Entries from June 2019 ↓

The big dog

Was it only two days go this geriatric but prescient and well-muscled blog suggested (a) a Trump-Xi hug and (b) no rate hike? Hmmm. More bullseyes.

So it happened in Japan. Trump and his Chinese counterpart agreed to re-open trade talks aimed at ending the current war. The US will not impose a boatload of more tariffs on Chinese goods. They smiled, kibitzed, and Xi used all the time he gained by ignoring Justin Trudeau to yak with the Donald.

This is a big deal. The temperature went down immediately. The way’s now cleared for a US-China trade pact. It might take a while to emerge, but that’s okay with markets. Just stop the damn war. Thus Dow futures are up as I write this, making for an interesting Monday.

Meanwhile, as you know, China continues to dump on us. Canola guys stiffed. Pork shipments halted. The two Michaels in shackles. All because Canada unwisely did Trump’s bidding and arrested Huawei’s CFO (and daughter of the Chinese tech giant’s founder). Now we’re paying a big price for that, just as the US president is doing a deal with the company. American irony. We got played. Just ask poor John McCallum, our talented former Chinese ambassador that T2 threw under the bus. He knew.

Well, the trade war truce also has markets today rethinking interest rates. Odds were 100% the Fed would cut in July, with the expectation of a full 1% drop in the price of money within the next 12 months. But, nah, not so fast.

No trade war means lower input costs for US manufacturers and reduced consumer prices. All that translates into more economic growth, better job creation numbers, more upward pressure on wages bringing higher inflation and – bingo – no reason for the Fed to add stimulus. Stocks should rally past their 2018 all-time highs in the next few days, and could – as mentioned here last week – melt up.

Politics matter, too. Last week’s two-night Democratic debate slugfest defrocked the front-running Biden, exposed several of the leading candidates as lefty wackjobs and gave Trump a delicious moment when they all supported universal health care for undocumented immigrants, when lots of natives lack it. And then, the Kim Moment. Brilliantly orchestrated as a Tweet-inspired, ‘I’m-in-the-hood-so-can-I-drop-in?’ suggestion, it saw the first US president ever walking on NK soil. It resulted in a commitment to re-open talks on taking away Kim’s ballistic toys.

So what?

So politics is optics. While the 2020 election is a long ways off and anything can happen, this was a dream weekend for the White House. Trump and Xi. Trump and Putin. Trump and Kim. Saving the world. One badass foe at a time.

More predicting: Trump does a deal with Xi. Maybe next year. The US and North Korea sign a nuclear non-deployment agreement. Kim visits America and starts a haircut craze. The American economy shifts into overdrive. The Dow and S&P move into uncharted territory. People forget about rates cuts, since they no longer matter. And investors plan on four more years of tax-cutting, growth-pumping, inflationary, testo-drenched, capitalistic chaos from the oldest person ever to be elected to a second term.


Glory days

DOUG  By Guest Blogger Doug Rowat


“Old age is like a plane flying through a storm. Once you’re aboard there’s nothing you can do.”  – Golda Meir

My father once joked that young people think old age is a club that they can opt out of. Well, of course, there’s no opting out. We all age, and inevitably decline both physically and mentally. And, if we’re not careful, our finances may decline as well.

A client approached me recently concerned about his 75-year-old father’s erratic investment decisions and subsequent declining portfolio. I sat down with his father and we reviewed his self-directed investment accounts. As I feared, it was an incoherent mix of poorly performing securities. Despite an underlying bull market, the portfolio had meaningfully fallen over the previous five years. Regrettably, failed portfolios managed by elderly investors are something I see frequently.

Successful investing is largely ability-based. Luck, of course, sometimes plays a role, but investors who effectively process market variables and conduct thorough analysis, generally speaking, get results. In other words, if you have skill, you’ll do better. But, unfortunately, our investment skill declines as we age and declines very rapidly when we’re in our 70s and 80s.

I’ve touched on this subject before when I highlighted the work of David Laibson, an economics professor at Harvard University, who starkly illustrates how cognitive impairment, on average, begins at about age 52 and then rapidly accelerates from there:

“If the chance of getting a disease is 10%, how many people out of 1,000 would be expected to get the disease?”

Source: David Laibson, Harvard University, 2009

But his research is not unique. In the latest The Atlantic, journalist and academic Arthur C. Brooks highlights the work of Benjamin Jones, a professor at Northwestern University’s Kellogg School of Management. Jones examined major inventors and Nobel winners over the past 100 years and noted that the most common age for producing a magnum opus was in the late 30s. However, “the likelihood of producing a major innovation at age 70 is approximately what it was at age 20—almost nonexistent.”

Brooks goes on to highlight the work of others who have also studied age and declining ability:

Scholars at Boston College’s Center for Retirement Research studied a wide variety of jobs and found considerable susceptibility to age-related decline in fields ranging from policing to nursing. Other research has found that the best-performing home-plate umpires in Major League Baseball have 18 years less experience and are 23 years younger than the worst-performing umpires (who are 56.1 years old, on average). Among air traffic controllers, the age-related decline is so sharp—and the potential consequences of decline-related errors so dire—that the mandatory retirement age is 56.

In sum, if your profession requires mental processing speed or significant analytic capabilities…noticeable decline is probably going to set in earlier than you imagine.

Now, you might argue that you’re simply a private investor, not a major league umpire or an air traffic controller. But the decline in performance with age is similar. George Korniotis, a former financial economist at the Federal Reserve in Washington DC, and Alok Kumar, a finance department chair at the University of Miami, examined investment performance versus aging in a landmark 2007 study. They focused on the investment behaviour and performance of more than 62,000 investors who traded common stocks. While older investors do many things right, namely trade less frequently, they are ultimately hampered by their declining abilities. Korniotis and Kumar’s conclusions were blunt:

But consistent with the cognitive aging hypothesis, we also find that older investors have worse investment skill, where skill deteriorates sharply around the age of 70. Examining the economic costs of aging, we find that older investors earn about 3–5% lower returns annually on a risk-adjusted basis. Collectively, our evidence indicates that older investors’ portfolio choices reflect great knowledge about investing but their investment skill deteriorates with age due to the adverse effects of cognitive aging.

Their research results are shown graphically below. Note how closely the basic pattern and the rapid rate of decline mirrors David Laibson’s chart above.

Investing performance declines sharply as we age

Source: George Korniotis and Alok Kumar. Performance differential is the change in the performance between the last two and the first two years of the sample period. The individual investor data are from a large US discount brokerage house from 1991 to 1996. In other words, the differential is showing that the performance of older investors has rapidly gotten worse in a short period of time.

In short, cognitive decline is inevitable. No one is immune. It also probably happens much sooner and accelerates much faster than many expected. So, as we age, there’s absolutely nothing wrong with asking for help with our investments.

It can be tough to accept, but your best investment decision may be recognizing that you can no longer make good investment decisions.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.