Money Clip

Blog by Matthias Paul Kuhlmey

Matthias Paul Kuhlmey is a Managing Director & Partner at HighTower Advisors, where he serves as wealth manager to High Net Worth and Ultra-High Net Worth Individuals, Family Offices, and Institutions.

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Tag Archives: Liquidity

Not A Bubble!

Monday, January 20, 2014

Posted By: Matthias Paul Kuhlmey

Those “bubble men” in New York’s Central Park are quite impressive. If you have seen them, creating gigantic, soapy elements between two rather large sticks, you get the idea: Bubbles are hard to predict, especially directionally, not easy to form (until they do), and rather messy, especially right at the end. “Bubble,” according to some market observers, is one of the most overused words related to 2013 Wall Street jargon. In fact, as early as 2009, Forbes magazine issued a “ban on bubble[s]” from the financial dictionary, but without much success, as we know today.

Beating Forbes magazine by seven years, in 2002, then fairly-new FED Chairman, Ben Bernanke, put his very own ban on bubbles, dismissing a Central Banks’s ability to identify inflated (bubbly) assets. The topic, overused or not, doesn’t seem to get old. Today, numerous market observers fear the existence of a bubble in asset markets, but especially in U.S. Equities, notably: Ben Inker, from GMO, claims a +75% overvaluation for the S&P 500; Professor Robert J. Shiller (the same guy who correctly predicted the U.S. Housing bubble) calculates the adjusted 10-year average of earnings over prices, resulting in a PE ratio of more than 1.3 standard deviations above the long-term average since 1880; and, last but not least, seasoned investor, Marc Faber, is convinced that “we are in a gigantic financial asset bubble” that now can “burst any day.”

There is, however, some good news, and our three amigos (as above, not counting Ben) may just want to relax. A recent study finds that, based on advanced econometric methodologies, bubbles in asset prices potentially can be detected. Applying this new approach to historic data of the S&P 500, only during nine episodes did equity prices deviate from fundamentals – but(!) most certainly not this time around. The conclusion (quite different from above) is that the probability of the S&P 500 currently trading in a bubble comes to only 20-33%. Nevertheless, this doesn’t mean we can simply sit back and relax:  considering current market dynamics under the new research methodology, the S&P 500 could very well reach bubble territory in 2014. Think “Central Park” for visualization!

The vivid debate over bubbly stuff cannot clearly be decided, and, consequently, we need to be reminded of previously established disciplines to be applied as part of an overall investment process:

      1. Beware of the vibrant “headline” news; we are most likely being told “stories of convenience.”
      2. Should a “story of convenience” prove to be inaccurate, beware of volatility in markets.
      3. As economic conditions continue to be “subpar,” accommodative policies will exist (QE).
      4. With further increases in the global monetary base, asset price inflation will continue.
      5. It will be important to distinguish “inflated assets” from those that rise on good valuations.
      6. As long as Central Banks keep easing, equity markets will have a “floor” … and so should bonds!
      7. Central Banks will “take turns”:  After the U.S., it is now Japan’s turn. Europe (likely) will be next.
      8. No country can afford a strong currency (competitive devaluation). Identify future stores of value.

Don’t turn greedy and “chase” markets. Manage volatility. Understand risk-adjusted returns.


Collective Wisdom – Moneylife Radio Show

Wednesday, December 11, 2013

Posted By: Matthias Paul Kuhlmey

HighTower was designed specifically not to follow a single viewpoint, or “house view,” in Wall Street jargon. Consequently, as we do not have to sell product, but rather provide advice, our business model allows us to reduce or avoid many conflicts we may have faced earlier in our careers as financial advisors. As partners in our business, we take great pride and responsibility in sharing best practices and ideas to deliver excellence to our clients.

This morning, it was a great pleasure to make an appearance on Chuck Jaffe’s Moneylife Show, along with my partners, Drew Nordlicht and Stephen Rosen, discussing the current market environment, the importance of the Fed’s continued asset purchases, and how these aspects relate to portfolio positioning for our clients. Please click here to listen. 

