Category: Economy


Millennials Ruin Everything

Content Provided by Michael Hadden – Investment Research Analyst Seriously. Just go online and look. In fact, this article cites 70 different things millennials have “killed,” an impressive feat for a generation spanning the ages of 22 to 37. So, if millennials are so great at destroying things we know and love, are they also...

Behind the (Research) Curtain

Content provided by Grant Engelbart, CFA, CAIA, Portfolio Manager There are five areas of analysis we utilize to review investment ideas (see our Risk Budgeting White Paper pages 9-10). To help our readers understand these analyses and our investment processes, let’s take a look at a real life example applicable to many, if not all,...

Tariffs: Market & Economy Implications

What has Happened? President Trump has officially imposed a 25% tariff on steel imports, and 10% on aluminum, from everywhere in the world (pending some exemptions). Reasoning for these tariffs is a belief that other countries’ current trade practices are a threat to national security, as well as to save U.S. jobs. Several countries influenced...

Reason #29 Not to Use Stock-to-Bond Ratios to Manage Risk

Income-Based Portfolios Which portfolio would you expect to be riskier? A or B? Or, put another way, which portfolio would you expect to be more volatile?   Tough call, isn’t it? They both look very similar in terms of stock-to-bond ratios. Let’s call it a wash — they both hold the same risk. How about...

Currencies’ Impact on Portfolios (and My Honeymoon)

Content provided by Joshua Jenkins, CFA, Portfolio Manager

Over the last year, currencies have been on the forefront of my mind, which is unusual. I’m not saying they are not important. In the short term, they definitely impact returns. Portfolio Manager Case Eichenberger recently wrote about that here. Over the long term, however, the impact of currency fluctuations tend to net out to zero. As long-term investors, we are generally comfortable taking on currency risk if the asset we are buying is priced attractively.

So, why have I been thinking about currencies so much? Well, my wife, Kirsten, and I were married this August, and immediately after the wedding we traveled to Europe for our honeymoon. While I may be a long-term investor, I am not a long-term honeymooner. Suffice it to say the recent dollar move definitely had an impact.

We did not choose Europe last fall specifically because the euro was trading at the weakest level to the dollar in 15 years, but believe me that fact did not go unnoticed by me. So, as I spent 2017 watching my trip becoming more and more expensive, it was painful. Fortunately, we locked in a substantial portion of the cost in April by prepaying for hotels and flights to various destinations in Europe. At least we were partially hedged.

(If you look closely, you can see me calculating how much more I had to pay for the gondola ride due to the euro rally. Just don’t tell Kirsten.)

The chart below provides some rough evidence that currency moves even out over time. During the last 50 years, rolling 12-month returns on the Dollar Spot Index (DXY) generally resemble a normal distribution with a return of 0.01% on average.

As Case’s blog pointed out, weakness in the dollar has provided a very nice tailwind for our international holdings at CLS this year. In addition, according to the table below from Ned Davis Research, when sentiment towards the dollar (red line) is as sour as it is today, the dollar typically continues to underperform to the tune of 5% to 8% per year. To put it another way, this tailwind may persist, and that should generally be a postive outcome for CLS portfolios.

So, if you are planning a trip overseas in the near future, some attention may be warranted. Perhaps hedging a portion of the expenditure ahead of time could be beneficial. Though I was better off having hedged, my experience tells me it does little to reduce the mental pain of the unhedged cost. For long-term investors, enjoy the tailwind while you have it. Just remember — honeymoons aside — the long-term impact of currency fluctuations doesn’t need to keep you up at night.



Oh, That Crazy Debt Ceiling

Content provided by Marc Pfeffer, Senior Portfolio Manager

I know many investors don’t follow the short-term Treasury market on a day-to-day basis. But, as someone who has followed the fixed income market for my entire career, which includes running money market funds, I know these securities are key components. During the summer months, the debt ceiling dilemma started to play havoc on short-term Treasury bills maturing in October. Why? The debt ceiling was set to expire at the end of September, and there was a possible, albeit very small, chance the U.S. would technically default by delaying payment due to politics.

Although I personally thought there was zero chance of this occurring, one still has to plan and appreciate the market was going to price in some of this uncertainty. With Congress on vacation through August, it looked like a resolution could only come in September. From September 1 to September 7, investors in these T-bills had been whipped into a frenzy. But a deal was finally struck Thursday afternoon as Congressional leaders and the president agreed to a three-month deal to raise the debt limit. The negotiated measure would suspend the ceiling through mid-December, essentially kicking the can down the road.

So now, we go from worrying about T-bills maturing in October to those maturing in December and early 2018. Until the debt ceiling is abolished, it will continue to wreak havoc from time to time on the short-term T-bill market.

Luckily, the U.S. has never been late on its debt payments, and hopefully it never will.




CLS Answers Your Questions

Content provided by Case Eichenberger, CIMA, Client Portfolio Manager

I’ve received a few thoughtful questions from advisors this week, and I’d like to address them as I believe they may be on the minds of many CLS clients.

  1. How will President Donald Trump’s tax plan affect the economy and how are we positioning portfolios?
    • The Story: Last week, Trump unveiled a broad package of tax reforms that aims to spark a sustained 3% growth rate. The proposal includes cutting the corporate tax rate to 15% (currently 35%), lowering individual rates, raising standard deductions to benefit the middle class, and repealing estate and alternative minimum taxes. Tax cuts have generated mixed results in the stock market, and the reforms must clear Congress first, so the potential impact is yet unclear. Trump has not proposed a method to pay for the cuts, which he hopes to enact in 2017, so they will add substantially to the federal deficit.
    • CLS’s View: Anything to spur economic growth is generally a good idea, and who doesn’t love lower taxes?! Tax cuts may help U.S. company earnings and allow them to grow into their already-high valuations. If growth improves and earnings continue to rise, we believe S. value stocks will benefit. Value is a current CLS theme, and we are overweight to this sector. We are also strongly tilted to financials as well as small- and mid-cap firms. Even though we have a slight tilt to large-caps, we are looking hard at smaller companies. Lower taxes should make smaller firms more competitive with larger ones as they derive most of their profits from within the U.S., while larger firms make much of their profits overseas and may defer their taxes.
    • Another View: Recently, a financial advisor asked me if the reforms happen and the economy and market shoot higher, am I worried our tilt to international stocks could be a bad call? The answer lies with diversification. Diversified portfolios mean CLS will hold some positions that will work well and some positions that won’t. But ultimately, we recognize policy doesn’t drive long-term returns; fundamentals and valuations do. Right now, U.S. valuations are high, which is a sign we should lower expectations and look for cheaper areas of the market. These are currently international stocks, which have performed terrifically so far in 2017.
  2. Are we worried about geopolitical risk, such as that posed by North Korea?
    • The Story: North Korea appears to be getting more active in terms of its capabilities to develop, test, and launch long-range nuclear weapons that have the ability to hit U.S. ships in the Pacific and possibly reach as far as San Francisco. Most experts, however, doubt it could accurately accomplish this and believe the U.S. would be able to stop an attack before it started. The U.S. and China are currently in talks on ways to handle the situation.
    • CLS’s View: There are always reasons not to invest, and when the market dips, negative stories show up more often and seem to make more sense. But, at CLS we don’t run to cash based on news headlines or short-term volatility. We typically buy what we like during times of stress, and at the moment, we very much like emerging markets (up 14% this year). In fact, even with North Korea acting up again (when has it not?) the countries that surround it have performed even better. China is up 16%, South Korea is up 17%, and Asian emerging markets are up 17%.
    • Another View: North Korea is not the only geopolitical risk in the world. France, Italy, Great Britain, and even the U.S. have the potential to roil markets. But, because there are always reasons to scare out of the market, it’s essential to have a plan in place. As the saying goes: “Investing is simple, not easy.” We must be disciplined and not react to stories; instead we must look at fundamentals and valuations.
  3. Given a normal CLS core portfolio, do we feel our allocation to international stocks right now is high enough?
    • The Story: An advisor asked me this question recently, and if I could have, I would have hugged him through the phone. It’s great to hear our advisors and clients share our vision for a portfolio. I told him, at 50% of equity, our international position is 10 points higher than our policy benchmark, but we have a view to add more (more on this can be found in CLS’s perspectives binder).
    • CLS’s View: We all know why we like international stocks: higher yield, lower starting valuations, improving fundamentals, weakening dollar, etc. Add to that improving momentum, as international stocks have outpaced U.S. stocks so far this year, and continue to approach a technical level of support.
    • Another View: We will always have a tough job ahead of us. Our belief that investing overseas is beneficial goes against most investors’ home country biases. We also believe buying assets that are on sale is beneficial to investors’ bottom lines long-term, which can often make our clients uncomfortable. But, we work with clients to help them stay comfortable throughout the process; we try to educate them and help prevent their emotions from getting the best of them. This is how our advisors and CLS earn our fee.

