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  • The Robo-Advisor industry continues to be a hot topic. I was asked to present at the Los Angeles Chapter of the American Association of Individual Investors. My presentation last month (which is already partially out of date due to recent developments) can be viewed here. I am scheduled to present next at the CFA Society of Los Angeles on August 5th focusing more on the wealth management industry perspective. Vanguard and Schwab's respective Robo-Advisor offerings continue to attract assets and more firms are entering the space (the Robo-Advisor Scorecard and Extended List reflects those updates).
  • The second quarter (see links on the Benchmarks page) was a generally flat to slightly negative quarter for most investors. US and international stocks averaged about +1% for the quarter, but interest rate sensitive investments tended to have negative returns with real estate funds in particular down significantly, while taxable bond funds were down -1% and balanced funds also had slight losses for the quarter on average.
  • One of the hottest topics in the investment business recently has been so-called "Robo-Advisors." Wikipedia describes Robo-advisors as "a class of financial adviser that provides portfolio management online with minimal human intervention." Comparing the various firms is somewhat like comparing apples, oranges, bananas, and perhaps some other fruits and I was somewhat annoyed seeing virtually every commentary list different firms, so I started building a master list of firms that are competing in the robo-advisor space. Wealthfront and Betterment are often mentioned, but the original Robo-Advisor is Financial Engines, which has a huge business via employer-sponsored defined contribution plans (a target market for some of the newer firms). Guided Choice and Promanage are other prominent firms with niches arguably competing in the space. I built this Robo-Advisor Scorecard & Extended List to get all of the firms I've seen mentioned in one list and get some perspective based on the publicly disclosed discretionary assets under management. By my count there are forty something firms to be aware of (acknowledging they are not comparable in many ways - some are software providers, some are brokers, some include human more interaction, while others have none).
  • 1Q2015 was another positive quarter for most investors. US Stock funds averaged roughly 2 1/2% for the quarter, but international stocks generally did even better averaging 4% (although emerging market stock funds were generally up 1-2%). Real estate funds were strong again returning north of 4%. Balanced funds average about 2%, while taxable bond funds generally returned a little over 1%.
  • 2015 is off to a rough start for stock investors, but 4Q2015 was another good quarter for most investors. Balanced funds generally returned 1-2% for the quarter and 5-6% for the year (depending on whether you refer to Morningstar or Lipper/WSJ metrics - links are updated on the Benchmarks page) and taxable bond funds generally had modestly positive returns for the year. US stock funds returned roughly 5% for the quarter and 8% for the year (despite investors withdrawing more than $50 billion from US stock funds), while the S&P 500 was even stronger and completed a triple double (>10% returns for the third straight year). International stock funds were popular with investors (taking in over $86 billion from investors), yet they had negative returns (down slightly for both the quarter and the year). This is another example of poor timing by investors, which I plan to be write about extensively this year. We have decades of research demonstrating the remarkably consistent pattern of investors buying high and selling low and making moves that are against their best interest (recently popular "gap" metrics documenting the difference between dollar weighted and time weighted fund returns is part of the story).
  • The newest crisis author to participate in the Global Financial Crisis Survey is Gabriel Investments managing partner Richard Vague. Vague is the author of the recently released book The Next Economic Disaster: Why It's Coming and How to Avoid It. Vague co-founded and subsequently sold multiple firms including First USA (the largest Visa issuer in the industry, which was sold to Bank One in 1997). Vague believes private debt (business plus consumer debt, including mortgages) and high overall levels of private debt (marked by what he describes as "runaway lending") is the main reason for financial crises in major economies (numerous researchers in recent years have come to similar conclusions). Vagues survey response can be viewed here.
  • The Benchmarks page has been updated with links to Morningstar and WSJ/Lipper 3Q14 fund returns data. 3Q2014 was a generally down quarter for most investors. Bond funds tended to have slightly negative returns and stock funds had losses averaging roughly 2%, while balanced funds tended to have slightly lower losses. Real estate, international stock and emerging market funds tended to have larger losses. Investors and academics that study stock market anomalies can note that for the 10 year period, large cap growth funds slightly outperformed small cap value funds. Value and size are the two most commonly discussed "risk factors" and many have attempted to increase returns by outweighing those factors. That could indicate it's a good time to consider those factors, or it could indicate the factors have lost or could be losing their effectiveness due to their popularity. Of course there are always new factors being discussed (for instance see Fama and French's recent paper A Five-Factor Asset Pricing Model).
  • Six years ago today (9/7/2008) the US Government placed Fannie Mae and Fredie Mac under conservatorship marking one of the critical events of what would become known as the Global Financial Crisis (with Lehman Brothers bankruptcy following a week later). Hundreds of books have significant discussions of the crisis, and Timothy Geithner's recently released book Stress Test has the potential to become one of the primary crisis reviews due to Geithner's central role. Many prominent crisis commentators reviewed or discussed Geithner's book shortly after its release in May. Now that I've had a chance to read the book in its entirety, I've added some excerpts to several of my crisis related pages. I've posted a page of my comments with excerpts and links to reviews and other relevant media (including some of Geithner's interviews) in my Stress Test Book Review.
