Posted By: Matthias Paul Kuhlmey
It was on one of the TV Infomercials that a young man stated his satisfaction with legal services provided, “…they exceeded my expectations by a mile!” Not to dwell on the theme song, Seasons of Love, from the musical Rent, but the question remaining is how one can really measure expectations…in miles, minutes, daylights, sunsets? Who knows?
When the financial system was at the brink of collapse in 2008, the general expectation was to stop the suffering for all financial institutions involved and, more importantly, for the global community of investors. I recall precisely the mood and feel of all heavy trading days to the downside; like the screeching noise of old steel working in a dated cruise liner, it was eerie, and expectations during those times were that someone had to help. Sure enough, Central Bankers and Policymakers gained prominent status. Fast forward. Three years into the biggest deleveraging cycle since the Great Depression of the 1930s, we continue to “muddle through.” On the very surface, our expectations are somewhat met…but are they really?
We continuously receive feedback to write about something positive. Point taken; the issue, however, is that this is an economic/financial blog, and that the related remaining challenges are staggering. Our very own expectations are measured in units of intellectual honesty and, therefore, it becomes our obligation to continuously educate our clients and friends; so there are a two general points to consider:
First, the U.S. economy continues to be in a difficult state: “About 24.4 million Americans are either out of work or underemployed and employment remains 6.3 million jobs below its level in December 2007 when the recession started.” This data translates into an official unemployment rate of 8.6%, but real unemployment still stands at 16.6%. With a) 30-50% of all Americans, depending on method of assessment, living in poverty, b) the highest utilization of food stamps in recorded history of the program (46.3 million recipients), and c) U.S. family household income having dropped by 7% over the past 10 years, a broad-based recovery is very difficult to achieve, especially considering that growth of U.S. GDP has been dependent on a contribution of 70% from consumption. The rest of the world experiences similar challenges and, in simple conclusion, industrial economies will not grow much over the next few years.
Second, what has the financial industry done to help clients navigate this new, low-yielding and volatile environment? Not much, in our view. It is still mostly a quantitative and model-driven world, relying heavily on historic-based asset class data and related return assumptions. Considering this aspect, the “black swans” of the days to come will, once again, be missed; and, once again, these low-probability events of devastation will only be rationalized after the fact, given the (still) current systems of operation and data utilization; this, in all modesty, is where our work is different, and positive for a real change. We have applied a qualitative, forward-looking approach to risk (rather than the traditional asset allocation approach), seeking to hedge the fat-tail risks before they actually occur. How can this be
done? Instead of accepting market volatility as a painfully persistent element of today’s investing world, it can be “promoted” to an asset class; it is not an entirely straight-forward exercise, but can be done.
So, we are not giving up on our “negativity,” as we, our clients, and business partners will have to adapt the new environment of investing, no matter what. But before wrongfully accepting outdated standards, let’s walk the extra mile…and after the fact we will measure expectations, once again.