Wrong Track

Tuesday, June 11, 2013

Posted By: Matthias Paul Kuhlmey

Wrong track may be considered a bit of a stretch, but in our minds, we’ve at least delivered on our near-standard music reference to kick things off. Sticking with the concept of what may be “on the right or wrong track” these days, we can successfully “check the box” on our work. In one of our recent entries, Rocket Man, we suggested to review/rethink long-duration investments within portfolios, and this should still be a consideration on every investor’s mind: several segments in fixed income markets have been notably under pressure, and not only in the U.S.

Another party we should mention, in the midst of “checking the boxes of right vs. wrong,” is the Fed. It is without debate that Mr. Bernanke and team are “testing the waters,” not only as it relates to the overall experiment of providing massive stimulus to the financial system, but (more recently) also on how to withdraw it without causing a “disruptive element” to stock and bond markets (the latter, in particular). Our Fed Chairman has been an avid student of the malaise in Japan after the bursting of their asset bubble in 1989, and he is well aware of the socioeconomic implications of decade-long deflationary forces at work.

Past experience in mind, Ben Bernanke will keep an accommodative stance until it is very clear that economic growth can support the economic system with less (or without) monetary stimulus. The dilemma, however, is that market participants may lead the normalization of long-term rates before the economy can fully “catch-on” – this is exactly what appears to be taking place, with the new emerging buzz word being “taper,” instead of QE. Investors are concerned over likely stimulus withdrawal and are preparing their portfolios … stock in, bonds out … but not so fast!

Here is the catch, eloquently worded by our friend Scott Minerd at Guggenheim: “… the current economic expansion is dependent on further gains in housing, which would be adversely affected by a material rise in mortgage rates. Between one and two percent of GDP growth is coming from housing activity. The sluggishness in the rest of the economy is evident if you remove that number from the latest reading of 2.4 percent GDP growth for Q1. This dynamic underpins the Federal Reserve’s current dilemma over how to normalize monetary policy. I do not anticipate an easy ride for policymakers or investors over the coming months.”

Before you sell all of your bonds, consider the following: “The economic expansion following the 2008 recession has been the weakest of the post-World War II era and remains an outlier among postwar recoveries along several dimensions.” With this in mind, “tapering” may not lead the buzz charts for too long before our dedicated Fed will change the tone of things to come. Ergo, we could experience more asset price inflation and potentially higher stocks paired with volatility, as market participants try to figure out where to invest. Interest rates may “creep” higher, but should find some resistance as our current global environment is not exactly “priced” for high refinancing cost. And so, let’s play this tune again – right or wrong track decisions delayed, once more.

What do “the people” think about all of this? According to a recent poll, “60 percent [of Americans] say the country is on the wrong track, while just 32 percent say things are headed in the right direction. That’s the highest percentage saying “wrong track” since September [2012] and it comes amid continued concern about such issues as health-care costs and the national debt …”

P.S. For an extremely thoughtful way of understanding the Fed (or not?!), please see my partner Adam Thurgood’s work: A Circular Argument and A Circular Argument – Part II.


Rocket Man

Tuesday, May 21, 2013

Posted By: Matthias Paul Kuhlmey

Over the weekend, North Korea launched yet another short-range guided missile, upsetting neighboring nations, but especially her brothers and sisters to the South. South Koreans, these days, have been dealt a “difficult hand.” As the country steps closer to the brink of a conventional war, a recently launched “currency war” by the Japanese is causing the South Korean “export engine” to experience stress. With the Yen down nearly 20% (vs. the USD), the Japanese have created a significant price advantage for their products offered to the global marketplace, leaving other export-driven nations (e.g., South Korea) at a disadvantage.