  • In yesterday's (9/6/2014) Wall Street Journal article titled Read ‘Em and Reap: Smart People for Investors to Follow, Jason Zweig encourages "investors to socialize 'only with investors who are calm and methodical.' Here’s a small selection of websites, blogs and Twitter feeds that I think pass that test." Zweig's list includes, among others Berkshire Hathaway shareholder letters, William Bernstein's Efficient Frontier, Memos from Howard Marks, and a less well known web site called Investor Home.
  • The Benchmarks page has been updated with links to Morningstar and WSJ/Lipper 2Q14 fund returns data. 2Q2014 was another good quarter for most investors. US Stock funds as well as balanced funds averaged roughly 3 1/2% for the quarter. International stocks were modestly stronger than US stocks and emerging markets were even stronger posting gains of over 6%. Real Estate and Utilities were particularly strong with returns of roughly 7 & 8% respectively, while equity precious metal funds returned over 13%.
  • Timothy Geithner's Book Stress Test is officially a NYTimes best seller, and although I'm not aware of a most criticised crisis book list, if there was one, Stress Test would likely be making a run for the title. Before it was even released, it was drawing critical comments (for instance, see Jennifer Taub's column). Since it's release some of the other crisis commentators that have weighed in on Stress Test include William Black, Robert Reich (who calls Geithner "delusional"), Sheila Bair (who recommends the book, but not for the usual reasons), Michael Lewis, Joe Nocera, and Dean Baker. Geithner's column in the WSJ was titled The Paradox of Financial Crises and the book was reviewed by the WSJ and NYTimes, plus Geithner also appeared on the Daily Show for an interesting interview. I haven't read it yet, but plan to.
  • The Benchmarks page has been updated with links to Morningstar and WSJ/Lipper 1Q14 fund returns data. 1Q2014 was a modestly favorable quarter for most investors. US and international stocks tended to be roughly flat, while REITs and bonds generally earned positive returns thanks largely to interest rates dropping after spiking toward the end of 2013. Over the last 10 years A) US Stocks B) International Stocks C) Real Estate D) Junk Bonds, and E) Emerging Bonds have all had fund returns just above 7%. While emerging markets stocks have lagged over the last 3 years, they outperformed all the other major asset classes over the last ten years with returns over 9%.
  • Dean Starkman, author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism, discussed financial crisis cause narratives and Investor Home's Crisis Survey in an article in The New Republic titled No, Americans Are Not All To Blame for the Financial Crisis. Regarding the "Everyone-is-to-blame" crisis narrative, Starkman hasn't officially weighed in on the survey (he writes in the article "I haven’t voted yet"), but Starkman clearly favors the narrative that Wall Street is to blame for the crisis. His article also includes interesting commentary on multiple crisis topics, including crisis loses due to fraud (relative to all mortgage losses) and the large percentage of subprime loans taken by prime-eligible borrowers.
  • The Benchmarks page has been updated with Morningstar and WSJ/Lipper returns data. 4Q was another good quarter for most investors, although strong returns were focused in the US stocks, which returned roughly 9% (32% for 2013). International stocks returned roughly 6% (18%), while emerging markets returns about 2.5% (flat) and real estate funds were generally flat (up 1.5%). Balanced funds returned roughly 5% in 4Q and 14% in 2013. Taxable bond funds generally had positive returns for the quarter, but losses for the year. Bank/variable loan and high yield bond funds were generally the strongest performers in fixed income with returns around 2-3% in 4Q and 6-7% for the year. The Great Rotation debate looks to be back in play given that record amounts were invested in US equity mutual funds and ETFs in 2013, while record amounts were withdrawn from US bond funds.
  • The Nobel Prize in Economics was awarded earlier this week to Eugene Fama, Lars Peter Hansen, and Robert Shiller (Press Release - Trendspotting in asset markets. As Mark Gertler commented in the WSJ "They've all been on the short list for many years...The interesting thing is how the three are connected." Brenda Cronin calls it Not as Shocking as Some Think and is one of several that notes Shiller called The Efficient Market Hypothesis one of ‘the most remarkable errors in the history of economic thought.’ I have a linked discussion of Efficient Market Hypothesis discussing Fama, Shiller, and others, where I link to an article in which Shiller writes "The Efficient Market Hypothesis is one of the most egregious errors in the history of economic thought...It's a half-truth." (My tweet of the quote was a popular favorite and retweet.) Ironically, the Nobel committee seems to have adjusted (not really) Shiller's "half" comment to "a third" in awarding both of them the award (along with Hansen). A few other interesting commentaries on the award I've seen include these from Michael Casey who calls them The Oddest of Bedfellows, Roger Lowenstein who writes the Nobel Needs Grounding in Reality-Based Economics, and Elisabeth Kashner who writes about Fama & Shiller: The Great Democratizers. Of course, Shiller is also one of the primary examples of people that DID see a crisis coming (as well as a bust). And of course, people, academics, and even politicians, should be able to have a difference of opinion and debate facts in a respectable and peaceful manner, which is clearly an objective of the Nobel committee. And despite Shiller's critique of EMH, he states in this Washington Post commentary that "Fama has done a lot of important things. I’m pleased to be united with both [Fama and Hansen]. I am an admirer of both of them, and it is an honor to be associated with them in this way."
