Category Archives: Investing

Brexit and the dream of Apartheid

“I don’t want to sound racist, but I think there are just too many people coming into the country. I moved out here from Dagenham four years ago, because Dagenham was looking like a foreign country.”

Nobody wants to sound racist, but sometimes racism happens.

The referendum vote in Britain has been an object lesson in the dangers of direct democracy. This is what we hire politicians for.

It is also an object lesson in the dangers of loose confederacy over a tight Federal union. The greatest triumph of American statesmanship was to replace the Articles of Confederation with the Constitution. The states were bound together much more tightly by the Constitution, and it was a one-way street.

David Cameron has given Vladimir Putin the best bit of news the Russian dictator has had since the Ukrainian Revolution. Why join? Why stay? These questions are so much easier to ask, today.

The effects within the UK are still to be assessed, but already we see that English relations with Scotland and Northern Ireland have been vastly complicated, perhaps fatally for the Union. At the same time, London will face the largest threat ever to remaining a more important financial center than Frankfurt.

North Korea and Myanmar have been stark lessons in the success of going your own way. All Britain is, I’m sure, breathless to hear what Nigel Farage’s juche advice will be. The rest of us are simply shaking our heads.


Half the story and no punchline

Marketwatch recently published a piece on the sad history of the Central States Pension Fund of the Teamsters union. As a quick update for those that do not know why there are jokes about Jimmy Hoffa being buried at the fifty-yard line of Giants Stadium in New Jersey, the Teamsters were a very powerful union in 20th century America, covering the trucking industry and related trades. It fell under mob influence and union leader Hoffa is widely believed to have been murdered by the Mob to keep him from cooperating with the FBI investigation.

The Central States fund is a classic underfunded pension. Many truckers today are not union members, so the ratio of working to retired is 1 to 5.2, according to the article. Investment management of the fund was taken away from corrupt union officials in 1982 and put in the hands of Wall Street firms such as Morgan Stanley, Goldman Sachs (a former employer of the author), and Northern Trust.

The Marketwatch article opines that Wall Street did worse for Central States than the mob did. But is that true? It appears that part of the strategy to deal with the underfunded pension was to invest in higher risk/reward assets than the typical pension. When the financial crisis hit in 2008, this strategy means that the fund’s losses were also magnified.

That’s all the story tells us, but that is only half the story. Yes, the downside in stocks was worse than bonds in 2008, but the rebound was also better. The long-term outperformance of equities over all other asset classes has persisted after the crisis of 2008. And if the mob was still in charge and heavily invested in Vegas casinos – that would have been better for Central States? Of course not.

The real problems here are two, in my opinion. Did the investment managers abandon their equity-heavy allocation at the bottom of the market? That would be a tragic misstep. Did the investment managers consider the average retirement age of the members in their asset allocation decisions? This should have driven concerns for generating cash vs growth. There is a tension between these two, but that is why GS and NT were getting paid the big bucks.

As a piece of financial journalism, this article doesn’t close out the issue it raises in the headline. A stock-heavy allocation does make sense (in my opinion). That in itself is not the problem. Changing strategy at the bottom – now that is a problem. But the article doesn’t document that that actually happened. We have only half the story and no punchline.

Grant Thornton’s Big Tick Nostalgia

English: Crowd gathering on Wall Street after ...

Previously, I said that no one had offered me a coherent explanation of how larger tick sizes would create jobs (outside of Wall Street). I’ve just finished reading the latest in a series of Grant Thornton whitepapers on this subject. Let’s talk about it, because while it is an explanation, it is less than coherent. Continue reading Grant Thornton’s Big Tick Nostalgia