heart

Over the past two weeks I've attend two conferences titled "The Future of Finance" presented by two different organizations. To be fair there is a connection between the said organizations but the delivery of ideas and positions are quite different. One organization relies on the academic and government careerist point of view which was predictably hostile to past activities without taking any reasonable amount of accountability. The other organization presents experienced financial industry stalwarts, some of whom have taught college part time and spent the time flirting with the endless experiments that sprang from the industry only to embrace the new normal dogma (and add that they questioned those products all along).

However, while I applaud the ongoing debate regarding the need for more trust and transparency in the financial services industry I can't help thinking that what was strongly missing from the events was perhaps less talk articulating the problem and more talk on fixing the problem. For example knowing there is a need to be more transparent, albeit obvious to most, is not the same as actually knowing how to recognize it. Among the primary goals I commit to are a non-conflicted ecosystem for my clients that start with assurances of my accessibility at anytime. Another is to focus on my asset management services and to support the meaningful importance of my credibility through a steady diet of continuing education in an industry that experiences elusive changes in perspective with a frequency comparable to the markets themselves. But that's where I stop, because unlike many in the financial services industry the advice most commonly provided is so with the aim to deliver products.  And in the instance where discussion can be had regarding insurance, estate planning or tax services, advice can easily blend into a lecture on the benefits, rather than the needs. These are areas where transparency is easily confused. That's why the difference for me begins with my experience first and in areas that I openly profess marginal knowledge it's my experience with insurance, estate planning and tax burdens that steers my solutions for which the outcome for clients is talking to a professional not a holistic generalist.

Now in projecting the contributions needed to fund a retirement plan I can't underestimate the value, while understanding the effect of tax rates, inflation rates and the average volume of life changes (kids, homes, jobs, parents), to having a great investment plan. And if at any time we decided to liberate state lines to bring down insurance costs, embrace broad tort reform or overcome the barriers to simplification of our tax system, the level of transparency that would emerge would take the world of financial services that much closer to the trust it so desperately craves.

Hey Buddy, Can You Spare A Bitcoin?

There is a lot in the news recently about a new and innovative form of money called Bitcoin. So the real question is, is Bitcoin money? My answer is, sort of. However could the race to create a single global currency that nobody "owns or controls and in which everybody can take part" be nothing more than the latest entry into a long list of financial schemes that proceed it, namely to make the few rich and the many frustrated. Sound familiar? What about trading or hedging do you think we'll see the introduction of Bitcoin Default Swaps (BDS's)?

Have you ever bought into something advertised as one size fits all? It's an idea born of the industrial age that has become a popular descriptive that flows out of the technology think tanks aimed at making the world a better place. The supporters of Bitcoin, the fiat currency attracting the interest of people around the world, claim that. As social media marketing becomes an ever bigger industry it has accomplished that by adhering to a simple rule, namely one size doesn't fit all. If Bitcoin is a currency it doesn’t fit the description of it but if it’s a commodity it does and if it’s a commodity it's an investment and that's where my interest comes in.

But the idea of it being an investment otherwise is open to a lot of debate. First of all in referring to it as a fiat currency it can easily be said that many countries maintain fiat currency in particular the US dollar is one. The dollar's value is in its full faith of a government guarantee not any underlying commodity such as gold or silver. This is interesting because in addition to the government's pledge the markets have needed other insurance which has come in the form of currency management. For example if the US economy is generating less revenue for the government than the amount of currency being printed there is a need to issue debt to finance the difference. To manage this over 50 year ago the Treasury introduced a mechanism to maintain a finite amount of debt outstanding, it was called the debt ceiling.

See there you have it. Besides being a currency you can't touch, Bitcoin is a creation of an entity we don't know, transacted in an environment we can't feel by people we can't see. It also claims to be a controlled supply. Recent decisions banning the Bitcoin in China and safety warnings from the EU have underscored the need for more transparency before governments provide the bridge to legitimacy. At that time who knows? It may start showing up in Mutual Funds, traded on the Futures Exchange, as an ETF and maybe eventually we might see a Bit Bond.  Now wouldn't that be interesting?