Hard Assets Alliance
March 20, 2019



I don’t like to speculate on what the market is going to do next, but there are three things that have me worried right now...
See this chart?


This shows how much US households are spending on goods and services…

And spending has absolutely CRATERED!

Like, “we haven’t seen this since 2008” kind of bad.

The personal savings rate has made a HUGE jump...



And most disturbing of all…

The number of major S&P 500 tumbles in the last three-year window has hit its highest level since the 1940s!


What the heck is going on here?
Is this a warning sign for trouble ahead?
Or are people just getting jittery, and it’ll all be okay?


P.S. Precious metals – like gold, silver, platinum and palladium – are a great option to consider if you’re looking for a reliable safe haven from the stock market.


For more info, click HERE

March 14, 2019


We’ve written before about the advantages of direct indexes over ETFs and Index Funds (see Direct Indexes are Better than ETFs). And we’re not alone. The coming rise of direct indexes has even been called the “The Great Unwrapping.”1 But not all are convinced. So we thought we’d address some common objections to direct indexes.


Direct indexes are unwieldy. (Who wants to own 500 shares?)

Owning the 500 securities in the S&P 500 — or, worse, the roughly 5,000 securities in the Russell 5000 — would seem to make for dreary statements and endless Schedule Ds.

But with computer-generated statements and tax statements, advisors find that large holdings are not actually burdensome. In any case, direct indexes rarely include all the holdings in the underlying index. Most direct indexes are just a representative sample of the index holdings, say 50 to 150 stocks. It’s less fuss and less expensive.


Direct indexes do a poor job of tracking indexes.

As mentioned above, most direct indexes don’t hold all the securities in an index; they hold a representative basket, which won’t track indexes perfectly. But the returns will be pretty close, typically within one percentage point plus or minus. And, for most investors, this is OK, since the purpose of investing is not to track an index; it’s to maximize (after tax) risk-adjusted returns, and here direct indexes shine — they outperform comparable ETFs on an after-tax expected basis. They’re also customizable — you can add social screens, work around outside holdings, counterbalance geographic and employment risk exposures, etc.


High minimum investments put direct indexes out of reach of ordinary investors.

Don’t you need to be rich to invest in a direct index? For most investors, the practical minimum is around $100,000. Anything less, and it becomes difficult to own all the shares in the index in the right proportion — think about Google, which trades at around $1,200 / share. At $100,000, that’s 1.2% of your portfolio, so there’d be no way to own, say, a 1.8% Google position. But more and more custodians, like Apex Clearing, FolioFn, and DriveWealth, let investors buy securities in increments of 1/1000 of a share. This makes direct indexes accessible to investors with as little as $100.


Direct indexes are expensive, and this pretty much negates any advantage they have over ETFs.

Historically, direct indexes have been premium products, costing as much as 10X similar ETFs. And, yes, this undid much of the direct index’s advantage. But one of the drivers of the rising interest in direct indexing is reduction in costs — as low as 10 bps. The management of direct indexes, even with tax optimization and high levels of customization, can be largely automated. We haven’t seen any true robo direct indexes yet, but this isn’t because of technological barriers. More to the point, at scale, direct indexes should be less expensive than both index funds and ETFs, which are structured as investment companies that are required to have boards, file annual reports. Direct indexes have none of this overhead.  


So what is stopping investors from adopting direct indexes? Mainly, familiarity and availability. It took index funds years to come into their own, and it will take time for direct indexes to do the same. But the benefits to investors make the long-run success of direct indexes pretty much inevitable.

It’s a win for advisors, as well. As Inside ETFs’ Chairman Matt Hougan put it “When I think about you building portfolios and you out there competing, and you’re competing with Wealthfront and Vanguard and Schwab, I just see a bunch of sadness. But when I think about designing portfolios that you get to know your clients and you build Bob’s portfolio and you build Janet’s portfolio and you build specific portfolios that you’re delivering with tax-loss harvesting, in a mixture of direct indexing and ETFs, I think I see the next $1 billion, $10 billion, $100 billion financial advisor opportunity.”  Let the great unwrapping begin.


1We like the phrase “The Great Unwrapping” and wish we had come up with it, but credit goes to Inside ETFs’ Chairman Matt Hougan and ETF.com CEO David Nadigand. See What’s Next in ETFs? The Great Unwrapping


Hard Assets Alliance
March 6, 2019

The Wild Ride

On any given day, you can find numerous articles about the hazards posed by our federal debt, municipal debt, consumer debt, and so on. The list is long and plenty scary.