  • 3Q13 was generally a good quarter for investors (updated Benchmarks page), although volatility in interest rates did lead to some losses in some asset classes. US equity funds returned an average of nearly 8%, which was a few % above the S&P 500 (small cap growth funds did particularly well). International Stock funds were up slightly more, but emerging stock funds were up less (about 5%). Balanced funds were generally up more than 4% and taxable bond funds were up just under 1% for the quarter. US Real Estate funds were down 2%, but global real estate funds were up.
  • One of the reasons I haven't had many comments recently was because the kids were on summer vacation and we decided to take a major road trip. I'm a sucker for exotic beaches and ski resorts, but I have to say our road trip this summer was probably our best vacation to date. If you've never been to Yellowstone National Park, I highly recommend you add it to your to do list. This was my third (and best) visit and one of my intentions was to get completely away from the finance world, yet ironically we ended up getting close-up to real bulls and bears. I posted details, pictures, and videos for anyone interested at 1 Day in Yellowstone, including my son's video of a bull elk walk by.
  • Earlier this month Jay W. Richards released Infiltrated (on the topic of exploitation following the financial crisis), which quickly became a bestseller (#4 at NYTimes). Richards is the 44th crisis expert to weigh in on the Global Financial Crisis Expert Survey. See Richard's take on the GFC.
  • In Nov 2011, I released the initial survey of 22 crisis experts regarding the causes and prescriptions for the Global Financial Crisis. Today's 44th entry completes a second sample of crisis experts. While many of the high level results are very similar for the two samples (which implies the results are relatively robust), there are some changes of note which may imply some shifting of opinions regarding the crisis. Specifically, a larger percentage of the participants in the second sample (a majority in fact) prefer the narrative ("Everyone" was at fault: Wall Street, the government, and our wider society). In the first sample the narrative that Wall Street was responsible came in second, followed by the narrative that the government was responsible. In the second sample, the narrative that Wall Street was responsible came in a distant fourth (behind "Everyone", Government, and None of the narratives), which may offer some anecdotal evidence that as time has passed, fewer crisis commentators are concluding that Wall Street was responsible for the crisis and more are concluding that the Government and wider society played major roles (along with Wall Street). More details on the Survey Summary page.
  • Coincidentally, Andrew Ross Sorkin writes in the NYTimes (Five Years After TARP, Misgivings on Bonuses), that former Treasury Secretary Henry Paulson told him "I believe that the root cause of every financial crisis, the root cause, is flawed government policies." Paulson is the author of On the Brink, which is being reissued this week (FIVE YEARS LATER: On the Brink -- THE NEW PROLOGUE: A Look Back Five Years Later on What Happened, Why it Did, and Could it Happen Again?) to coincide with the crisis anniversary.
  • The second quarter of 2013 was an eventful one and most likely to be remembered for the so-called "taper tantrum" which coincided with a spike in interest rates and record outflows from bond funds in June. While the proponents of Sell (stocks) in May strategy generally haven't benefited from exiting equities, those that have been underweight long-term bonds were not surprised by falling bond values. While my prior discussions (3/13/2012 & 1/8/2013) of the many individuals that were warning about risks in bonds were arguably early, the general consensus now seems to be that interest rates bottomed. Certain categories of bonds that are considered by some to be among the safest investments (like long term treasury bonds and inflation protected bonds) suffered substantial losses in 2Q and many are questioning their prospects going forward, especially if interest rates continue to trend higher. Among the primary questions for investors (both during the quarter and going forward) remains whether to under or overweight bonds. Those that have turned to some yield focused asset classes (like REITs, High-Yield Bonds, and MLPs) have likely been exposed to perhaps more volatility than they might have expected.
  • Morningstar and Lipper 2Q13 numbers had taxable bond funds losing roughly -2.5%, while TIPS funds lost -6.6%. Balanced funds (which hold stocks and bonds) had smaller losses averaging less than -1%. Domestic stock funds averaged +2.3%, while the broad indexes were closer to +3%. However, international stock funds lost -2.2% and emerging market stock funds were off -7.5% on average, while among the hardest hit were equity precious metals funds losing roughly -35%.
  • There have now been more than 300 books with substantive discussions of the Global Financial Crisis, including over 30 "best sellers." While the quantity of books released in the last year has slowed dramatically from the pace of prior years, the quality has been at a very high level recently. The latest to weigh in is Washington Post Columnist Neil Irwin, with The Alchemists: Three Central Bankers and a World on Fire. You can read an adapted excerpt here.
  • 1Q2013 was a strong quarter for most investors, particularly those with large allocations to US stocks. Per Morningstar the S&P 500 returned over 10% and domestic stock fund returns averaged over 12% (Small Cap Value funds over 14%). International stock returns were also generally positive although not as strong, with intl funds up about 5%, and emerging market funds up less than 1% on average. Bond investors tended to be slightly positive, with high yield funds returning almost 3%, but TIPs and international bond funds generally showing modest losses.
  • There have been some interesting articles this week discussing real estate prices and changes in home rental prices in some regions (for instance, see John Gittelsohn's latest at Bloomberg). Some believe that institutional investors that have bought homes to rent them may have added too much rental supply in some cities (see comments at NakedCapitalism and ZeroHedge). There are also legitimate concerns that short-term oriented investors in the new asset class may try to exit at the same time in large numbers, thus contributing to falling prices. Yet, the number of participants and the long-term commitment to the space seems to be growing. Two pure plays (SBY and RESI) came public in December, two publicly traded private equity firms (BX and CLNY) are major players, JPMorgan has clients invested in the strategy, and several others major players are racing toward IPOs. Over a year ago Warren Buffett said "I'd Buy Up 'A Couple Hundred Thousand' Single-Family Homes If I Could." At least one of the firms (BX) has reached 10% of that number and I wouldn't be surprised if the major players get closer to Buffett's range in the next few years. I suspect those that have writen off the buy to rent movement might be underestimating both the demand for the new asset class among institutions and retail investors, as well as the interest of these firms in creating long-term revenue streams from managing the properties and investment vehicles. More details at the updated Buying Homes to Rent page.
  • There is a very worthwhile debate about defining investing and speculating that started last week via the CFA web site and the Wall Street Journal. Participants in the debate include Robert Hagstrom, Howard Marks, Martin Fridson, and Jason Zweig. I previously commented extensively on this topic in 1999 and 2010 and I respectfully submit my definitions with elaboration in this discussion (with links) Are you an investor, speculator, or investulator? Fridson's argument (which is very problematic for most of the people in the so-called "investment" industry) has, as far as we know, remained unchallenged and I believe that is because he is correct. I follow-up on Fridson's conclusion that any movement away from a market index (which he calls "subdiversification") is speculative, but my definition of investing includes a requirement that there be both a theory, as well as empirical evidence that the activity generates positive risk-adjusted returns over the long run for all the participants in aggregate. Some believe that investing is long-term while speculating is short-term. I don't believe length of time in a position is a required component of investing, although in general it is correlated.
  • There is a new asset class that is getting attention both in the press and among institutional investors. As of December, individual investors also have the opportunity to invest in REITs that buy single family homes and rent them out, passing the income to shareholders (although that is in theory at the moment). SBY and RESI started trading publicly in December and several others have announced plans to go public including a division launched by Public Storage founder and Billionaire Wayne Hughes. I've created a new page listing more than a dozen significant players publicly mentioned as active in this new field, statements about expected returns, as well as quotes and links to articles in the popular financial press. See my new page on Investing in Rental Homes.
  • Regarding the Great Rotation discussion below, the recent fund flow data coming in doesn't support the theory that investors are moving from bonds to stocks (currently). Both equity and bond funds have had inflows, although the big January equity inflows generally came from cash rather than bonds (see Investmentnews article).
  • The big investing topic of the last week seems to have been the theory of a "great rotation" out of bonds and into stocks. I've collected quotes about risks in long-term bonds (and I continue to see articles on that topic, for instance see Fortune's The ticking time bomb in bond funds and Rising Bond Yields. This Is Just the Start at CNBC), but the great rotation argument goes beyond money moving out of long-term bonds, to money flowing into equities. The current focus follows large recent inflows into equity funds which followed outflows in recent years. BofA Strategist Michael Hartnett looks to have coined the phrase "great rotation" from bonds to equities in this 1/11/2011 commentary. I asked Hartnett about the derivation and he points to the graphic on page 5 showing the DJIA and Treasury Bond yields (which dropped from 14% in the early 80s to historic lows last year). Hartnett writes that the beginning of every great bull market in equities (after the first world war in the 1920s, the second world war in the late-1940s, and during the war against inflation in the early-1980s) coincided with a major inflection point in the trend of long-term bond yields. He also highlights the flow of funds into bonds and out of equities from 2007 to 2012 (see for instance fund flows graphic via JPMorgan's end of year guide to markets or a similar graphic via Fidelity). I've seen the topic prominently discussed at CNBC, Bloomberg, WSJ and FT (both of the latter articles note that "we’ve seen this type of flow into equities before in January” the "last four years ... only to see that trend reverse"). This economist article concludes "mini-rotation is more likely." So the big question is whether the jump in equity flows was again a January event, or the beginning of sustained flows into equities (and potentially out of bonds).
  • The "Global Financial Crisis" debate of the week revolves around the role of the 1977 Community Reinvestment Act (CRA). The broader debate involves whether there are unintended consequences from government actions in encouraging home ownership and lending (with the CRA being the current topic). This debate was reignited by a new paper coming from a globally diverse group of four authors representing some prominent institutions that concludes the CRA did encourage risky lending. This paper follows-up on the FCIC report and its discussion(s) of the CRA's contribution (or lack thereof) in the crisis (with the majority report dismissing any significant link between the CRA and the crisis, but Wallison's dissent suggesting otherwise). See Did the Community Reinvestment Act (CRA) Lead to Risky Lending? (10/1/2012) by Sumit Agarwal, Effi Benmelech, Nittai Bergman, and Amit Seru (NBER version)

    "Yes, it did... We find that adherence to the act led to riskier lending by banks ... The effects are strongest during the time period when the market for private securitization was booming."

    Additional details from the paper and extensive links (on both sides) and background at this new page about the Community Reinvestment Act (CRA) Crisis Debate.
