Charter Trust - Global Market Update

Are cars the new smartphone? It doesn’t take an advanced degree to tell that cars are changing. Gone are the days of the flooded carburetor and “tune-up” executed by twisting a distributor cap. The ubiquitous sensor chip is even going away. Cars today are networked, with various parts communicating other parts to make everything work.Wireless connectivity has been creeping into cars since 1996, when GM introduced its OnStar system, used to contact emergency services and also to disable a stolen vehicle. Now cars can run mobile apps like Pandora for music, Google Maps for navigation, and other apps to help you find your car in a busy parking lot. New network features might alert you to icy roads ahead—or even adjust your settings for you.All this functionality raises the prospect of distracted driving. Narrow, winding roads with heavy traffic are already dangerous. Distracted drivers can make them deadly. And hackers could target an auto’s computer system.Smart-cars are part of the growing “internet of things,” where trillions of components continuously communicate. It might turn your iPhone into a remote starter, but it could also let someone else turn your car off. 

Are higher interest rates good or bad? That’s a good question. Since Ben Bernanke’s press conference three weeks ago interest rates have moved sharply higher. Some note that higher interest rates make it more expensive to borrow and conclude that these rates will make it more expensive to borrow money and put the economy at risk. Others note that higher rates result from a stronger economy, and so they should presage good things to come. Which is it? Interest rates can be seen as the price of credit. When they’re low, there’s too much supply chasing too little demand, and credit is cheap. Conversely, when they go up, demand is outstripping supply. Since 2008 the Fed has been injecting huge levels of credit into the banking system, but now they’re intimating that the economy is strong enough that monetary spigots may dry up. Friday’s employment number confirmed that the labor market is getting better. This is a good thing. A stronger US economy means that consumers and businesses are demanding more credit, and the clearing price needs to rise. Higher prices that result from an increase in demand are sustainable. This question arises every time the economy comes out of the doldrums: will higher rates push it back down? It came up in 2003, and before that in 1994. If history is any guide, the answer is, “no.” Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd

What’s happening with the economy? Friday’s employment report contained some good news. Not only did the economy create almost 200 thousand jobs last month, but April and May were both revised higher as well, for a total pick-up of some 300 thousand jobs. And the leading elements of the job report were higher as well: temporary jobs went up, hours worked increased, and average hourly earnings were higher. Both the household survey and the establishment report indicate that the job market is getting healthier. This is important, because the jobs report is the broadest assessment we have of what the economy is doing. Some folks dismiss the report as “old news,” but this data has been collected, reviewed, and analyzed for over 60 years. The report moves markets around the world precisely because it is so reliable. So most economists expect the Fed to begin to reduce their purchases of government bonds sometime this fall, and eliminate it by the middle of next year. They’re still a long ways from raising rates. But this report makes it look like our national stuck-in-second-gear-economy may finally be shifting into third. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all! Follow me on Twitter @GlobalMarketUpd

What’s going on in Egypt? Two and a half years ago millions of protesters took to the streets of Cairo, Egypt, demanding change. Although there was no formal, legal mechanism to effect that change, they still got it: President Hosni Mubarak’s government fell, and the President was taken into custody.A year ago President Mohammed Morsi was elected, a leader of the Muslim Brotherhood party. Over time, he appears to have enacted policies that favor his political party, and eventually the populace lost patience with the process. Demonstrations broke out across the country—one estimate was that up to 17 million Egyptians took to the streets last weekend. Certainly the pictures of the demonstrations have been stunning.Now the military has stepped in, informing the government that they need to address the crisis or face suspension of the Constitution and martial law.This is how democracies are born. It’s a messy process of trial-and-error, where people often disagree. A country of 85 million that has been ruled by an autocrat for decades can’t just slide into self-governance. Institutions and customs need to be established that support majority rule, minority rights, and the rule of law. Success isn’t guaranteed.In the end, the emergence of millions onto the world stage is a good thing. 150 years ago today American soldiers fought and died to keep democracy alive. Let’s hope Egypt’s “new birth of freedom” isn’t so bloody.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd

Are muni bonds facing a wave of defaults?Back in 2010 celebrity-analyst Meredith Whitney made headlines by predicting 50-100 major defaults resulting in hundreds of billions in losses. Since then we’ve seen two or three--Jefferson County, Harrisburg, San Bernardino—troubled credits whose problems were well-known before Whitney’s 60-Minutes interview.But now we’re seeing a new round of problems: Rhode Island “Moral Obligation” bonds, and the City of Detroit. Detroit’s easy to understand. They’ve simply run out of money. Mismanagement and economic contraction have taken their toll, and Emergency Manager Kevyn Orr has suspended debt payments and offered a deal so draconian that many bondholders think they can do better in bankruptcy court.Rhode Island’s problem is linked to a failed business venture by Red Sox pitcher Curt Schilling. The bonds are only assured payments from the enterprise—the legislature has to appropriate any guarantee payments annually, which they aren’t obligated to do. With their economy still in the tank, it’s understandable that they might have qualms about paying millions of dollars to out-of-state investors.But this is a problem of willingness, not ability. In the end the legislature will appropriate the funds because they need credit to run the State, and Detroit will go through Chapter 9 because the City’s population has been declining since 1950 and is in free-fall now, tumbling 25% in the last decade.Whitney’s famous call was deeply flawed and poorly considered. But even a broken clock can be right once-a-day. Muni bonds aren’t facing a systemic crisis, but now, as always, it pays to be choosy.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd

Is this the “big one?”Mortgage rates are up, corporate bonds are yielding more, high-yield debt has spiked, even emerging bond markets have seen large capital outflows. Is this the “big one?” Are bond markets bracing for “bondmageddon,” a Lehman-like moment when everything goes to you-know-where and the markets trade down 30 to 50%?Don’t count on it. Bonds aren’t equities. There’s a reason why they’re less volatile. Investors who hold individual issues can always hold them to maturity. If they do that, they may suffer lost opportunities, but they won’t see any nominal losses unless there’s a credit event—a default or missed payment. With the economy doing better, that’s less likely now.Still, market losses from missed opportunities are real losses: the clearing price is lower. But by adjusting their strategy and letting bonds season, investors can limit the damage. Rising rates are like a strong gale to a sailboat. Sometimes you have to reef the mainsail to protect the mast.Let’s just hope this storm blows over soon.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd

So how would you sum up investors’ rights?Investors have the right to competent, honest advisors that put them first, that keeps their mouths shut, and that communicate clearly. All this is to say that investors should be special—not put on a pedestal, but made a priority. Advice and actions should be tailored to fit each investor’s situation. Financial counsel should feel comfortable, and if it doesn’t, they have the right ask questions until they understand.The best way to feel at ease with advice is to have a plan and to put the plan in writing. An investment policy statement is a great way to develop your financial philosophy and clarify your objectives. Having a written plan helps everyone understand what you want to do with your money. This is especially important when times get tough.With rights come responsibilities. Creating a plan is something that investors and advisors should do together. It helps everyone understand where you’re going and how to get there. All investors have goals. Writing a plan makes them clear.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd

How can investors secure these rights?The way to get what you deserve is through communication. And investors should have reports, statements, and regular contact that’s clear and complete, and that tells them what’s going on.It starts with the statement—that humble mailing that can run for pages and pages of incomprehensible jargon. Because everyone want’s something slightly different, it tends to be a “kitchen sink” document that goes to everyone and satisfies no one. Instead, it’s complicated and confusing. But communication doesn’t work if it is just a one-way proposition.Investors need to ask for statements and reports that make sense—and that state clearly what’s happened with their money, what decisions have been made, what fees have been paid, and how it’s invested. A “black box” may be appropriate in physics or engineering, but it has no place in money management. If investors don’t understand what’s being said, they have a right to ask questions and be given answers.Any time people work with your money, you should be told what they’re doing. If an advisor won’t be clear, find someone who will be.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!  Although I’m out this week, so it might take me a little while to get to them.Follow me on Twitter @GlobalMarketUpd

What do we mean when we talk about investors’ rights?Investor rights are non-negotiable. They’re the principles that should undergird financial industry practices and securities laws. What’s legal isn’t just the minimum standard necessary. In many cases it’s totally inadequate to the task of safeguarding investors’ interests.One example of this is in the area of confidentiality. Americans tend to think that their securities laws are the best out there, but this is an area where our societal mores and expectations lag behind Europe’s. In general, investors should expect that information they share within a fiduciary relationship will remain within that relationship, and won’t be disclosed to others unless they need to know it to serve that relationship. This should apply to everything—not just finances.But in a tell-all celebrity culture where cell-phone cameras and digital recorders are ubiquitous, privacy seems almost quaint. Some folks even worry now about having their bank statements mailed to them, out of concern about the Postal Service—which doesn’t seem that outlandish, lately.Collecting information and using it for anything other than an investor’s interest should be seen as deeply immoral. Anything less is unacceptable.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd

What should investors expect?When investors are buying financial products and services, their cash is paying the bills and salaries of the professionals and institutions that they’re working with. So how should they be treated?One expectation they should have is that their interests should come first, before that of the finance professionals or the companies they’re working with. That is, the investor’s welfare should be considered before the professional’s. This seems obvious, but this implies, for example, that investors need to know how the people working for them are getting paid. Are they earning commissions, or on a salary? Do the commissions get paid all at once, or are the spread out? If there are other fees, what is the basis for those fees? And are there any potential conflicts?Investors have a right to ask these questions, because everyone has “skin in the game” one way or another. People can hope that other folks will do the right thing, but they need to know whether they’re getting paid to do the right thing. And when investors’ interests and professionals’ interests diverge, they need to know that, too.It’s by being open and honest with their clients that professionals can earn their trust. And without trust, there can be no business.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all. Although I’m out this week, so it might take me a little while to get to them. Thanks for your understanding.Follow me on Twitter @GlobalMarketUpd

