As a conservative-leaning libertarian, I think I can do a better job spending my money than the government can. Naturally, I was skeptical that the Trump Tax Cuts would actually result in a lower tax rate for us. Most tax cuts are in name only. Seeing a tax cut in 2018 would be particularly difficult. 2018 was a good income year for us. In addition to my salary, we had some capital gains and our side gig had its best year ever. This should be the year we jump into the next tax bracket. Yesterday I completed my tax return using TurboTax. Since I have been using TurboTax for five years, the Tax History Report shows that both the 2018 Effective Tax Rate and the Tax Bracket are lower than any time in the last four years! Wow, that was a pleasant surprise!
Recently I found out that my brokerage account offers a money market fund, SWVXX, that yields 2.3%. That is even higher than the 2.1% rate offered by Discover Online Savings. Both of these rates are much better than the rate on the sweep account attached to my brokerage account. That account yields about 0.1%. Unlike investments in short term bond funds, there is no risk to the principal if the Federal Reserve continues to increase rates in 2019. This money market rate is even higher than the Consumer Price Index(1.6%). A positive real interest rate on a money market fund is rare. This is such a rare occurrence you have to wonder what is the Federal Reserve thinking! Regardless, this money market fund looks like the perfect way to put your money to work while you wait for the next stock market pullback. Low-interest rates courtesy of the Federal Reserve was a massive gift to investors in the stock market over the last ten years. During this time there was no viable alternative to the United States stock market. We even had a name for it, There Is No Alternative (TINA). Are higher returns on money market funds the answer to the TINA question? The Federal Reserve giveth and the Federal Reserve taketh away.
Last week I got an offer from Cincinnati Bell I could not refuse. They offered to upgrade my Internet to 30 Mbps, keep my home phone, and give me video streaming for about the same price as I was paying for the Internet and the home phone. Due to our distance from the road cable TV has never been an option. Getting the Internet from the telephone company was our best option. Our farm is about 8000 feet from the telephone company equipment providing us with Internet access. That distance pretty much guarantees us slow Internet access. As an example, my Internet was advertised to be 20 Mbps but I never had a speed test greater than 7 Mbps. On the other hand, if the technology had improved enough to support faster Internet over longer distances, I could replace DirecTV and save over a hundred bucks a month.
The installation went smoothly until I got home and turned on the television in the bedroom. Both the television in the bedroom and the living room locked up. When I ran a speed test on my laptop it said I had only 2 Mbps. Video streaming is never going to work at this speed! So I called Cincinnati Bell and they sent out a technician. After a little bit of troubleshooting, he replaced the ADSL filter. My engineering background says that changing the filter should not affect the Internet speed but my speed was now 24 Mbps. That is three times faster speed than I ever had. I am confused but not complaining. Even when I run just one television the speed test is showing 21 Mbps. This is more than enough capacity for me to watch football while my wife watches a movie. As soon as my wife is comfortable programming the DVR we should be ready to cut DirecTV from our budget.
I installed Android Pay on my phone about a year ago but never used it. I never found a place to use it. Last Friday my phone notified me that Jungle Jim’s accepts Android Pay so I gave it a try. The cashier advised me to hold my phone next to the right side of the card reader. Evidently some customers had better luck with the right side. After fumbling around placing my phone next to the reader I got it to work. I still had to select transaction type, credit or debit, and sign on the pad. It did not save me any time. Maybe I will be faster next time around.
Last year I wrote a post early in 2015 that asked whether 2015 would be the year active stock pickers finally caught up to passive investors. Looking back at 2015 we can see that it was not a good year for stock pickers. The S&P 500 return was propped up by the FANG stocks, Facebook, Amazon, Netflix, and Google. It is hard to be a successful stock picker if the market is stuck on four stocks and refuses to rotate into cyclical or value oriented stocks. At some point the S&P 500’s dependence on FANG stocks for growth should become a liability when earnings and dividends become important again. It may be early but 2016 looks like it will be different. My current favorite US stock ETF, SCHD, and my son’s moderately conservative mutual fund from USAA(UCMCX) are both doing better than the S&P 500. If conservative stock ETFs and mutual funds can outperform the S&P 500, active stock pickers should not be far behind.
