Monday, September 26, 2011

Notes From a Noted Economist

1 - It seems that late September/early October (along with late January/early February) is conference season. In addition to the Financial Planning Association (FPA) National Convention less than two weeks ago, last Wednesday and Thursday saw the annual Symposium of FPA's Charlotte chapter. Both Juliet and I attended, and as always, it was superb. We heard from several top-notch speakers, each of whom had important and timely information to share.

2 - If you scroll down a bit, you can read a synopsis of the presentation by Ken Goldstein, one of the speakers from the Charlotte symposium. If you have a minute, read his comments. The summary comes directly from my notes, and I think you'll find his comments to be interesting and insightful.

3 - As if we had not gotten smart enough last week, Juliet is boarding a plane this morning bound for Washington, DC, where she will participate in a two-day Operations Workshop with TD Ameritrade. In Washington, she will meet up and spend time with Bonnie Armstrong, our special projects guru. Juliet will be back in the office on Thursday; in the meantime, Libbie and I will hold the fort.

4 - On Friday, we mailed out Portfolio Resetting DVDs to clients who were unable to attend the workshops in person. Please let us know if you have any trouble viewing the video or have questions regarding the content.

Of course, last week saw the stock market lose everything it had gained the previous week -- and more. This see-saw may continue for a while yet. We continue to steer the best course we know how.

Have a wonderful week!


Ken Goldstein Holds Forth

At the Financial Planning Association of Charlotte's annual two-day symposium last week, Ken Goldstein (above), an economist with The Conference Board, gave an excellent presentation entitled "Stuck in the Slow Lane." Here are some of the highlights from the notes I took during the talk:
  • "Some folks are wasting time talking about a fiscal crisis, but this country doesn't have a fiscal crisis. We have a jobs crisis." And the single biggest problem causing the jobs crisis, according to Goldstein, is the fact that there is no demand for goods and services. Businesses aren't going to hire more until consumers spend more.  Consumers aren't going to spend more until businesses hire more, so it becomes a vicious cycle.
  • "Right now, with an economy that faces a lack of demand, we're talking about reducing the deficit. We're talking about the wrong thing."
  • "What we are seeing is not simply a cyclical crisis, it is a fundamental structural shift in the global economy. The world you lived in prior to 2006 is not coming back. The economy will come back, but the world has changed. The rules--some of them--have changed."

By way of example, Goldstein described three changes that have occurred in the U.S economy:   

1 - Increasing savings by US consumers. This means that dollars which used to be spent in the economy are now sitting unspent in the bank. This includes people who have started aggressively paying down debt, as a reduction in debt is equivalent to an increase in savings.

2 - The rules of finance have changed. It is much harder to obtain a loan. As a share of the overall economy, lending is shrinking.

3 - Housing has undergone a fundamental shift. In Goldstein's words, "Real estate just got a long term haircut." This is because the population is barely growing, so we don't need as many houses. Why is this important? Here's why: You have heard that 2 out of every 3 jobs come from small businesses. Well, more half of those jobs are related to real estate. When real estate slowed to a crawl, many of those jobs dried up.

And it doesn't look like the situation is about to change anytime soon. The economic advantages of being a homeowner instead of a renter have changed. Also, in Goldstein's words, "No longer can you get a mortgage with no money down, nor should you. So the sub-prime market is gone, and it's not coming back."
(A couple of real estate sidelights from the talk: [1] The average consumer cares more about the housing market than the financial market. [2] In Canada, homeowners can't deduct mortgage interest the way we can here, yet their housing market is stronger than ours.)