  • FSA Chairman Adair Turner (author of Economics After the Crisis) comments on the crisis in a speech at South African Reserve Bank.
    The crisis of 2008 was essentially a crisis of excessive leverage, the result of a steady build up of excessive debt contracts over several preceding decades. That excessive leverage led to bust. And after the bust, deleveraging creates deflationary pressures which we cannot offset by conventional monetary policy alone, since interest rates are at the zero bound.
  • The vast majority of crisis experts I've surveyed don't exect the global financial crisis to end until at least next year. While not everyone agrees that the Euro crisis is related to the crisis that was triggered by subprime loans and the bursting of the US Housing Bubble, many consider them related in some way. German Chancellor Angela Merkel recently suggested that the Euro crisis will take at least five years to resolve.
  • The debate over Glass-Steagall (and whether it should be reinstated in some form) continues with President Obama effectively taking a position counter to the majority FCIC report argument that the repeal of Glass-Steagall was a cause of the crisis. In an interview with Rollingstone, Obama states "But there is not evidence that having Glass-Steagall in place would somehow change the dynamic. Lehman Brothers wasn't a commercial bank, it was an investment bank. AIG wasn't an FDIC-insured bank, it was an insurance institution. So the problem in today's financial sector can't be solved simply by reimposing models that were created­ in the 1930s." Matt Taibbi comments today in A Brief Response, which includes "The repeal of Glass-Steagall was just part of the decades-long deregulatory effort that led to this toxic situation... It wasn't just Glass-Steagall – it was Glass-Steagall plus all of this other stuff that made the world so dangerous." Somewhat surprisingly, Taibbi adds in between those two quotes "a 2004 SEC decision to lift restrictions on leverage for the country's biggest investment banks allowed companies like Lehman to borrow forty dollars or more for every one they actually had." See 10/12/2012 note below with links to prior discussions (by Andrew Lo, Bethany McLean, and William Cohan) that argue the specific SEC rule change didn't contribute to the crisis.
  • I just happen to be reading Henry Paulson's On the Brink and yesterday I found on Youtube what seems to a mirrored version of Aaron Ross Sorkin's Too Big Too Fail film (in 7 pieces). That along with Inside Job (which can be viewed here) are two of the don't miss crisis films for anyone that hasn't seen them yet. I don't know if one or both of these aren't violating some kind of rights, but they have been in public domain for some time.
  • The article of the day is Andrew Ross Sorkin's discussion about replacements for BOTH Bernanke and Geitner.
  • The fact checkers gave thumbs up and down on various statements by both candidates last night and backers of both sides have plenty of examples to cheer for and back away from (see 3rd debate links Factcheck, Politifact, The Fact Checker). Regarding the two major "fact" disagreements from the last two presidential debates here are the relevant links. Regarding the US auto makers facing failure during the crisis, Romney's claim that he supported federal assistance after bankruptcy (to which Obama suggested "let's check the record") is supported by Romney's NYTimes Op-Ed Let Detroit Go Bankrupt (11/18/2008) which includes "The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk." The disagreement from the 2nd debate is less clear-cut and the topic was Remarks by the President on the Deaths of U.S. Embassy Staff in Libya Rose Garden. Here is the specific language with one sentence before and after. "Our country is only as strong as the character of our people and the service of those both civilian and military who represent us around the globe. No acts of terror will ever shake the resolve of this great nation, alter that character, or eclipse the light of the values that we stand for. Today we mourn four more Americans who represent the very best of the United States of America." So Obama did mention "acts of terror" but did not specifically state that the attack in Libya was an act of terror. The broader perspective on the Bengazi incident is the subject of this 41 minute video Death And Deceit In Benghazi. On a lighter note, its a good time to revisit this Fortune discussion about the differences between Democrats and Republicans Wendy's or Subway? Depends which way you vote. (6/13/2012).
  • The third quarter of 2012 was rewarding for most investors. Despite a slowing economy, persistent unemployment, and continuing international issues, the anticipation and subsequent announcement of additional quantitative easing encouraged investors and market values rose in the vast majority of asset classes. The S&P 500 and Wilshire 5000 returned more than 6%, while Morningstar and Lipper both show US stock fund returns averaged over 5%. International and emerging market equity funds were slightly stronger with average returns of almost 7%, while balanced fund investors had returns averaging roughly 4.5%, and bond fund investors averaged over 2%.
  • Global Financial Crisis theories and research remain a hot topic.
