Dragon Claws
Weekend reading
Here are three things I’m thinking about this weekend:
1) Three terrible ideas that won’t die
The Great Financial Crisis was wonderful because it made people interested in the economy. And it was terrible in that it convinced many people that mainstream economics was wrong on almost every point. This led to a revival of some heterodox ideas that the mainstream had long since thrown into the trash can. Unfortunately, some of these ideas have crept into the national political debate and others have even been implemented.
Luckily, we have Cliff Asness on our side to remind us how bad some of these ideas are. Cliff reminded us on Twitter of three things that almost all mainstream economists agree on. I won’t put words in his mouth, so feel free to go over there and read what he had to say. It’s pretty good. In short:
- Rent controls (and price controls more broadly) are bad and never work the way politicians claim. Price controls create shortages by distorting prices and discouraging production. You might think that a rent cap would lead to lower prices, but it simply discourages new construction that rents out those apartments, driving up prices in the meantime.
- The greedflation narrative is tempting and intuitive, but it really only applies to monopolies and uncompetitive markets. In a competitive market, blaming inflation on corporations is like blaming gravity for plane crashes. I mean, have the “greedflationists” just realized that corporations are trying to maximize their profits?
- Tariffs and trade wars are like throwing boulders into your own ports and thinking you’ve made your economy more accessible to everyone, when in reality you’ve only made things harder for everyone.
2) The rule on age in bonds is wrong
As you may or may not know, I am obsessed with time in financial planning processes. This is the current problem that I am currently unable to solve with my OCD. As someone who works with many retirees and people who are retiring, I am constantly trying to help people navigate this difficult time in their lives. And I am convinced that this is the absolute most difficult time in a person’s financial life because it is when your time horizon becomes the most uncertain.
When it comes to asset allocation, the old rule of thumb is roughly “your age in bonds.” The basic assumption is that you should get more conservative as you get older. But I think that’s wrong. I think your bond/cash allocation should peak just before retirement. My basic assumption is that this is the time in your life when you have the most time uncertainty. In other words, when you’re young and old, investing is easier because you have a lot more clarity about your time horizons. When you’re young, you have a lot of time and leeway to make mistakes. When you’re old, you have less time and less leeway, but you have more clarity about the specific time horizons. Either you’re going to die soon or The assets will belong to someone else. The difficult part is when you are middle-aged and nearing retirement because you accumulate many financial liabilities with varying maturities. This is further exacerbated by the fact that you have dependents that require short-term and long-term planning.
This is a very general way of thinking and there are always circumstances that require greater adjustment, but the image above shows my more general way of thinking.
3) When ETFs become weapons of financial destruction
I’m a big fan of boring ETFs because I think asset allocation should be boring. ETFs are great for helping people build low-cost, diversified, boring savings portfolios. I’m not a fan of overly fanciful ETFs that prey on people’s emotions and trick them into gambling. Asset allocation should be mostly boring. Create a financial plan, allocate the assets that match that financial plan, diversify, reduce taxes/fees, etc. ETFs are the perfect vehicle for that, but as John Bogle often noted, they can be weaponized to trick people into doing things they shouldn’t do.
One disturbing trend in the ETF space is that it’s becoming increasingly popular to create ETFs that help people trade in a way that looks more like gambling than investing. For example, Bloomberg had published an article about the 1.75x leveraged Microstrategy ETF. This is a fund designed to track 175% of the daily volatility of MicroStrategy Corp, the well-known Bitcoin company that also does some company analysis on the side. It’s a hugely volatile stock because it’s leveraged to Bitcoin, a hugely volatile asset. And now you can get even more volatility for the not-so-low expense ratio of 1.3%. Oh man.
Look, I’m all for free markets. If someone wants to launch an ETF that charges 10% annual fees and there’s a market for it, great. People like crazy stuff, and some people like to burn their money. That’s all well and good. And there’s nothing wrong with gambling for fun. But regulated financial markets are not casinos, and I think the line between gambling and saving gets blurred when we position products like this as “investment products.” They’re gambling products. And again, that’s fine. There’s nothing wrong with gambling. I have no problem with stock picking, speculation, day trading, whatever. I don’t think you should do those things in large quantities, but if you need to satisfy an itch, then satisfy that itch. But don’t confuse the process of prudent asset allocation with something that reflects imprudent gambling.
Anyway, I don’t like this trend. Gambling seems to be an increasingly problematic endeavor in this country, and I’m not happy that our financial markets are looking more and more like casinos rather than places where companies finance investments and savers invest their savings…
I hope you have a nice weekend.
Original post
Editor’s note: The summary points for this article were selected by the editors of Seeking Alpha.