Thinking of another “rocket launched,” how about Japanese stocks? For the year, the Nikkei is up +48% (in local terms), and about +25% for USD-based investors (accounting for losses in the exchange rate). Along with these outcomes, there are other, possibly undesired, results of the inflation-targeting “Abenomics,” policies (or experiment?) supported by Prime Minister, Shinzo Abe, to free Japan from decades of deflation. More recently, we warned that “… upon announcement of major stimulus (or money creation) by the Bank of Japan, the 10yr yield on JGBs (Japanese Government Bonds, or the equivalent to Treasuries) dropped to an all-time low (0.425%), only to almost double(!) a few hours later.” Not a big deal, one may think, as rates are still below 1%; but, for a nation that is already allocating about 50% of total public spending to debt service and social security, the trend is not pretty. Consider that Japanese Banks (in good recycling fashion) hold a majority of all outstanding JGBs, we can already spot another rocket in the distance – this one “nose down” … According to a recent IMF publication, a “[1 percent] rise in market yields would lead to mark-to-market (MTM) losses of 20 percent(!) of Tier-1 capital for regional banks (not taking into account net unrealized gains on securities).” More simply, small increases in interest rates can have a magnified negative impact on the required capital reserves of banks.

The “nose-down” scenario for banks in the U.S. was clearly averted by domestic Rocket Man, Ben Bernanke. His directed balance sheet expansion has eased funding stress and, on the “flip-side,” created quite the “launch” for U.S. stocks. The S&P 500 is now up 151% (price return) from the dismal levels of March 2009; this is a picture-perfect environment, also considering that U.S. bond yields have not moved “Japanese style,” still marked near historically-low levels at 1.94% (10yr). Here’s the catch: If our friends at mi2partners are correct, we may experience some sort of déjà vu of developments that took place in 2003. Back then, the world encountered a significant decline in global bond prices, preceeded by (read carefully) 1) the Japanese in dire need to bail-out their failed banking system, and 2) U.S. market participants having bet on QE, but caught by a far less accommodative FED … sound familiar?

If our preview is correct, the next “rocket to launch” will most likely be linked to yields in U.S. Government paper. As we cannot be sure if “it’s gonna be a long, long time” before this event occurs (if at all), you may want to check your exposure to long duration investments, and rethink your overall bond strategy.

P.S. The lyrics to the song “Rocket Man” were inspired by Bernie Taupin’s (Elton John’s writing buddy) sighting of either a shooting star or a distant airplane. The moral here: it doesn’t matter what actually triggered the launch of a great composition, a “hit is a hit.”


Big Themes – Outlook 360 Spring Edition

Wednesday, May 15, 2013

Posted By: Matthias Paul Kuhlmey

I. Introduction

Five years ago, we founded HighTower in the midst of the 2008/2009 financial crisis. This, in itself, was a courageous undertaking at that particular time, and we certainly (in retrospect) contributed to a Big Theme ourselves (knowingly or not). The transformation of the financial industry is in full motion, with an increasing number of independent financial services businesses being established throughout the marketplace and across our nation. In this competitive landscape, HighTower was recognized as one of the fastest-growing, privately-held companies in the U.S., recently ranked #13 (lucky number) on the prestigious Inc. 500 list. Today, we are one of the leaders in the evolution of the independent model for financial advice.

To refresh our collective memories, in case the 360 format does not “ring a bell”: Our partnership is not bound to follow any single viewpoint. As we do not have to sell product, but rather provide advice to our clients, our business model allows us to reduce or avoid many conflicts we may have faced earlier in our careers as financial advisors. More importantly, we enjoy insight into leading opinions from Wall Street and beyond. On this basis, we made the decision, some time ago, to discontinue publishing a standard market outlook in lieu of a more reflective approach  ̶  a “look around the industry,” or 360, as we named it.

In this 360 edition, we focus on themes that may not be relevant with respect to immediate financial market and related investment outcomes. Instead, we provide a selection of viewpoints from our respected HighTower Partners, with a focus on aspects that could lead paradigm shifts and may have an impact on investment allocation choices and outcomes in the long run. Whereas we recognize the importance of tactical and strategic allocation choices, it is monumental to also consider the “big picture,” specifically in an increasingly interconnected world, either to avoid risk or to seek an investment-relevant opportunity.

Topics covered include the challenge of feeding a growing world population, demographics and economic development, and the potential end of an independent Federal Reserve Bank.