  • William Cohan has another interesting column out in Bloomberg Businessweek titled Rethinking Robert Rubin: An assessment of the former Secretary of the Treasury. One of the major disagreements between the Democrats and Republicans on the Financial Crisis Inquiry Commission was whether the repeal of Glass-Steagall caused or contributed to the global financial crisis. Chapter 4 of The Majority report was titled "DEREGULATION REDUX" and began with "Expansion of banking activities: 'Shatterer of Glass-Steagall.'" In November 1999, Congress passed and President Clinton signed the Gramm-Leach-Bliley Act (GLBA) and The New York Times reported that Citigroup CEO Sandy Weill hung in his office “a hunk of wood—at least 4 feet wide—etched with his portrait and the words ‘The Shatterer of Glass-Steagall.’” In their Dissenting Statement, Hennessey, Holtz-Eakin, and Thomas summarized "Neither the Community Reinvestment Act nor removal of the Glass-Steagall firewall was a significant cause. The crisis can be explained without resorting to these factors." Yet, there are Democrats and Repulicans on both side of this debate. Cohan points out that Rubin stated at a CNBC forum, “It is a myth that the repeal of Glass-Steagall contributed to the financial crisis.” Cohan continues "This is no longer the consensus. Aside from Paul Volcker, several of Rubin’s ex-Citigroup colleagues have recently revised their opinions." Cohan also mentions former Citigroup executives John Reed, and Richard Parsons, as well as Sandy Weill himself who told CNBC in July 2012 that the law’s reinstatement in some form is necessary to restore confidence in the financial system. Yet, as Cohan points out Larry Summers "dismisses this as revisionism, warped by hindsight and political convenience." Cohan also notes that "Greenspan, Levitt, and others have conceded errors in judgment that, upon reflection, may have created conditions that led to the crisis." Rubin told the New York Times in April 2008 “I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.” Actually, dozens on people publicly warned in advance the crisis, and Cohan also discusses former Citigroup banker (relieved of his duties in January 2009) Richard Bowen "who repeatedly warned senior management, including Rubin," that he believed 60 percent of the mortgages the firm was buying and stuffing into mortgage-backed securities were defective.

    Other recent discussions on the topic of Glass-Steagall include Repeal of Glass-Steagall Caused the Financial Crisis (8/27/2012) by James Rickards (author of Currency Wars), who summarizes "the fact that there were so many parties to blame should not be used to deflect blame from the most responsible parties of all—the big banks." Back in May, Andrew Ross Sorkin (author of Too Big To Fail) in Reinstating an Old Rule Is Not a Cure for Crisis pointed out that after pressing Elizabeth Warren about whether she thought the financial crisis or JPMorgan’s losses could have been avoided if Glass-Steagall were in place, she conceded: “The answer is probably ‘No’ to both.” See also comments from Dean Baker and Barry Ritholtz (who writes that the repeal of Glass Steagall itself did not cause the financial crisis. However, the repeal did help make the crisis worse). Michael Hiltzik summarized in We need a stronger Glass-Steagall Act to regulate financial firms (5/30/2012) that "People tend to link the 2008 crash to the repeal of Glass-Steagall a decade earlier not because they've made a reasoned analysis of the connections between the causes of the financial crisis and the provisions of the old statute. Rather, they're thinking metaphorically: The repeal symbolizes the rush of deregulation of the 1990s. That's good thinking, because deregulation driven by lobbying by Wall Street and the banks in that era did set us up for disaster."

    Of course the other FCIC dissent came from Peter Wallison who argued the crisis resulted from housing policy, and on that topic the Economist has an interesting discussion and poll on Home-ownership: Should home-ownership be discouraged? with Andrew Oswald and Richard K. Green, which includes discussions of the experiences of other countries regarding home-ownership policies.

  • While many of the individuals that warned in advance of the Global Financial Crisis, have gotten plenty of attention for being among the few that saw the crisis coming and attempting to warn the public, there are some individuals that haven't gotten much attention, yet appear to be deserving of credit for their warnings. A few weeks ago I came across this NYTimes article from earlier in the year titled A Mortgage Tornado Warning, Unheeded by Gretchen Morgenson (co-author of Reckless Endangerment). Morgenson and Wikipedia cite Nye Lavalle for multiple prescient warnings about many of the biggest players that got into trouble and played major roles in the Global Financial Crisis. Lavalle wasn't involved in the industry until he fought back against a lender on a family property, which led him to begin researching mortgage abuses. Lavalle subsequently became a foreclosure debt defense expert and confronted multiple problems at Fannie Mae (which were investigated in depth and eventually disclosed) and Bear Stearns, and also identified robosigning practices long before the crisis. Further, as early as 2000, Lavalle claimed that Bear Stearns and EMC Mortgage were engaged in predatory servicing and lending abuses as well as cooking their books, and that their practices would ultimately bring down the U.S. economy and international financial markets. I spoke with Lavalle last week and his responses to the Global Financial Crisis Experts Survey have been added here making Lavalle the 41st participant of the survey. Like most of the other participants, Lavalle thinks we are still in a relatively early stage of the crisis, but he does not believes the crisis can be summarized with a simple narrative. You can read his more about his opinions about the crisis causes and fixes, as well as link to his early research and warnings at his survey response page.
  • There is a somewhat disturbing, yet not terribly surprising report out from Diligence Reveiw Corp documenting that among SEC Registered Investment Advisors 11% report a “significant adverse regulatory event” and they manage 46% of assets among the advisors, yet 46% of the advisors on the "green list" (no reportable events) manage only 10% of assets among the advisors. Why the Advisors with some history of red flags would have more assets under management and the advisors with clean records would have much less in assets under management is certainly due to multiple factors, but in a logical world you (or at least I) would hope it would be the opposite (advisors with clean records managing most of the money). See Red-Yellow-Green Report on All SEC-Registered Investment Advisors for definitions and details of the report.
  • Long weekend viewing/reading in case you missed any of these...
