Another Wall of Worry

by Weston Wellington, VP Dimensional Fund Advisors

Reprinted with the permission of Dimensional Fund Advisors


By John Berzellini

We believe the financial media’s ravings, whether financial exuberance or doom and gloom, are a major factor contributing to the average investor’s subpar returns.  In his most recent article (below) Weston Wellington points out stock prices are on the rise while the financial media is in its doom and gloom mode. Want to be a successful investor? Tune them out!

October 3, 2012

Another Wall of Worry

Weston Wellington

Down to the Wire

Vice President, Dimensional Fund Advisors

Stock prices rallied sharply around the world in the third quarter, with forty-two out of forty-five countries tracked by MSCI showing positive returns in US dollar terms. Total return exceeded 10% in nineteen different markets, while Ireland, Japan, and Morocco registered minor losses.

For the twelve-month period ending September 30, 2012, forty markets had positive returns, with six countries—including the US—delivering a total return in excess of 30%, according to MSCI.

Investors have been confronted with a steady drumbeat of discouraging news over the past year—a feeble economic recovery here and abroad, staggering budget deficits with no solution in sight, the prospect of a Euro zone breakup, an acrimonious presidential election campaign, banking scandals, and a punishing drought across the US. Considering all the uncertainty, it’s not difficult to explain why mutual fund investors have generally favored fixed income strategies rather than equities over this past twelve month period.

Many investors are easily persuaded that successful investing requires constant attention to current events and frequent adjustment of their equity exposure. The news excerpts below represent just a small sample of the issues investors might have dwelled on. We suspect that many investors not only failed to achieve their respective market rate of return over the past twelve months but would be surprised to learn how well stock prices have done in many markets over that period.

  • “Unless politicians act more boldly, the world economy will keep heading toward a black hole… At a time of enormous problems, the politicians seem Lilliputian. That’s the real reason to be afraid.”

“The World Economy: Be Afraid,” Economist, October 1, 2011.

  • “Investors also are nervous because October historically has been one of the more volatile months for stocks.”

E.S. Browning. “Market Nears Bear Territory,” Wall Street Journal, October 4, 2011.

  • “The Dow Jones Industrial Average turned in its worst Thanksgiving-week performance since markets began to observe the holiday in 1942.”

Steven Russolillo. “Investors Go Shopping—Just Not for Stocks,” Wall Street Journal, November 26, 2011.

  • “Over the past three months, investor uncertainty about the soundness of bank balance sheets, manifested in the daily volatility of stock prices, is back up to levels seen historically only in advance of two great crises… This dynamic has played out twice before in the past 85 years—in the Great Depression and the panic of 2008-09—with devastating consequences for the broader economy.”

Andrew Atkeson and William E. Simon, Jr. “The Rising Fear in Bank Stock Prices,” Wall Street Journal, November 28, 2011.

  • “The managing director of the International Monetary Fund has raised fears that the world faces the risk of economic retraction, rising protectionism, isolation, and… what happened in the ’30s  (Depression).”

Hugh Carnegy and George Parker. “IMF Chief Warns over 1930s-Style Threats,” Financial Times, December 16, 2011.

  • “It is hard to avoid the conclusion that stock prices are levitating at over-inflated values, thanks to the herd-like behavior and collective fear of investment institutions.”

Financial Times, December 30, 2011.

  • “An escalation of the crisis would spare no one. Developed and developing country growth rates could fall by as much or more than in 2008-09.”

Quotation attributed to Andrew Burns, head of macroeconomics, World Bank. Chris Giles. “World Bank Warns on the Risk of Global Economic Meltdown,” Financial Times, January 18, 2012.

  • “This may be the unhappiest bull market ever. We love to hate it, but that may be just egging it on.”

Tom Petruno. “The Unhappiest Bull Market Ever,” Los Angeles Times, February 12, 2012.

  • “US companies are more uncertain about the future than at any point since the financial crisis, with just one in five of the biggest corporations making any predictions as they published quarterly results.”

Ajay Makan. “Doubt Haunts US Company Results,” Financial Times, February 21, 2012


  • “For nearly a decade, it turns out, the most accurate forecasts have come from the fringe. So it’s upsetting to learn that many of these Cassandras now believe, for different reasons, that we are on the brink of another catastrophe that may be far worse.”

Adam Davidson. “Sorry to Break It to You,” New York Times, February 5, 2012.

  • “It remains clear that this almost uninterrupted equity market  lacks substance and conviction. The rally’s volume has been very weak, and  institutional operators have been absent from the market. There has been very little participation from the retail investor, based on data from  Lipper, a provider of information and ratings on mutual funds. Corporate insiders have been big sellers of stock, exceeding $6 billion last month (with the ratio of selling to buying hitting the astronomical 13-to-1 mark).”