Other bullet points to consider:
  • "The average raise this year, for those who get one, might be 1% - 2%."
  • "For everything you buy, 18.5% of that cost goes to pay for somebody's health care."
  • "The Fed is about to announce Operation Twist. Don't pay any attention to it. It won't hurt and it won't help."
  • "If we go into a second recession, it will be short and shallow, but we won't come out of it with a bang."
  • "There is no pricing power, nor will there be for the foreseeable future." (It is virtually impossible for businesses to increase prices on their goods and services, because consumers can't afford higher prices. That translates to low inflation.)"
  • "No matter who gets elected next November, the economy is not going to grow at a rate greater than 2% to 2.5%, with an inflation rate of about the same, because there is no ability to raise prices."
  • "Emerging economies are growing at 2 - 3 time the rate of developed economies. At this rate, the global share of the economy will go from 60/40 in favor of developed economies to the reverse within ten years or so."
  • "Global businesses are trying to convince emerging market consumers to trust their brands. Those companies that succeed in that quest will still be in business when the good times return."
  • "If Europe goes to heck, all their banks are really going to take a hit. Then our banks are going to take a big hit; that's called contagion."
  • "The problem with the Eurozone is that since the beginning of the euro, one size fits all. That doesn't work."  
  • "So," Goldstein concluded, "the economic environment is lousy." The question then becomes: What is the economy going to look like 10 years from now?

The good news is that there's a brighter future ahead. It's going to come from taking all the money that companies and investors have been hoarding and investing it into the "next great thing." Goldstein didn't know exactly what that next great thing will be, but he believes that it could be in an area such as renewable or other domestic energies.

Finally, the most interesting moment during the Q & A period came when an advisor asked: To what extent should the government be involved in the economy? Goldstein's answer: "We need a cop on the corner. How big a cop is open to debate, but we need that cop."

Tuesday, September 20, 2011

2011 Financial Planning Association (FPA) National Conference

1 - As I write this, I'm flying home from the Financial Planning Association's annual national convention in San Diego, California. As is always the case with such events, I learned a great deal from the sessions and even more from my colleagues and other attendees. Much of what Millard & Company is doing -- from our frequent client communication to our recent portfolio modifications -- was validated and echoed by some of the leading thinkers and practitioners in the industry. It was a gratifying experience.

2 - Among many other worthwhile sessions, I participated in a half-day pre-conference workshop entitled "Has Diversification Failed Us?", given by Dr. Christopher Geczy of The Wharton Business School. For a brief report on this interesting and enlightening session:

Has Diversification Failed Us?

A summary of a pre-conference workshop at FPA Experience 2011 in San Diego, CA on September 15, 2011

As mentioned above, I was privileged to spend Thursday morning in a very interesting session with Dr. Chris Geczy of The University of Pennsylvania's Wharton School of Business. His office is next door to the famed economist Jeremy Siegel, author of Stocks for the Long Run.

Chris is no slouch himself: he serves as Academic Director of the Wharton Wealth Management Initiative and co-created the first full course on hedge funds at Wharton. Before earning his Ph.D. at The University of Chicago (which is, along with Wharton, one of the top two or three business schools in the nation), he worked for the Board of Governors of the Federal Reserve System in its Division of Research and Statistics. He also works with his own private investment clients. I think it's safe to say that this guy is no dummy.

The provocative title of Chris' session was "Has Diversification Failed Us?" We explored the historical value of diversification; the fact that most asset classes declined during the recession of 2008; which asset classes provide the most (and least) diversification benefits; and potential sources of diversification as we move forward in the 21st Century.

The short, emphatic answer to the question posed in the title is no, diversification has not failed us. In fact, it is more important than ever. But in a crisis, the effect of diversification is diminished. In 2008 there was no refuge from falling asset prices except for cash. So the question becomes: Where can we look for added sources of diversification? Where do we seek protection during tough times?

Dr. Geczy's session focused largely on what is known as the "Endowment Model," also known as "Yale Model" after that university's famed portfolio. In case you are unfamiliar with Yale's endowment fund (reported by the
National Association of College and University Business Officers
to be worth more than $16 billion), for many years it has enjoyed enviable returns with relatively low volatility.

Like our Millard & Company portfolio models, Yale's endowment maintains a relatively low allocation to stocks. And, like our models, Yale devotes a healthy allocation to alternative asset classes. But unlike us, the folks at Yale have access to some very illiquid asset classes such as timberland.

Fortunately for people like us and our clients, there are more and more ways to access these previously-inaccessible asset classes through ETFs and some open-end mutual funds. Of course, as more and more of these vehicles become available, it becomes vital for investment fiduciaries like us to try to identify those options that are appropriate, beneficial, liquid, stable and inexpensive. Just because we can do something doesn't mean that we should do it.

