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I'm not so convinced. Outside the realm of the ultra-rich, Madoff was hardly known before the scandal because it was an exclusive hedge fund. Meanwhile, Bogle was already practically a household name by the time of the scandal. I would say the growth of no load funds and fee-only/fee-based financial advisers had more to do with the shift to indexing. Instead of selling high cost active management with a commission or load based fund, advisers were charging a percentage of asset fee, typically 1%. Combine that fee with a high cost active fund charging 1.5% and you've got a 2.5% drag on returns each year. A 0.05% index fund combined with the 1% was far more palatable and produced better results. The whole advice model has shifted dramatically.I’ve long been convinced that there is a link between the end of Madoff’s scheme and the overwhelming popularity of index-fund investing in the aftermath of the financial crisis. It’s not simply that, as the Wall Street Journal theorized, people realized pricey money managers hadn’t seen what was coming. Nor was it merely that the regulators’ cursory investigations into Madoff’s fund left many dubious of all sorts of investments (and the officials tasked with overseeing them). Instead, Madoff demonstrated the lie that almost any savvy individual investor could produce steady gains in a way that nothing else could. By destroying the retirements and dreams of so many, he inadvertently performed a much-needed service.
don-t-let-china-mint-the-digital-currency-of-the-futureLet’s begin with the future of money that no one foresaw.
In 2008, in a wonkish paper that bore no relation to any sci-fi, the enigmatic Satoshi Nakamoto launched Bitcoin, “a purely peer-to-peer version of electronic cash” that allows “online payments to be sent directly from one party to another without going through a financial institution.” In essence, Bitcoin is a public ledger shared by an acephalous (leaderless) network of computers. To pay with bitcoins, you send a signed message transferring ownership to a receiver’s public key. Transactions are grouped together and added to the ledger in blocks, and every node in the network has an entire copy of this blockchain at all times. A node can add a block to the chain (and receive a bitcoin reward) only by solving a cryptographic puzzle chosen by the Bitcoin protocol, which consumes processing power.
Nodes that have solved the cryptographic puzzle — “miners” — are rewarded not only with transaction fees, but also with more bitcoins. This reward will get cut in half every four years until the total number of bitcoins reaches 21 million, after which no new Bitcoins will be created. As I argued here last November, there were good reasons why Bitcoin left gold for dead as the pandemic was wreaking havoc last year. Scarcely over a year ago, when just about every financial asset sold off as the full magnitude of the pandemic sank in, the dollar price of a Bitcoin fell to $3,858. As I write, the price is $58,746.
On Thursday, April 15th, we will host two webinars about the MFO Premium search tool site.
The site helps individual investors and financial advisers 1) sort through the vast number of funds available today based on criteria important to them, 2) maintain candidate lists of promising funds to conduct further due diligence on, and 3) monitor risk and return performance of their current portfolios.
Since our last webinar in January, which featured my colleague Lynn Bolin, the site has experienced several upgrades, including:
The morning session will be at 11 am Pacific time (2pm Eastern). The afternoon at 2pm Pacific time (5pm Eastern). The webinars will be enabled by Zoom. You are welcome to register for both webinars.
Please use the following links to register for the morning session or afternoon session. Each will last nominally 1 hour, including questions.
Material covered in previous webinar can be found here.
Hope to you can join us again on the call. If you have any topics you'd like discussed, or general questions, happy to answer promptly via email ([email protected]) or scheduled call.
When you shift risk from individuals to the government (or anyone else, as what happens every day in financial markets) one of three things can happen:
1. The risk still exists, but it’s smaller because of the power of diversification.
2. The risk stays the same size and is transferred from one party to another.
3. The risk increases, because you’ve created a new systematic risk, moral hazard, or some distortion in which prices and incentives don’t make sense anymore.
known-unknownsWelcome to Known Unknowns, a newsletter that’s here to remind you that although you can shift risk onto someone else, it never really disappears.
whats-changed-for-now-and-whats-changed-foreverOn the economic and investment side, the quants at BofA are thinking that... over 60% of the bank’s analysts see rising prices in their respective coverage universe. One of BofA’s top strategists, Michael Hartnett, is talking about 2020 being the secular bottom for rates and inflation.
and,
... a whole lot of fiscal stimulus and monetary stimulus, too. But here we are, at the big, fat middle part of an economic expansion with rising prices, capex growth, increasing demand for skilled labor and a massive, generational infrastructure bill on the way.
inflation-rebound-means-40-year-bull-market-in-bonds-is-over-says-bofaThe value of U.S. financial assets are now six times the size of gross domestic product. “Wealth gains obscene, but extreme asset bubbles natural end to nihilistic bull markets of past decade,” he said.
And longer-term drivers of disinflation were poised to wane, too. Fiscal authorities were now more open to increased spending and central banks were now explicitly targeting higher inflation as a goal.
Hartnett anticipated the coming decade could show similarities to the late 60s and early 70s when inflation and interest rates started to lift off as investors questioned the combination of easy fiscal and monetary policy.
So what does this all mean?
First of all, investors will have to get used to a world of lower investment returns, while dealing with an upturn in volatility, said Hartnett.
And the ravages of inflation could turn negative returns in fixed-income into the norm. Instead, investors should look to take shelter in assets that tend to thrive during period of price pressures such as commodities.
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