David Rosenberg, chief economist and strategist, Gluskin Sheff. “The World is Not Fixed and This Equity Rally Lacks Conviction,” Financial Times, March 15, 2012.

  • “No one sees a growth rate fast enough for the American economy to return to full employment any time soon.”

Joseph Stiglitz, Nobel laureate 2001. “The American Labour Market Remains a Shambles,” Financial Times, March 13, 2012.

  • “We think that most of the US market is just not worth investing in… And it’s our belief that profitability will have to come down and the market isn’t priced for it.”

Quotation attributed to Ben Inker, head of asset-allocation group, Grantham, Mayo, Van Otterloo. Jonathan Cheng. “Two Pros Weigh In on US Stocks,” Wall Street Journal, April 2, 2012.

  • “It’s simple arithmetic and it leads to a simple yet alarming conclusion that unless current law is amended before year-end, the stock market has to fall by at least 30%.”

Donald J. Luskin. “The 2013 Fiscal Cliff Could Crush Stocks,” Wall Street Journal, May 4, 2012.

  • “Stocks have not been so far out of favor for half a century  Many declare the ‘cult of the equity’ dead.”

John Authers and Kate Burgess. “Out of Stock,” Financial Times, May 24, 2012.

  • “The US economy is continuing to lose momentum just as global events that could derail the recovery gather steam… The downshift couldn’t come at a worse time. Experts warn that a breakup of the euro zone could spark the worst credit freeze since the collapse of Lehman Brothers in 2008.”

Ben Casselmann and Phil Izzo. “Recovery Slows as Global Risks Rise,” Wall Street Journal, June 16, 2012.

  • “‘Dr. Doom’, Nouriel Roubini, says the ‘perfect storm’ scenario he forecast for the global economy earlier this year is unfolding right now as growth slows in the US, Europe, as well as China.”

Ansuya Harjani. “Roubini: My ‘Perfect Storm’ Is Unfolding Now,” CNBC, July 9, 2012.

  • “Bill Gross, co-founder and co-chief investment officer of Pacific Investment Management Co., says stock investors should rethink the age-old investing mantra of buying and holding stocks for the long run… Stocks, he says, operate much like a Ponzi scheme, showing returns that have no real bearing on reality.”

Steven Russolillo and Kirsten Grind. “Bill Gross: Stocks Are Dead and Operate Like a Ponzi Scheme,” Wall Street Journal, August 1, 2012.

A Funny Thing Happened On the Way to Economic Armageddon

by Scott Coyler, CEO Advisor Asset Management

Reprinted with the permission of Advisors Asset Management


by John Berzellini

In his most recent blog article, “A Funny Thing Happened On the Way to Economic Armageddon” Scott Colyer, CEO Advisor Asset Management; reminds us of three absolute truths; Death,Taxes and Don’t Fight the Fed.

We may not be able to do anything about death and taxes, but let’s make sure our portfolio manager isn’t picking fights we can’t win!

A Funny Thing Happened On The Way To Economic Armageddon…

by Scott Colyer On October 03, 2012 | Categories: Featured, Market Commentary, U.S. Economy

After the recent announcement by the U.S. Federal Reserve (Fed) that they would begin to engage in what has been deemed “QE3,” there has been a lot of skepticism that such a plan could actually work. The Fed is attempting to carry out their dual mandate of price stability and full employment by engaging in a new round of asset purchasing targeted at the mortgage market. Public support of Bernanke seems to be waning as even some sitting Fed governors are publicly dissing the plan. Congressional support of the Fed is also being tested by those worried that the Fed is monetizing U.S. Treasury debt to a degree that will debase the U.S. dollar leading to inflation.

Many pundits are making media appearances denouncing the potential healing power of Quantitative Easing. The latest version follows three bond buying binges by the Fed (QE 1, QE2, Twist) where the Fed has given its unending promise to buy agency mortgage-backed securities monthly until they see the recovery in full swing. Furthermore, they have extended their zero-interest rate guidance until at least 2015 and promised to continue the stimulus until things get much better. We note that potentially the most important part of the Fed’s new moves is the commitment to keep policy “kitchen-sinked” well into the next recovery cycle. Yes, we believe we are now in uncharted territory.