I came upon this question while listening to David Stockman make his pitch for his Bubble Financing newsletter. Evidently he made some money by correctly anticipating the downfall of a biotech exchange traded fund(ETF) and was now predicting the demise of the 3 trillion dollar ETF market. The problem I had with his argument was that the risks facing a small, single sector ETF comprised mainly of startup biotech companies are considerably different than the risks facing a large ETF based on a well diversified portfolio of stable, liquid stocks. It was especially ironic that Agora Financial was sponsoring the Buble Financing video since another one of their advisers, Jim Rickards, has been recommending an ETF that I have owned for several years as part of my large company asset category, Schwab US Dividend Equity ETF (SCHD). I doubt anyone would make the argument that an ETF like SCHD is as risky as a biotech ETF. This comparison becomes even more stark when you look at the liquidity and diversification of the largest ETF, SPY.
Then we get to the mutual fund question. Although ETFs are relatively new, mutual funds based on indexes have a long history. Is Mr. Stockman really saying that a large, stable ETF based on the S&P 500 such as SPY is significantly riskier than a mutual fund based on the same index such as the Vanguard 500 Index (VFINX). History has shown these two assets have similar risk and performance and brokers and customers look at them as being equivalent. As an old school MBA who constructed his retirement portfolio with large, stable ETFs, I thought I should do a little investigating. Was there a higher mis-pricing risk or other risk associated with ETFs that is not present in mutual funds or was this just another rant by a stock picker against the index funds strategy?
To put this investigation in perspective I started working in the 1970s. In the 1970s many defined benefit pension plans were under attack for under-funding by businesses and by embezzlement and fraud by the fund managers. It comes as no surprise that 401k plans were born to add a bit more honesty and accountability to the ugly retirement funding situation. In the 1980s private companies quickly replaced their defined benefit plans with 401k plans and added better fund performance reporting as a safeguard against the misdeeds of the past. Typically these companies offered their employees four investment options, company stock, a mutual fund stock plan, a bond plan, and a money market fund. The 401k plans became popular and reasonably well-understood. It did not take long before it became common knowledge that most of the stock plans consistently under-performed the S&P 500. By the end of the 1980s the HR directors got fed up with the employee complaints and the repeated excuses by poor performing fund managers. Since the academic research said that index funds out-perform most fund managers their solution was too either add index funds as an investment option or to require a significant portion of index funds in the stock portfolio option. The battle lines were drawn. Fund managers needed to start beating the S&P 500 on a long term basis to justify their fees or the HR directors would going to divert even more of the investments to the very efficient S&P 500 index funds. In the quest for higher performance for retirement accounts, low cost index mutual funds and ETFs grew into a 3 trillion dollar behemoth. In the last eight years most of the growth has come via index ETFs.
So what was David Stockman complaining about?
As far as I can determine both the ETF, SPY, and mutual fund, VFINX, fall under the same SEC rules. If there is a systemic risk with SPY then that same risk affects VFINX. Since VFINX was created in 1976, history tells us that the systemic risk for this asset class is very low.
I agree with Mr. Stockman that an ETF such as SPY will occasionally have times the in which the ETF does not accurately reflect the value of the underlying securities. The mis-pricing risk is a problem for market makers and day traders. I am not sure how much a long term investor cares about daily fluctuations.
If an ETF such as SPY is faced with a severe drop in the underlying assets, I am not sure why Mr. Stockman thinks the fund managers will be forced to redeem ETF shares and sell stocks into a declining market. The liquidity risk in Mr. Stockman’s doomsday scenario is real but this is the same risk as a run on a company stock like Apple or Exxon. Although making a market in a declining or rising security may be scary or painful, market makers having been doing this in good and bad markets for a very long time.