    • The SEC is out with a 212 page report on "Financial Literacy that concludes "studies have found that investors do not understand the most elementary financial concepts." People (in Baltimore, Atlanta, and San Diego) were surveyed using peculiar theoretical funds named 1) Petunia Core Equity, 2) Gardenia Asset Allocation Portfolio, and 3) Hydrangea Bush Government Bond Fund about prospectuses and trade confirmations. Only 17% correctly identified that the trade confirmation involved a mortgage-backed security. I was curious what one might look like since I doubt many investors actually trade them (see page 52 of the appendix). 45 public comments were also submitted and commented on in the report. The report also concludes "many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds, and are not fully aware of investment costs and their impact on investment returns. Moreover, based on studies cited in the Library of Congress Report, investors lack critical knowledge about investment fraud."
    • Heleen Mees's doctoral thesis entitled ‘Changing Fortunes: How China’s Boom Caused the Financial Crisis’ is a somewhat different angle on the primary cause of the Global Financial Crisis (in line with the "Giant Pools of Money" theory). The report is 171 pages and includes citations of prior work by Kotlikoff, Taylor, Rogoff, Bernanke, Greenspan, Shiller, Tversky, and many others.
  • As we approach the 4 year anniversary of the critical weekend at the center of the global financial crisis (the focus of Andrew Ross Sorkin's book Too Big To Fail and film), hundreds of books with substantive discussions about the crisis have been written with dozens of them qualifying as "bestsellers." There have also been scores of journal articles published, as well as countless articles and other commentary. Of course the crisis has also been a frequent topic on television, as well as in documentaries and movies. There have been a number of fictional feature films with crisis themes (for instance Wall Street: Money Never Sleeps, Margin Call, and Up in the Air), but focusing specifically on the crisis, there have been at least twenty documentaries (that I've come across so far), often based on crisis books or including crisis book authors among the cast. So Crisis Films is a natural additional to the Investor Home Crisis research collection. You can watch portions or trailers online of all of those I've listed and quite a few can now be viewed in their entirety for free, including several originating outside the US. Of course the primary causes and fixes of the crisis continue to be hotly debated and many of the films are tilted toward one narrative or another. Forthcoming this fall is The Bubble (with a freshly released trailer and cast interviews), which will present an alternative perspective to Oscar winner Inside Job (and PBS's Frontline: Money, Power, and Wall Street) from best-selling author Tom Woods with a cast that includes Ron Paul and Peter Schiff among many others.
  • Following strong stock returns of 1Q12, 2Q12 generally resulted in losses for most balanced investors. While bond investors generally had gains in both the first and second quarter, most stock investors gave back part of their 1Q gains in 2Q. According to Morningstar fund data (which is published the day the quarter ends), Large Cap Blend funds gave back exactly one third of their 1Q gains in 2Q (+12.48 1Q, -4.16 2Q), while international funds gave back a majority of the 1Q gains in 2Q (+12.51, -7.03). REIT's have been the star performer of 2012 thus far with gains of roughly 15% (seen graphically here or summarized in table form here). Lipper fund data is published usually about a week after quarter end in the WSJ (2Q12 review is in today's edition). WSJ points out that money flowed into bonds (and international stocks to a lesser degree), while US stocks had outflows.
  • Global Financial Crisis theories and research remain a hot topic as exemplified by Fortune's follow-up The 5 myths of the great financial meltdown: Round 2. Allan Sloan concludes "Instead of a discussion about what happened, we've gotten into a government-vs.-free-market shoutfest. These fragmented days, many people tend to see things in black and white terms, in ways that reinforce what they want to believe. The real world is more complicated than that. Black and white have their places -- but to understand the financial meltdown, you need to see some gray."
  • Last week, the Economist had an article titled Over-regulated America in which they noted that "America’s share of initial public offerings fell from 67% in 2002 (when Sarbox passed) to 16% last year." Yet, the trend in dropping numbers of US public companies started earlier. According to Wilshire Associates, sponsor of the Wilshire 5000, there are only 3665 publicly listed companies in the US at the end of January, down from 7458 companies at the end of 1997. So, in the last 15 years the number of US listed companies has been more than cut in half. If we extrapolate, at that rate (about 250 fewer companies per year) by the end of 2014, there would be < 3000 - would the Russell 3000 get renamed? By the end of 2025, there would be < 500 stocks - would the S&P 500 get renamed? And by the end of 2027, there would be no more US listed stocks.

    Rick Ferri also noted the trend in The Incredible Shrinking Market (3/10/2011) and The Total Economy Portfolio (2/27/2010) and he points out that there are more mutual funds and ETFs investing in US equities than there are US equities. Which reminds me of the old pizza joke, which in the investment/hedge fund industry could go something like "An executive asks his staff if they should start six or eight funds: better make it eight - at least one is bound to get hot and attract a bunch of suckers.”
  • Many have blamed the profession of economics for contributing to the Global Financial Crisis. But unlike many that have criticized Economics since the crisis, Steve Keen criticized the field in his 2001 book Debunking Economics and began warning about the pending crisis several years before it began. Keen updated and revised his book last year and I review the updated version of Debunking Economics and discuss The State of Economics here, including links to recent articles and books discussing economics and the crisis causes and prescriptions.
  • When I started InvestorHome in 1996 one of the sites I linked to and found the most useful was Dr. Ed Yardeni's web site. Yardeni was a student of Nobel Laureate James Tobin and has held high profile roles at many firms including Deutsche Bank, but now heads Yardeni Research. It's been many years, but it's nice to see Yardeni blogging for free again and I've returned his blog link to the home page. Yardeni and Keen are two of the most consistently interesting economic bloggers.
  • Some outstanding commentary on the Global Financial Crisis has appeared in the Financial Analysts Journal. To supplement the Crisis Links page, I've created a page of the articles that have appeared there. Most are free to the public (including numerous crisis book reviews). They include commentary from some of the most prominent individuals in both the academic and investment communities, beginning with a 2008 article by John Bogle. See Global Financial Crisis Articles in The Financial Analysts Journal.
  • The latest expert to weigh in on the Global Financial Crisis Experts Survey is UCLA Professor and author of over 100 published papers (including many award winners), Richard Roll.
  • Richard Koo (author of The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession) has a new paper out titled The world in balance sheet recession: causes, cure, and politics in real-world economics review (12/12/2011), which opens with this point. "Remarkable similarities between house price movements in the U.S. this time and in Japan 15 years ago, illustrated in Exhibit 1, suggest that the two countries have indeed contracted a similar disease." Koo previously made this point in How to Avoid a Third Depression (Koo Bio on last page) in presenting to the U.S. House of Representatives on July 22, 2010. Sadly, the Japan comparison is not a new observation. John Talbott wrote the following prescient comparison between Japan and US Real Estate Prices (as US prices were peaking just prior to the collapse and onset of the Global Financial Crisis) in Chapter 1 of Sell Now! (2006) roughly six years ago.
    "the United States is becoming more and more like Japan every day."
    "Even if you optimistically (and naively) believe our government is independent of political pressure brought on it by industry and the banks, the Fed may be very slow to force banks to recognize losses and thus push the problem out for years. In an attempt to protect some of the biggest banks and possibly avert a bank run on the entire system, the Fed may choose to punish the American economy for years as it struggles slowly out of the loan morass it created during the real estate bubble. No, the story Japan has to tell is not a pretty one, but unless we are expected to repeat their troubled history we had best do something differently with our future."
  • Recent additions to the Global Financial Crisis Experts Survey include
  • Discussions about Warren Buffett (who in 2002 called derivatives "time bombs, both for the parties that deal in them and the economic system") and Joshua Rosner (who wrote in 2007 "The feared outcome is nothing less than a 21st century bank run" among other warnings) have been added to Who Predicted the Crisis?
  • When the Global Financial Crisis began to spin out of control, a common phrase was used to imply that it was not predictable - "No one saw this coming." Many people have argued that is simply not true and a major effort to debunk that claim was published by Dirk Bezemer in 2009. It's title was "No One Saw This Coming": Understanding Financial Crisis Through Accounting Models. While many commentators have stated that only a few or a handful of people saw this coming, Bezemer documented 12 individuals that publicly warned in advance of the crisis. Since then there have been many Books discussing those that won big during the crisis and many articles, as well as a vote of thousands of economists to determine who was most accurate in predicting the crisis (the Revere Award - with Steve Keen winning along with Nouriel Roubini, and Dean Baker). I've summarized and linked to those that I've found on a new page about Who Predicted The Crisis? The number of individuals that I believe deserve some credit for sounding the warning bell is closer to 50 (including many outside the US).
  • Given the split conclusions in the Final Report issued by the Financial Crisis Inquiry Commission, and the ongoing debate about the causes of the Global Financial Crisis, I decided to do a survey to try to clarify opinions and ask for simple prescriptions from the people that have studied and written about the crisis. I've surveyed 22 experts including crisis book authors (including several with bestsellers), published/cited researchers, and 7 that predicted the crisis (including Keen and Baker). Details of the Crisis Expert Survey are here and the initial results are here including one paragraphs summaries of Crisis Causes and Prescriptions for what needs to happen.
  • I am finally starting to catch up to the modern internet world and you can follow updates to InvestorHome (including additional survey participants) via
  • 3Q 2011 was a rough quarter for equities, while long bond holders (aside from high-yield) generally had gains. US stock funds were off roughly -17% on average, while balanced (stock/bond) funds dropped about -10%. Generally small caps lagged large caps and value lagged growth. Links have been updated on the Benchmarks page including in Morningstar's Fund Category Returns and Lipper/WSJ Yardsticks.
  • 2Q 2011 had it's ups and downs, but in the end US Equity funds were generally flat (slightly positive on average per Morningstar, slightly negative per Lipper/WSJ). International stocks generally did better, although emerging markets were off roughly -1%. Large caps outperformed small and growth beat value, which is the opposite of the ten years numbers (as would be expected based on historical numbers and the three factor model). Taxable US Bond funds generally returned 1.5-2%, but high-yield returned roughly .6%, while municipals continued to recover from doomsday predictions and returned roughly 4%. Real Estate funds had strong returns, but natural resources and precious metals funds tended to have significantly negative returns for the quarter. The Benchmark page has been updated with new links.

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