Posts tagged: Fedor Sannikov
Gold’s performance at times of geopolitical volatility underscores its potential value as a portfolio diversifier. However, gold has also performed well amid strong equity markets this year as real interest rates fell. But just as there are many “goldbugs” who are enamored by the asset, there are many skeptics who raise legitimate questions about it. We investigate potential merits of adding gold to portfolios below:
From pharaohs to photosynthesis: the industrial and investment case of gold
Interest in gold is as old as civilization itself, with the earliest known usage of the metal dating back to the early Bronze Age (4th millennium BC). Today, demand for the metal continues to come from central banks, investors, jewelers–as well as commercial applications. Scientists have even developed a way of achieving artificial photosynthesis through leveraging gold particles as a catalyst.
Still, a high proportion of annual demand for gold is based solely on investment demand. This can expose the price of the metal to a large amount of speculation. The World Gold Council data suggests that only 59% of demand is for commercial uses; 26% of 2018 gold demand was for investment purposes while another 15% was demanded by central banks.
Three reasons to consider holding gold
Against that backdrop, there are three arguments for holding gold in a portfolio:
1. Historically, gold has been a diversifying compliment to a traditional stock and bond portfolio throughout market cycles. The below matrix illustrates that the correlation between monthly returns of gold and other asset classes has low or negative correlations to other major asset classes.
The Most Important Points From “Managing Your Wealth: A Must-Read for Affluent Families” by Christopher F. Poch
“We all face the same problems managing our wealth. We don’t want to buy stocks or mutual funds; we want to retire comfortably, pay for college, and if we have enough, we want to help others, educate the poor, endow a hospital, or cure cancer.
In order to start, you need to know where you are, where you want to go, and then how to get there. Don’t jump right into the investments. Start with a personal financial statement. A Personal Financial Statement is a document, not a $ 10MM house or $ 300K car.
Do you need a financial plan? Yes, we all do, but at this stage it doesn’t have to be formal or in great detail. Too many people start the financial planning process only to abandon it because the time involved was more than they expected. To start, you only need to know the basics: 1. How much money you need to do what you want. 2. From where the cash flow will come.
Low fees are great, but avoid the bait-and-switch. When it is all said and done, high-quality wealth management firms will charge between .75% and 1.5% on assets under management in most relationships.
Ask how your advisors will educate you and keep you calm when others are not.
Primary point of contact. Look for one professional to take on the responsibility as your primary advisor to navigate and integrate the myriad of issues and options. He or she should be a seasoned, experienced professional who will proactively contact you whenever there is information, actions, or recommendations to be considered.
Avoid permanent losses. Define risk as the likelihood of permanent impairment of capital, as opposed to price volatility, and make every effort to avoid large losses so that your wealth can compound at attractive rates over time. The power of compounding wealth is enormous.
Long-term view. Short-term performance is unpredictable. The surest path to generating attractive investment returns is to maintain a long-term focus.
The return for the average investor in an index fund has historically been much worse than the published time-weighted returns. Dalbar2 studies over the last 20 years show the average investor earns about 40% of the index. The reality is most people don’t have the stomach to be responsible for making global economic decisions when the market sells off 20%-30%.
Keep in mind that most hedge funds close inside of five years of launch due to poor performance. Private equity has the advantage of taking a long-term view, improving management, and providing guidance, as well as capital. This too has become a crowded industry and understanding how returns are calculated takes an advanced math degree. As the wise carpenter says: Measure twice before you cut. Read more »
“The BlackRock Geopolitical Risk Indicator (BGRI) continuously tracks the relative frequency of analyst reports, financial news stories and tweets associated with geopolitical risks. We have used the Thomson Reuters Broker Report and the Dow Jones Global Newswire databases as sources, and recently added the one million most popular tweets each week from Twitter-verified accounts. We calculate the frequency of words that relate to geopolitical risk, adjust for positive and negative sentiment in the text of articles or tweets, and then assign a score. We assign a much heavier weight to brokerage reports than to the other data sources because we want to measure the market’s attention to any particular risk, not the public’s.
We see geopolitical risk as a material market factor in 2019, especially in an environment of slowing growth and elevated uncertainty about the economic and corporate earnings outlook. At the center of the geopolitical debate? Increasing rivalry between the U.S. and China across economic, ideological and military dimensions. We believe these tensions are structural and long-lasting. With that in mind, we are taking a deep dive into the race between the two countries for global technological leadership.
Our geopolitical risk dashboard features both data-driven market attention barometers and judgment-based assessments of our top-10 individual risks. We show the market attention to each risk, assess the likelihood of it occurring over a six-month horizon, and analyze its potential market impact. We adjust the market impact reading for how much each risk may already be priced into markets. The greater the market’s attention to the risk, the lower the potential market impact. Lastly, we highlight assets sensitive to two key risks that are on the market’s radar screen: Global trade tensions and European fragmentation”.
The Federal Reserve Bank of New York (FRBNY) recently unveiled the publication of three reference rates: the Secured Overnight Financing Rate (SOFR), the Tri-Party General Collateral Rate (TGCR) and the Broad General Collateral Rate (BGCR). The production of the three reference rates signaled the start of the phased transition by the Fed away from the London Interbank Offered Rate (LIBOR) to a new paradigm. This dramatic shift is part of a multi-year effort by regulators to restore market confidence and transparency in the wake of the LIBOR rigging scandal that rocked the global markets.
SOFR was first recommended as the US dollar alternative to the LIBOR back in June 2017 by the Alternative Reference Rates Committee (ARRC) – a committee comprised of board of governors of the Federal Reserve (“the Fed”), the FRBNY, financial institutions, trade groups and other regulators. The election of SOFR is the culmination of work begun by the Fed and the US Treasury Office of Financial Research (OFR) in 2014, when the ARRC was convened to create a new set of alternative reference rates rooted in actual transactions.
TGCR, BGCR and SOFR reflect transactions in the Treasury repurchase market. TGCR is a measure of rates on overnight counterparty/tri-party general collateral repurchase agreement (repo) transactions secured by Treasury securities, while BGCR measures rates on overnight Treasury general collateral repo transactions. The BGCR includes all trades used in the TGCR, as well as general collateral financing (GCF) repo trades. Of the three reference rates, SOFR was deemed to be the best alternative to LIBOR.
SOFR’s daily volume (which the FBRNY estimated at $800 billion, for underlying transactions, in November 2017) and coverage across multiple repo market segments allow for flexibility for future market evolution. Read more »
As rates have risen, investors have, once again, started asking the perennial question: Is the bond bull market over and are rates normalizing? In thinking about bond yields, it is important to keep longer-term factors in mind that have nothing to do with central bank policy. Low yields have correlated with two, related longer-term trends: low nominal GDP (NGDP) and an aging population. The reason they’re related is that an aging population means slower growth in the workforce, and in turn, slower economic growth.
An aging population impacts rates through a second mechanism. As consumers age, their borrowing and investing patterns shift. Older households tend to borrow less and demonstrate a preference for income, in the process raising the demand and lowering the supply of bonds. The net result is that older populations tend to be associated with lower real, or inflation-adjused interest rates. This dynamic has been at work for decades and helps explain why low yields predated the financial crisis.
Because the population will not get younger any time soon, what would need to change to push rates back to “normal”? In terms of the real economy, the simple answer is faster nominal growth. Looking back over the past 60 years, the level of nominal growth has been the key to understanding the level of rates. During this period, a smoothed average of nominal growth explains almost 60% of the variation in long-term rates (see the chart below).
“Owning shares in a mutual fund or ETF has never been cheaper. According to Morningstar’s annual fund fee study, the asset-weighted fee for roughly 25,000 funds and ETFs averaged 0.518% in 2017, down from 0.562% in 2016. The 8% drop was the biggest year-over-year decline since 2000, when Morningstar began tracking the data, and represents more than $4 billion in savings for investors, according to Morningstar. Driving the decline were investor preference for low-cost funds — flows into the cheapest 20% of funds within different categories surged 60% — and fee reductions by active funds.
“The cheapest 20% of funds raked in nearly $1 trillion last year while the rest of the industry saw net outflows of approximately $250 billion,” said Patricia Oey, senior manager research analyst at Morningstar, in a statement. “The message investors are sending is crystal clear — cost counts.” Passive funds were the biggest beneficiaries of these flows, accounting for 70% of new inflows; lower cost actively managed funds accounted for the rest.
The average asset-weighted expense ratio for passive funds fell from 0.16% in 2016 to 0.15% in 2017, while the asset-weighted expense ratio for actively managed funds dropped from 0.75% to 0.72%, as investors moved funds out of costlier funds into cheaper ones. Read more »
Global debt rose to a record $237 trillion in the fourth quarter of 2017, more than $70 trillion higher than a decade earlier, according to an analysis by the Institute of International Finance. At the same time, the ratio of debt-to-gross domestic product fell for the fifth consecutive quarter as the world’s economic growth accelerated. The ratio is now around 317.8 percent of GDP, or 4 percentage points below the high in the third quarter of 2016, according to the IIF.
While the amount of uses in one barrel of oil is quite incredible, we still need a mind-boggling amount of the natural resource each year to sustain consumption.
Oil production per year: 34 billion barrels (incl. other liquids)
Oil market size at current prices: $1.7 trillion per year
To consider how big this actually is, we compare the annual market sizes of all major metals and minerals that are mined throughout the world:
- Gold: $170 billion
- Iron: $115 billion
- Copper: $91 billion
- Aluminum: $90 billion
- Zinc: $34 billion
- Manganese: $30 billion
- Nickel: $21 billion
- Silver: $20 billion
- Other metals: $67 billion (Including platinum, palladium, titanium, tin, moly, uranium, and more)
The total amount works out to $660 billion – just a tiny fraction of the size of the oil market.