Please follow this link for the full article:  2013 Q2 Big Themes

Hotel California

Tuesday, May 7, 2013

Posted By: Matthias Paul Kuhlmey

My colleagues consider my distinct (possibly questionable) assessment of good vs. bad hotels as “diva-ish” (some may even think I am an idiot). Possibly a full and extensive topic for another blog, I can assure you, that with nearly 20 years of combined personal and business travel experience, one begins to have a good sense of the “dark side” of accommodations hidden behind the shiny stars. This writing should have carried the title “Reality vs. Perception,” but in our attempt to not immediately reveal our planned course of writing, as well as to deliver on our traditional music reference, it turned out to be Hotel California, possibly the best-known song by the Eagles.

In 1950, Robert Schuman (not the composer, but the French Foreign Minister) became the promoter of a united Europe by announcing plans of the formation of the European Coal and Steel Community, which became the Foundation for the European Union (and later the EMU). On the surface, Schuman had the objective to establish a common value system, but part of his hidden agenda was to create an environment for European countries to never again be at war with their neighbors. German Chancellor, Konrad Adenauer, recognized as the first statesmen to have reconciled the relationship between France and Germany after WWII, subsequently bought into Schuman’s plan. Voilà.

With much “civic love” and reconciliation having taken place over the years, Germany’s Banking system now carries about $2.62 trillion in exposure to debt of other Governments across the world (Q4 2012), including $996 billion to the Euro area. When segregating those numbers to the PIIGS (Portugal-Italy-Ireland-Greece-Spain), German Bank exposure totals a little less than $400 billion (BIS) of an estimated Euro 8.3 trillion ($11 trillion) banking system (assets) or nearly 11% of German GDP (ca. $3.6 trillion at 2012 figures). Not a small chunk. These numbers do not even account for all the “other stuff,” including regular lending activities among banks, derivatives, etc. I guess Adenauer didn’t see this one coming.

Another lesson in perceived realities: On the “home front,” everyone appears to have gone “gaga” over the latest employment report and related unemployment rate of 7.5%(!). Admittedly, it is not too shabby compared to previous years, but underneath the surface the story is different. “In March, 7.6 million Americans who want more hours were stuck in part-time jobs, about the same as a year earlier and 3 million more than there were when the recession began at the end of 2007.” The job market is only improving on the “net line.” When considering more and more people leaving the labor force, along with an increasing number of “underemployed” workers, the real unemployment rate (U6) still stands at nearly 14%(!). More tragic is the development in youth unemployment across the globe, now being called “Generation Jobless”: “OECD figures suggest that 26m 15- to 24-year-olds in developed countries are not in employment, education or training; the number of young people without a job has risen by 30% since 2007 … Depending on how you measure them, the number of young people without a job is nearly as large as the population of America.” In Spain and Italy, respectively, youth unemployment ranges between 40 and 55%(!). The situation is unsustainable, but for now it’s a breeding ground for radical measures and political opinions.

The lyrics to “Hotel California” describe a “luxury resort where ‘you can check out anytime you like, but you can never leave.’ On the surface, it tells the tale of a weary traveler who becomes trapped in a nightmarish luxury hotel that at first appears inviting and tempting” … but then things change (as always). The Germans may have created this very constellation for themselves. In other words, it’s quite an expensive undertaking to “leave” now – either you pay up and help your ailing neighbors, or you let them fail, likely implying that Mrs. Merkel and friends would have to “bail out” or possibly nationalize the German banking system. Regarding the young and unemployed across the globe (and especially in Southern Europe), they are “stuck” in a similar dichotomy; improving headlines assessed on an incomplete basis with an underfunded education system, and their respective economies in dire straits.