Do investors have rights? It’s a fair question. After all, it’s their money. But the financial industry is filled with fast-talking rogues who might make you think twice about that. Ponzi schemes and outright fraud are only the tip of the iceberg. There are all sorts of ways for advisors can take advantage of the folks with capital that can fall short of what’s illegal. First, investors have a right to honest, objective, competent advice. That seems like a no-brainer, but it can be harder than you think. Honest advice means that the advisor needs to know the laws—securities laws, tax laws, fiduciary laws—that govern the instruments under consideration. In today’s complex world, there are frequently conflicting issues that need to be sorted out. For example, is it legal to own a limited partnership in an IRA? How about real-estate? Sometimes the answer can surprise you. It may be legal, but there can be significant tax implications—especially if you or a relative use the real estate that the IRA holds. Honesty isn’t just telling the truth. It also means being clear and forthright. Anything less is simply unacceptable. Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all.  Although I’m out this week, so it might take me a little bit to get to them. Thanks for your understanding. Follow me on Twitter @GlobalMarketUpd

Where is Japan going?To answer that question, you have to know where Abenomics is going. Economists around the world have been supportive of Mr. Abe and his “three arrows”—easy monetary policy, fiscal stimulus, and structural reforms. The theory is that the first two can promote growth in the short run, which will provide political cover for the third: changes in labor laws and other regulations that can promote private sector investment-led growth.Because to return to stable, solid growth Japan’s economy must become more flexible and competitive. Government restrictions, anticompetitive laws, bureaucratic interference, and relatively high taxes all impede growth and make it difficult to do business. Indeed, Japan was ranked 24th out of 185 nations on doingbusiness.org; the US is ranked 4th. Starting a business is especially hard; Japan is ranked 113th in that area, behind Ghana and Tanzanea.For Japan to turn around, they need to remove the protectionist, crony controls that have grown up over the past 20 years. The reforms will take some time to have an impact. Let’s hope that Japan’s people can wait that long.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd

Defensive. Nervous. Pensive.That’s how Ben Bernanke came across yesterday during his press conference.  In a halting way, he discussed adjusting Fed economic targets, stock-vs-flow theories of balance sheet management, and—the big news—tapering Fed purchases of Treasury and Mortgage-Backed securities. But what was most interesting was what the Fed Chairman didn’t say. Early on he noted that he would not discuss whether he would like to stay on as Fed Chair.Maybe that’s he’s just shy, or maybe it’s because President Obama noted that he had stayed on longer than “he was supposed to” the day before, but that’s the one question the Chairman seemed ready for. Otherwise, he was edgy and tense, tapping his hand on the podium, half-closing his eyes in an inward gaze as he expounded some of the subtleties of monetary policy.So why was he nervous? Bernanke’s been an outstanding leader, bringing transparency and collegiality to an arcane and confusing institution. It’s taken a toll, though—his beard has a lot more grey now than it did in 2006. But as someone once said, “It’s not the years, it’s the mileage.” Given the ground he’s covered, Ben just may be ready to leave it behind.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd

Does Japan even matter anymore?Twenty years ago Japan’s economy, was the second-largest in the world. Their export machine dominated global trade. Europe was an afterthought—divided and struggling with “Eurosclerosis.”But now it’s Japan’s economy that’s mired in stagnation. China grew past them as the second-largest individual economy years ago, and the united Euro-zone has more potential than either. Japan’s population is ageing and declining. With an insular economy and an overvalued currency, today Japan seems mainly useful as a cautionary study in the dangers of deflation.But that was before Abenomics. Japan is home to much world-class engineering and precision manufacturing. By deflating the currency, Abe hopes to boost Japan’s competitiveness. And a resurgent Japanese economy would prove a ready market for cheaper foreign goods, if Abe can create the political will to open Japan’s borders to imports as well as revitalize exports.A resurgent Japanese economy would be good for the global economy. If it’s good for Toyota, it just might be good for everyone.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd

What is Japan trying to do? On the face of it, end deflation, weaken the yen, and revitalize the economy. Abenomics is the fiscal and monetary policy package put together by Prime Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda. It consists of monetary reflation, deficit spending, and labor market reforms. For years, Japan was regarded as the sick man of Asia. But if Abenomics can get their economy moving again, that won’t be the case anymore.As stock prices shot up and the Yen fell, some investors looked at Japan’s potential GDP and thought the market could treble before reaching fair value. But trees don’t grow straight to heaven, and a stray word from the Prime Minister in mid-May broke the up-trend; now the market is down about 20% from its peak. Traditionally, a 20% decline constitutes a bear market. Is Abenomics dead?Probably not. The market shot up so quickly that investors’ expectations were bound to be disappointed. A minister discussing his concern with Japan’s 240% debt-to-GDP ratio doesn’t constitute a divided cabinet. The Nikkei is still up 50% over the last seven months.Japan has many options for dealing with its debt and other financial issues.  If Abe and Kuroda can break the back of deflation, everyone will be better off.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd