Saturday, July 24, 2010

The Future of Finance

I was offered the following link by dearieme in the comments. I haven't read it all yet but what I have read is certainly interesting.

The Future of Finance: The LSE Report

From Chapter 3...

Commodity investment should be especially shunned. Commodities as a general asset class offer a long-run return no better than zero % after inflation and less after fees. The cost of holding commodity positions is bedevilled by the herding of portfolio investors all seeking to roll over their futures positions at quarterly expiry dates. Commodity indices that act as the benchmark for performance can also be gamed by the investment banks that maintain them. The flood of portfolio investment going into commodities in the past few years has turned their hitherto negative correlation with equities into a high and positive correlation.

This goes right along with what I have been saying. If you hoard commodities with the intent to resell (and not just use yourself), then you will also need to pay taxes on the inflationary gains. That would push your return down even further. One of the following therefore better be true.

1. You better be buying commodities at a steep discount.
2. It is "different this time" AND it is different in way that is actually helpful to long-term commodity prices. A Great Depression would clearly not count.

From Chapter 6...

The Great Moderation – The Light that Failed

The Consequences of Disillusion

If nothing else, those are great section headings! I'm probably especially biased on the second one though. The illusion of prosperity ends in disillusionment.

Disillusionment

A feeling that arises from the discovery that something is not what it was anticipated to be, commonly held to be stronger than disappointment especially when a belief central to one’s identity is shown to be false.

4 comments:

  1. Hmmmm, is it time to trade PM for TP?

    I swear Mark, you have almost convinced me so, but then GYSC will post something that pulls me the other way.
    It's like how Charlie Sheen was pulled from two different sides in 'Platoon', both Tom Berenger and Willem Dafoe battling for young (except I'm not young)Charlie's soul.

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  2. watchtower,

    This is SO simple!

    1. Never bet against Tom Berenger.
    2. Never bet against Willem Dafoe.

    If you are ever put in a "Platoon" situation, then you must keep the two apart. Nothing good can happen. It's like matter and antimatter.

    Maybe I am not being clear.

    There's what matters and there is what antimatters. Both are important. That's what makes a market, lol. ;)

    ReplyDelete
  3. Another nice bit of chapter 3:
    "Active management
    fees and its associated trading costs based on 100% annual turnover erode the value of a
    pension fund by around 1.0% per annum. Pension funds are having their assets exchanged
    with other pension funds at a rate of 25 times in the life of the average liability for no
    collective advantage but at a cost that reduces the end-value of the pension by around 30%."

    ReplyDelete
  4. dearieme,

    ...reduces the end-value of the pension by around 30%.

    Mutual Funds By Family - Hartford Mutual Funds

    Hartford Inflation Plus L
    Hartford Inflation Plus R4
    Hartford Inflation Plus R5
    Hartford Inflation Plus C
    Hartford Inflation Plus R3
    Hartford Inflation Plus A
    Hartford Inflation Plus Y
    Hartford Inflation Plus I
    Hartford Inflation Plus B


    Let's pick on this one in particular.

    Hartford Inflation Plus C (HIPCX)

    The investment seeks a total return that exceeds the rate of inflation over an economic cycle.

    It invests mostly in TIPS. We can invest in TIPS directly from the government for free though.

    Total Expense Ratio: 1.60%
    Max 12b1 Fee: 1.00%
    Max Deferred Sales Load: 1.00%

    (100% - 1.6%) ^ 30 = 61.6%

    30 years -----> 38.4% missing.

    The word tapeworm comes to mind. No idea why.

    ReplyDelete