But there is surprisingly little talk about one of the most dangerous situations of all: the trouble in America’s recently booming oil patch.

Most people may not realize that the largest oil producer in the world today is not Saudi Arabia, nor Venezuela, nor Russia. It’s the U.S.  

The extraction of fossil fuels from shale formations, via fracking and horizontal drilling, has sparked a revolution so all-consuming that it’s forged an entirely new reality. About 20 years ago, fracking technology hit a point where it suddenly started to make a lot of economic sense. It “crossed the chasm” as they say in Silicon Valley, going from an expensive developing technology with its roots back in the 1960s to a mature and (frankly) cheap way to extract a familiar resource more easily (much like LED lights, which came out of RCA in 1964, but have only recently become ubiquitous).

Since then, the drilling of fracked wells has proceeded in earnest, exploding over the past decade.

What an amazingly fast, wild ride it’s been. It has:

  • catapulted the U.S. from back in the pack to the top of the list of global oil and natgas producers, with the Dept. of Energy (perhaps through slightly rose-tinted glasses) predicting the country would be a net exporter of both by 2022.
  • transformed obscure rural areas like Williston, North Dakota into rowdy, populous frontier towns.
  • provided high-paying jobs to those willing to relocate to Texas and North Dakota. The latter vaulted from 45th in the nation in per capita income in 2004 to 2nd in 2013; though it’s since pulled back, it’s still 6th as of 2017.

This has not happened without controversy. Objections have been raised about earthquakes, air and water pollution, disturbances to land and animals, and exploding pipelines. Environmental concerns have, if anything, intensified. Though they have not yet disrupted the industry, neither are they going away.

Like information technology saw setbacks in the early 2000s only to continue apace, the fracking boom experienced its own short-lived crash from 2014-16, when a global supply glut drove the price of oil as low as $26/barrel. During this period, according to The Economist, writing in March of 2017: “The number of drilling rigs in America dropped by 68% from peak to trough. Companies slashed investment. Over 100 firms went bankrupt, defaulting on at least $70B of debt.”

Yet today, the boom goes on. And on. Again, in The Economist’s wry words of 18 months ago: “Exploration and production (E&P) companies are about to go on an investment spree. Demand is soaring for the industry’s raw materials: sand, other people’s money, roughnecks and ice-cold beer.”

That’s just what has happened. Written off as dead in 2016, the fracking industry has roared back to life. In a 2018 forecast, the Energy Information Administration predicted that production across the U.S. oil patch is expected to average almost 10.6 million barrels per day this year, and to reach 12.1 million barrels a day by 2023. That’s about two-thirds of U.S. national usage.


DIY Marketplace: Hard Asset Alliance:  https://www.wealthcareconnect.com/index.php/advancedmarketplace/detail/72/precious-metals/


February 26, 2019

On January 15th I wrote an article in which I described that the most likely outcome to fund the government was congress passing a bipartisan resolution while President Trump declares the situation at the southern border a national emergency. And on Friday, this largely played out (though I also predicted that all of this would take place by January 21st and end the first shutdown). So, while I was correct on the ultimate outcome, I was off by a few weeks on the timing. But my other expectation was that all of this would have no effect on markets.

And on this point, I stand with my original conclusion – neither the contents of the bipartisan resolution nor the nature of the declared national emergency will have any effect on the markets. In fact, the market barely reacted to the declaration in real time. From a market perspective, this is as close to a non-event as it gets. Trade with China, Brexit, the Fed and other economic issues will continue to dominate the market cycle. Any noise surrounding the emergency declaration, be it a congressional override, lack of a congressional override, a lawsuit, or any other political maneuverings, will also have no effect on markets.

The decision to declare a national emergency to get what couldn’t be passed through congress is one with which I strongly disagree. It sets a very dangerous precedent where the current or future presidents could declare national emergencies to fulfill their campaign promises or other pet projects. And the results may not always be so benign for the markets. A democratic president could declare a national emergency on gun violence where they ban the sale of certain weapons. They could declare a national emergency in health care and mandate Medicare for all, enact a Green New Deal unilaterally, etc.

While this turn of events doesn’t warrant a new risk scenario in Portfolio Crash Testing, be sure that if the ‘emergency’ isn’t reversed by congress or the courts, we will begin to create scenarios around potential future ‘emergencies’ that may occur by presidential decree. We have promises from various parties that lawsuits are on the way to being filed, and we have the House likely to pass a resolution effectively undoing the ‘emergency’, and potentially even more than 50 votes in the senate. Overriding a veto is another issue, and it may come down to the courts to decide. Hopefully, we don’t have to start creating those scenarios.