We have not seen this type of “Mighty Banker” mentality since the days of Paul Volcker in the 1980s. You may remember that Volcker’s challenge was to break the back of inflation, which he did by raising the Fed funds rate to 20%. Do you think that rattled a few cages in Congress? Absolutely! Farmers, who were suffering because of high equipment costs and low grain prices, were rolling their tractors to Washington D.C. in protest. Mr. Volcker was looked at by many as a lunatic bent on ruining the United States by imposing usurious interest rates on a very sick U.S. economy. He was appointed Fed Chairman by Jimmy Carter in 1979 and spent the first three years systematically tightening monetary policy well beyond any measures that had ever been used before. He was re-appointed by Ronald Regan who was elected as President in 1980 and began to install a number of fiscal repairs designed to restore growth to the U.S. economy.

It was not until 1982, when the interest rate peaked on the 10-year Treasury note at 15%, that things began to look better. Unemployment peaked over 11% and the equity and bond markets began one of the longest bull markets in history. Volcker was pictured as a villain on Time Magazine’s March 1982 cover. Faith in the Fed was at an all-time low, yet the Fed was feeding the economy just the medicine that was needed to cure the patient. When it was darkest and popular to hate the Fed, history shows us we should have embraced their resolve.

In many ways, Ben Bernanke is fighting the same fight that Volcker did, except in reverse. Instead of fighting inflation, he is fighting deflation. Bernanke is using his lifetime of studying economic theory, with a focus on the Great Depression, to maneuver the tough conditions we now face. Like Volcker, he has been forced “off the reservation” to places we have not been before in modern days. Also, like Volcker, his medicine just might work. Nobody is saying it; nobody is supporting it; as most pundits are lining themselves up on the “I told you so” side of the street.

We are truly in a time of great anxiety. There has never been a time in modern history when global monetary policy has been this easy. From Washington D.C. to London and from Tokyo to Shanghai, monetary policy is incredibly stimulative. What happens if this actually works? Monetary policy is an incredibly powerful force and can produce some powerful results. With the Fed promising as much easing as is needed to obtain the desired result, should investors buy-in or run for the hills?

The empirical evidence does not favor those who “fight the Fed.” I was always taught that there are three absolute truths that one should accept without reservation. Those are: death, taxes and “don’t fight the Fed!” Because we are in unchartered territory, many people have found themselves doing just that. The Fed is trying to lower interest rates to provide additional cash to people and companies who refinance debt. They are trying to restore confidence by elevating stock and housing prices. A confident consumer is a spending consumer. A growing economy spreads jobs and profits to all of its participants.

Yet, even with the entire stimulus, cash is being drained from equity markets and jammed into U.S. Treasuries, banks and bond funds at a time where returns offered in those areas are at all-time lows. What gives? Could the Fed have it wrong? In our opinion, highly unlikely! Let’s look at what is happening not just here in the United States but globally as well. Equity prices are almost back to levels we saw in 2007. The valuation of equities is very attractive even at today’s levels. Housing prices have bounced as low home prices and record-low mortgage rates have caused the housing affordability index to hit record highs. Could the masses be wrong? Could record cash hoards and bond fund inflows be the wrong move? Most likely it is. History has shown us that when the masses all get parked on one side of a market, the likely winners will be those on the opposite side. If that logic holds here, those cash hoards and bond fund groupies will actually provide the cannon fodder for a prolonged equity market and commodity market run.

Remember, the Fed is producing currency and injecting it into the economy by way of asset purchases. That cash has been initially hoarded but will likely be re-deployed to other asset classes as returns are needed on that capital and returns in non-risk assets are non-existent. As fear dissipates, the velocity of the movement of capital will likely accelerate. Yes, the risk of a melt-up increases. The Fed has the tools and the resolve and they have shown they are not afraid to use it. They have told you what they want and they will keep printing until they get it.

We believe the key here is to get in front of the Fed. For bond fund managers, it might be trying to own what the Fed will be buying. For the normal investor who understands the Fed is trying to create growth, employment and, yes, inflation, they may favor assets where the income streams will likely increase with the rate of inflation. For a demographic generation that is starved for income, we suggest buying income-producing assets that others, in search of income, will come to want and need. They will pay-up for them as their alternatives are disappearing and the Fed has dashed hopes of higher rates any time soon.

We think the same strategy should be deployed to global markets as well. As of the writing of this article, people who fought the European Central Bank (ECB) are suffering as well. All Euro-country equity markets are now positive for the year, except Portugal. Yes, even Greece is up double digits for the year. Ireland seems solidly on its way to recovery. Yes, we hear the “Chicken Littles” tweeting a daily prophecy of death to Europe’s economy and its bonds and equities. Yet, it seems the louder they squawk, the higher the markets move. Another case of don’t fight the ECB (Fed)? We think so.