What does this all mean in terms of investing?:

1. Beware of the vibrant “headline” news; we are most likely being told “stories of convenience.”

2. Should a “story of convenience” prove to be inaccurate, beware of volatility in markets.

3. As economic conditions continue to be “sub-par,” accommodative policies will exist (QE).

4. With further increases in the monetary base globally, asset price inflation will continue.

5. It will be fundamental to distinguish “inflated assets” from those that rise on good valuations.

6. As long as Central Banks keep easing, equity markets will have a “floor” … and so should bonds!

7. Central Banks will “take turns”:  After the U.S., it is now Japan’s turn. Europe (likely) will be next.

8. No country can afford a strong currency (competitive devaluation). Identify future stores of value.

9. Don’t turn greedy and “chase” markets. Manage volatility. Understand risk-adjusted returns.

As HighTower is all about our 360 concept (i.e., “a look around the industry”), please find, in addition, an excellent opinion piece on Europe by our friends at Lord Abbett, specifically by Milton Ezrati, their Senior Economist and Market Strategist.


Left Pocket, Right Pocket

Friday, March 1, 2013

Posted By: Matthias Paul Kuhlmey

Markets have “shrugged-off the Italian scare,” and were off to yet another promised land of stellar returns in global equities. To keep our minds flexible, let us not forget to look beneath the surface. A common “confidence vote,” as it relates to the credibility of a sovereign nation, is the outcome of regular bond auctions held (a standard refinancing mechanism). And, there, was a nice surprise that helped market participants to initiate the recent turn-around: Italy was able to comfortably place a maximum targeted 6.5 billion Euro of long term-debt obligations. Relieved?!

Bond auctions held in most European nations, especially in Italy and Spain, are heavily supported by their respective domestic banks. According to data released by the European Central Bank (ECB), Italian banks purchased a record amount of government debt in January 2013, about 18.5 billion Euro(!), and (if this data point was not disconcerting enough) Monday’s auction was mostly absorbed by two Italian banks. Same deal, a little to the West, in Spain. Let’s not forget that these are the same (Spanish) banks, which require a minimum of 60 billion Euro in new capital and keep posting major losses. For some perspective, Spanish banking giant, Bankia, just reported the worst results ever recorded by a Spanish corporation, a screaming 19 billion Euro loss. Bankia was “bailed-out” by the European Commission in December of 2012 and continues to be nationalized ever since.

To round things up, there is another big player in the mix:  the U.S. Federal Reserve Bank. The FED reports that most cash reserves held in the US banking system are “under the roof” of foreign banks operating in the U.S. In the month of January 2013, the FED injected a record of $237 billion into foreign banks, a number greater than the liquidity influx seen after the Lehman collapse in September 2008. Something going on here? Let’s broaden the picture:

The top five banks in the U.S. receive about $64 billion in government subsidies, an amount roughly equal to their annual profits. Stated differently, our banking system, at the top of the global “financial food chain,” with nearly $9 trillion in combined assets, would just about break even in the absence of “welfare considerations.” The profits those banks are reporting are essentially transfers from taxpayers to their shareholders. None other than FED Chairman Bernanke, in his testimony to the Senate Banking Committee earlier this week, stated that American banks receive implicit subsidies because the market believes they are too big to fail. OK, case closed!

The above is exactly the reason why we prefer to talk “crazy” at times. “Drop It Low” was just the perfect outlet …

Behind the Numbers (Music): 2013 Edition

Wednesday, January 2, 2013

Posted By: Matthias Paul Kuhlmey

All in all, 2012 was not a shabby year for stock market investors or the economy … but then there is the constant (human) quest of explaining the somewhat unexplainable. What really happened here? For once, global Central Banks were united in their efforts to “flood” the world with extra liquidity and help to provide the volatility-controlling “back stop” (originally called the “Greenspan Put”) whenever it became dicey. In fact, an estimated $18 trillion of central bank “dough” (nearly 1/3 of world GDP at 2011 figures!) was committed over the past decade, and about $1 trillion is “earmarked” by the FED alone for 2013. Conclusion = asset price inflation.

Next, we have the U.S. consumer, who is responsible for about 70% of economic growth (on our “home turf”). According to a November 2012 update, consumer spending had increased to a 3-year high! If we combine this fact with a significant reduction in the personal savings rate, a steady increase in consumer credit, and countless transfer payments, Americans have never been so reliant on the almighty Government. And we must scratch our heads, for where will the money come from in 2013? Conclusion = not sure right now.