In the end, Dr. Geczy did not grace us with a simple and easy recipe for attaining the perfectly diversified portfolio. He didn't even tell us which vehicles to invest in to achieve that ideal portfolio. As always, such decisions must be dealt with on our own. But after the session, I was able to spend a few minutes alone with Chris and describe for him what we have been doing with our models. He seemed very impressed to learn that we have been allocating a portion of client assets to commodities since way back in 1998, and he indicated that our current changes were right on track. It was very reassuring.

3 - In case you're wondering, none of the great minds that I heard from in San Diego -- none -- were foolish enough to try to predict where the stock market is headed in the next few months or years. One presenter made a great point when he said, "I don't want to be one of those guys who says, 'I don't know where the market is going, but....' Nobody knows the future, and I'm not going pretend I can. I just want to get my clients ready for anything." Sound familiar?

Speaking of the she stock market, it had a good uptick last week, but that doesn't mean we can expect more of the same indefinitely. I'm reminded of a memorable Han Solo line from Star Wars: "Great shot, kid! Don't get cocky."

Have a fabulous week!


Wednesday, September 14, 2011

A Special Event for Special Guests

Items for your attention this week:

1 - Last Friday's Client Appreciation movie night was a rousing success. There were 56 clients and guests in attendance. The dinner was outstanding (although some folks had to wait for their pizzas, everyone took the delay with gracious good humor), and we received many comments that seeing the movie, Casablanca, in high definition on a big screen brought a whole new enjoyment to the experience. But I would have to say that the greatest compliments were reserved for Juliet's homemade Tiramisu. And for me, the best aspect of the event was certainly the company. It was a grand evening.

2 - The DVD of our recent Portfolio Resetting session should be available later this week. Please contact Juliet if you would like to receive a copy.

3 - The second panel discussion in our New Realities series, previously scheduled for September 20, has been postponed. Two of our hoped-for panelists have scheduling conflicts with the original date, so we are working on setting a date which will work for everybody. You will receive an email invitation as soon as plans are complete.

The stock market continues to be jumpy, driven largely by events in Europe. We are following events closely and mostly laying low for the time being. Times like these are why we diversify the way we do.

Enjoy the week!


Tuesday, September 6, 2011

Our New World

With the combination of Labor Day and the impending tenth anniversary of 9/11, one's thoughts inevitably turn to the changes that have taken place in our world in the last ten years. Both the concept of labor as it applies to the American worker and the idea of national security are a world away from our notions of a decade ago.

Some would argue that the changes to our world are all bad. I prefer to leave that judgment for tomorrow's historians, who will have the benefit of hindsight which we do not currently enjoy. Instead, we would do well just to recognize the new realities as they exist, and deal with them as best we can. That is the goal of all our recent work and events here at Millard & Company, and we hope you are deriving some benefit from them.

Items for your attention this week:

1 - Just a few days remain until this Friday's Client Appreciation Movie Night. We already have a good number of clients planning to attend, but we would love to have more, so please plan to spend some of your Friday evening with us. You may bring up to three guests. Each person will enjoy a personal made-to-order pizza from a wood-fired oven (which will be set up next to the Depot deck), fresh local salad, and Italian wine from our friends at La Bouteille. Juliet is even making Tiramisu for dessert. We will view the timeless Casablanca on the big screen in digitally-restored Blu-Ray high definition, complete with surround sound. It promises to be a fun night, so please make plans to join us here by sending your RSVP to Libbie Johnson at, to let us know to expect you!

2 - Last Tuesday's portfolio resetting work sessions were very well attended and received. We had 67 total clients in attendance between the three sessions. We will begin to implement the new portfolio models over the coming weeks and months. For those clients who were unable to attend, we are preparing a DVD of the presentation for you to view at home; the video should be ready by the end of next week.

3 - By way of introducing the client work sessions, we showed the 10-minute video slide show below. Feel free to view it and share it with others if you'd like. Unlike this introduction, the main presentation that will be included on the forthcoming DVD is intended for clients only.

Fall has unofficially begun; have a great week!