Source: https://www.rixtrema.com/blog/emergency-sos/

February 14, 2019


We’ve previously written about “Why the Days of Calendar-Based Rebalancing are Numbered,” making the case that rebalancing on a set periodic schedule has been made obsolete by the advent of what we called “cost-benefit rebalancing” — rebalancing not by the clock but whenever it is beneficial to the client, based on a cost-benefit analysis of each trade. Cost-benefit rebalancing has a triple advantage over more traditional approaches: it is more efficient, it reduces dispersion, and it supports greater tax efficiency. Simultaneously. But what, exactly, is cost-benefit rebalancing? We’ll lift the hood and show some of the mechanics.

Cost-benefit rebalancing starts with the idea of a cost-benefit score.1 Any trade can have both costs and benefits. Costs include taxes, commissions and losses from bid/ask spreads. Benefits include risk and drift reduction, improving the average “ranking” (e.g. “strong buy” or “strong sell”) of the securities in the portfolio, and loss harvesting. To get a cost-benefit score, we assign every cost and benefit a numerical value and then, roughly speaking, add them up. Once you have this scoring mechanism in place, you can use optimization technology to find the set of trades that have the highest possible cost-benefit score for every portfolio. The higher the score, the more the trades benefit the investor.

We then use these cost-benefit scores to implement a very simple rebalancing workflow: trade every account that either a) has a mandate, like a cash withdrawal or b) has a cost-benefit score above a predetermined threshold. That’s it. This two-step workflow is repeated every day.

This approach not only makes it easy to implement investment ideas, tax manage, etc., it also makes it easy to deal with process failures like trade errors and suspensions, which makes cost-benefit rebalancing less error prone. For example, you no longer need to have a special process to deal with accounts that are temporarily suspended — as soon as they are unsuspended, the daily cost-benefit rebalancing workflow will step in, automatically.


What actually goes into a cost-benefit score?

On the benefit side, we include:

  • Drift reduction: getting a portfolio closer to your recommended asset allocation and security selection. We use expected reduction in “tracking error” to measure drift reduction.3

  • Rankings improvement: increasing the average quality of the securities in the portfolio as measured by your rankings (e.g. “strong buy”, “strong sell”).  

  • Loss harvesting: selling a security, not because you want to get rid of it, but in order to reduce your taxes by realizing a loss.  

On the cost side, we include:

  • Commissions

  • Taxes won realized capital gains

  • The implicit costs of bid/ask spreads

After we assign each of these factors a numeric value, we can add them together to get a single net cost-benefit score. Our users set a preference for how much they value “low drift and dispersion” vs. “low cost and taxes.” There’s no right answer, and different firms will choose differently. This preference is folded into the way we add up the numbers so that the final score reflects each firm’s beliefs and preferences.3

Compared to common alternatives (like calendar-based or min/max weight rebalancing), cost-benefit rebalancing is better for investors. It enables wealth managers to simultaneously lower return dispersion and provide investors with higher levels of customization and tax management. We can quantify this. Compared with calendar-based rebalancing, cost-benefit rebalancing reduces BOTH return dispersion and taxes by more than 60% (see Are Your Portfolios Noisy?). As a general rule, you'd expect a tradeoff between low taxes and low dispersion. That it’s possible to simultaneously reduce both is a measure of the power of the cost-benefit approach.

Have more questions? Wondering whether cost-benefit rebalancing would make sense in your firm? Give us a call at 617-453-0078 or write to us.


Source:  https://www.smartleaf.com/our-thinking/smartleaf-blog/an-inside-at-cost-benefit-rebalancing?utm_campaign=thought%20leadership&utm_medium=email&_hsenc=p2ANqtz-_aurI-FG5rhilKHLjsPKIpvcJ3nJeBrVJq2oKcvSYMmM5pqSErdCtv4hgn9XrzhI0lphUpMkC8nXhNyMOr88k4nDRiXBeyerhJ66-WZ9IbHSCmXrQ&_hsmi=69892809&utm_content=69892360&utm_source=hs_email&hsCtaTracking=afeb3630-d604-478d-ba9c-a6d3acec1d60%7Cf3dba6cf-78c9-4bca-bd85-120856bedccf


1 In the Smartleaf application, we call our cost-benefit score the “opportunity score”.

2  Tracking error is the standard deviation of the expected difference in return of two portfolios. Tracking error is calculated using a multi-factor risk model. (Ask us if you want to hear more!).

3  OK, it’s actually a little more complicated than simple addition — at least one square root works its way in.