Spending by the public and private sectors is a game of confidence. We can expand credit in the hope that things will get better, and that obligations can be repaid with future dollars. Sure enough, this morning, markets are “taking off” on the promise of the presented (in)decision around the “Fiscal Cliff.” In short: Agreements without any meaningful consideration of spending limitations and, related, the U.S. Debt Ceiling. Not to be overly cynical, but one may wonder why our policymakers have spent all their precious time away from their families over the Holidays to come up with this half–… solution!(?) It is not that the importance of the issue came as a surprise.

We recall financial markets in crisis over the Summer of 2011, as a result of Standard&Poors’ downgrade of the U.S. Long-term Credit rating (for the first time in history). A detail worth mentioning is that the downgrade was also linked to the indecision of policymakers at that time. What have we really learned? With greater uncertainty avoided as it relates to the “home economies” of U.S. families, the bigger picture still remains to be resolved. Likely conclusions = 1) another U.S. downgrade in the making; 2) a weaker Dollar (for all the wrong reasons); 3) volatility in financial markets (after the initial “Hip Hip Hooray” fizzles); 4) more asset price inflation to come, with the FED “all over it.”

On a lighter note, and true to our promise to bring music to your lives, please enjoy the “DJ Earworm Mashup – United State of Pop 2012 (Shine Brighter)”. Very cool!

Good Investing and a Healthy New Year!

Economy Watch – Radio Interview with Matthias Kuhlmey

Monday, June 18, 2012

Posted By: Matthias Paul Kuhlmey

Our “blog” today is a recent appearance on the “Economy Watch” segment of Chuck Jaffe’s Moneylife radio show, released this morning, as well as a reference in Chuck Jaffe’s Marketwatch article, published yesterday.

Please follow the above hyperlinks for the referenced interview and article.

Missing Words … and Numbers

Friday, April 13, 2012

Posted By:  Matthias Paul Kuhlmey

The German magazine, Der Spiegel, is running a very interesting cover story this week, entitled “Heimat.” When I tried to explain to my wife what the article is all about, I l realized that there is no English word to translate Heimat. After doing some research, we acknowledge that Heimat “is a German word that has no simple English translation, denoting the relationship of a human being towards a certain spatial social unit. The term forms a contrast to social alienation and usually carries positive connotations. It is often expressed with terms such as home or homeland, but these English counterparts fail to encapsulate the true meaning of the word.”

With further lack of words, let us attempt to explain the current market or market participants’ behavior — as good as we can (promise). Setting the scene: We have terrible job numbers in the U.S. — meaning terrible(!) — about 50% under expectations, as reported last Friday (known as a “miss” in financial jargon); there is a continuously deteriorating situation in Europe, with our beloved European Central Bank (ECB)  preparing to buy European Sovereign Debt to ease markets; and, last but not least, we have seen a modest increase in Unemployment Claims, here at home. The Conclusion:  It does not matter! The “Solution”:  As soon as bad news “hit the tape,” the Talking Heads of the FED, ECB et al (Central Banks Unite) are not shy of words, even though they should choose them carefully. The “quick fix” is generously promised, and a bit of “hinting here and there” gives investors the confidence needed.

Wait a minute, what is an investor, anyway? You would think a thoughtful person, studying balance sheets, and being in for the long run — but not so fast. Doing some research on this word, even speculators may as well be considered investors. And here is the dilemma: Central Banks, ever since the Credit Crisis of 2008/2009, have been facilitating the most significant liquidity injection ever experienced by modern society. The Bank of Japan (BoJ) and ECB have expanded their balance sheets to about 25% of respective GDPs, while the FED and Bank of England come in at around 20%. On this basis, we are not talking investing, but rather of a massive inflation trade in the making.

Without a more formal approach to investing (and now we are referring to the “real thing”), there will be disappointment over the outcome, sooner than later. However, if you think all is “dandy,” consider another great data point, as observed by Bloomberg:  Apple stock’s price performance has accounted for 8% (!) of the Standard and Poor’s increase from March 2009 to this week. Fortunately, we do have an English word to describe our reaction to this — “Speechless!”