China is just beginning a huge monetary-easing program. Latin American countries are looking to weaken their currency values that have risen against the dollar. Their competitiveness is being challenged by the Fed’s actions. Japan just upped its asset purchase by 10 trillion yen. The race is on. Should an investor bet against a global easing? That’s hardly a wise course to pursue, in our opinion.

We conclude that fighting the Fed is not a wise move now, just like at any time in the past. Even though Chairman Bernanke is going places where the Fed has not gone before, the outcome is likely to be what they are shooting for. If they don’t get it, they will keep trying. Sooner or later they will achieve their intended target. We believe the risk is in resisting the Fed and staying parked in places that might suffer during a re-emergence of growth and at least some inflation. Finally, if you believe that there are significant opportunities on a more global basis, the same advice applies. Yes, “don’t fight the Fed” is still the rule.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at For additional commentary or financial resources, please visit

The Fed the Election and Retirement Planning

I recently attended a presentation by Greg Valliere, Chief Political Strategist of the Potomac Research Group. Greg is a widely quoted political analyst and regular guest on financial shows aired on CNBC, CNN and Fox TV.  For more than 30 years, Mr. Valliere has advised institutional investors about how developments inside the Beltway affect financial market. Below are some of his informed comments on the Federal Reserve and the Election and my take on the political predictions.

The Fed

In his more than 30 years of advising institutional investors, Mr. Valliere has never seen a more Accommodative Federal Reserve. “The Fed wants to keep interest rates low for a long time and they are ok with inflation”

The Election

Mr. Valliere predicts that President Obama will win this year’s election. Although his prediction has not changed since I last heard him speak this past February, he is more certain of the outcome.  He feels Romney must decisively win the upcoming debates to change the direction of the election.

He predicts the House of Representatives will remain firmly under republican control, and the Senate will have a more conservative leaning. He predicts the republicans will gain 2 or 3 more seats in the Senate. He has revised this prediction downward by a couple of seats since this past February.

No matter who wins the elections, Mr. Valliere believes the president and congress will act on five major events occurring in 2013.

Five major events:

Fiscal Cliff

  • Tax extender bill for the Alternative Minimum Tax
  • Bonus depreciation for business

Doctor Fix

  • Increasing payments to doctors for Medicare care services

Debt Ceiling

  • Action on this issue predicted to take place in Feb or March 2013


  • 10% across the board spending cuts, defense spending spared, action on this issue likely to occur in July 2013

Extending the Bush Tax Cuts

  • Romney would extend the tax cuts in January. Obama would like to work a compromise, maybe in the 2nd quarter 2013. One area to negotiate is the definition of the so called wealthy income level, $250k? $500k? $1M?

Mr. Valliere believes failure to act on these items would cause an economic train wreck, and negatively affect congressional incumbent’s future election prospects. Since nothing motivates a politician more than his or hers next election, there will be compromise on these issues.

However, Mr. Valliere does not see any action taking place on the big issues, large deficit reduction or fundamentally reforming the tax code.

My Take

The reason the Fed is keeping interest rates low, is to provide businesses with more incentive to increase investment in both capital and labor. The goal is to reduce unemployment; however, the problem is this type of monetary policy can result in high inflation.

No matter who wins the election, we are not going over a fiscal cliff, the government is not going to shut down, nor are we going to have 10% across the board budget cuts.  So don’t let the TV, radio, or internet commentary cause you any anxiety over these issues. In regard to income taxes, they are likely to go up for the wealthy, or whoever is classified as wealthy.

There is little political incentive for meaningful deficit reduction or fundamental tax reform. These big cans will be kicked down the road until the bond markets force the politicians to do something.

So how do you position your portfolio?  This is an individual facts and circumstances question. With that mind, here are couple ideas that may help with your investment planning.

If you need current income, try to avoid bonds with long maturities and low interest rates and avoid those variable annuities advertised on the radio talk shows.The bonds will rob you of liquidity in a high interest rate environment (it may cost to much to get out when you want to), in the case of the annuities it’s any enviornment and you may never be able to get out.. The Fed may not care about inflation, but this is a crucial issue for people in or nearing retirement.  In this low interest rate environment don’t get locked in, stay flexible!

If your investment time horizon for accumulating a nest egg is 10 years or more, and you have the emotional discipline to stay the course, the solution is fairly simple.  A broadly diversified portfolio which is rebalanced will serve you well.

Hire an independent investment advisor that has the capacity to deliver comprehensive financial planning and works directly for you rather than for a bank, for an insurance company or for a broker dealer. Unbiased advice is the best advice!