Just when I had written off Mr. Stockman as just another stock picker who thinks indexed funds like SPY are boring and risky, I ran into this Planet Money podcast, Episode 688: Brilliant vs. Boring, which describes the million dollar bet between Warren Buffet and hedge fund managers in which one of the all-time best stock pickers said the S&P 500 would outperform a sampling of hedge funds. According to Fortune:
Through the seven years, Vanguard’s 500 index fund, as represented by its Admiral shares, is up 63.5%. That’s the portfolio carrying Buffett’s colors. Protégé’s five hedge funds of funds are, on the average—the marker the bet uses—up an estimated 19.6%.
There is nothing that tells me a politician or a pope does not care about the problems facing the middle class than when they start talking about climate change or income inequality. That got me to thinking what would Pope Francis say to Dave Ramsey or the author of Thou Shall Prosper: Ten Commandments for Making Money, Rabbi Lampin. So while Pope Francis’s stinging criticism of capitalism might be appropriate for the world’s dysfunctional child, Argentina, the middle class in America is facing adult problems like getting good paying jobs, saving enough money for retirement, and overcoming the increasingly dysfunctional government attempts at wealth re-distribution. In my world Mr. Ramsey or Mr. Lampin are probably better suited for financial and moral advice. This reminds me of Luke 12:48 which says,
From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked.
Much has been given to the United States and regardless of how you parse the poverty numbers the poor in the United States are better off than most of the world. If Pope Francis cares for both the poor and the middle class then a prayer for prosperity is an inclusive way for him to recognize that he is not in Argentina any more and that the stinging criticism of capitalism was not the best way to fill the church pews in a country that is pretty proud of their accomplishments for the poor.
It might seem weird that I installed a fancy new way to pay for things but still felt the need for cash in my pocket. I was going out to dinner with some friends and cash is still the most convenient way for me to pay for drinks at the bar. We had six people trying to pay their bar tab all at once and half of them wanted to use a credit or debit card. Paying your bar tab would seem to be natural fit for applications like Apple Pay, Samsung Pay, and Android Pay but that would probably require a special purpose tablet with a NFC credit card reader.
When the stock market blows through its lower Bollinger Band you have to wonder whether we have reached a point where statistics will be of limited use in predicting the future. As you can see from the chart blowing through the lower Bollinger Band is a pretty rare event. I find it amazing that this “unprecedented and unexpected” stock market drop was a reaction to economic problems in China. Since many pundits have been saying for several years that the China’s growth was slowing down, it is hard to say that the recent Chinese devaluation was unexpected event for an economy so dependent of exports. So what made this devaluation different than previous devaluations? Maybe this Yahoo Finance article gives us some insight into the confidence of our financial leaders to get us out of the next financial panic and why the Federal Reserve is so committed to raising interest rates in September. Can the Federal Reserve restore public trust with just one interest rate hike?
A recent working paper by the vice president of the St. Louis Federal Reserve Bank finds that after six years of quantitative easing that swelled the Fed’s balance sheet to $4.5 trillion, “casual evidence suggests that QE has been ineffective in increasing inflation” and only seems to have boosted stock prices.
Complaints once in the realm of conspiracy theorists wearing tin foil hats are now being embraced by the Wall Street establishment. In a note to clients, Deutsche Bank analysts warned that “the fragility of this artificially manipulated financial system was exposed” and that “the only thing preventing another financial crisis has been extraordinary central bank liquidity and general interventions from the global authorities.”
Last week I followed up on my initial debit card test, The Dreaded Debit Card Hold. This time I paid for my Sam’s Club gasoline with a Visa debit card and my Sam’s Club groceries with the Discover debit card. Both the Visa and Discover debit card transactions put a hold equal to the transaction on the account. To avoid unreasonable and unnecessary holds this tells me I should not use the Discover debit card to buy gasoline.