If you have additional thoughts or questions, please reach out to me at 402-896-7004 or



A Terrible Year?

2016 review banner - text in vintage letterpress wood type block with a cup of coffee

Content provided by Kostya Etus, CFA, CLS Portfolio Manager

Let’s review some events that took place over the last year:

  • At the end of 2015, the U.S. Federal Reserve (Fed) hiked rates for the first time in nearly 10 years (the last one was in June 2006).
  • 2016 began with one of the worst market starts in history, and a second correction (loss of more than 10%) in less than six months (the first was in August 2015, and that was the first correction since 2011).
  • About mid-year, Great Britain unexpectedly voted to break away from the European Union (EU), a move termed “Brexit.”
  • Later in the year, a political novice, Donald Trump, was unexpectedly voted as the next president of the United States.
  • To finish off the year, all eyes and ears were on the Fed and expectations were confirmed with a second rate hike.

Considering all of this volatility, you might think financial markets had a terrible year. But take a look at 2016 performance of the most common broad asset classes:


All markets are up! And some by a lot. How can this be with all of 2016’s surprises?

  • The rate increase last year, as well as those expected this year, are actually good signs for the economy as they signal the Fed’s confidence in economic strength. So investors shouldn’t get too worked up about future hikes.
  • Keep in mind, historically the market experiences about one correction every year, so the corrections experienced in 2015 and 2016 are not out of the ordinary.
  • While markets dropped pre-open following the Trump election, they rallied through the end of the year, reaching all-time highs in the U.S.
  • While markets dropped slightly following Brexit, they quickly recovered and volatility reached historically low levels in a matter of weeks.

So now comes the hard part. Coming up with just one reason to add to our “91 Reasons Why People Did NOT Invest in the Stock Market” marketing piece for 2016!



The Bright Side of Rising Rates

hands holding tress growing on coins / csr / sustainable development / economic growth







Content provided by Grant Engelbart, CFA, CAIA, CLS Portfolio Manager

Investors have been infatuated with the timing and pace of the Federal Reserve’s (Fed’s) plan to raise interest rates ever since rates were pinned at the zero bound in the midst of the financial crisis. Most of the rhetoric regarding interest rate hikes is negative, after all, who wants to “pay more” for money? These fears for financial assets are overblown, as we have mentioned before. Besides focusing on the negatives, what are some of the benefits of higher interest rates?


Remember when your bank account paid you interest? Slowly but surely, banks are starting to raise the amount they pay customers. Online savings accounts typically have a slower process for moving funds, but those who are willing to accept a little less liquidity can get around 1% in interest. The craziness of celebrating 1% interest aside, it isn’t easy to find products paying 1% with a government guarantee (FDIC insurance) and no principal fluctuation.


Most fears regarding rising interest rates are based on client’s bond holdings (which nearly all investors have, whether they know it or not). We have written extensively on how important bonds are to portfolios and why investors definitely should not abandon them. When investing in bonds – whether through ETFs, mutual funds, or direct bond ownership –there are interest payments and bond maturities that need to be reinvested. Reinvesting these at higher interest rates is beneficial, particularly as the starting interest rate on a bond is often the best predictor of its return.


Interest rates rarely rise in a sustainable way without a prior rise in inflation. The word inflation typically brings memories of the 1980s or stories about the Weimar Republic to mind; however, moderate inflation is typically a sign of a healthy economy. By definition, inflation implies rising prices and wages. The latest jobs report shows wages rising nearly 3% from December 2015 to December 2016, which is currently faster than CPI inflation in the U.S.


Investment vehicles that use derivatives, such as futures contracts, have to collateralize their exposure. This collateral is typically invested in short-term, safe instruments, such as T-bills. Rising interest rates benefit the collateral yield of a futures position. This is particularly beneficial to commodity investments through ETFs, which typically use futures contracts to gain that exposure. Not to mention, commodities are also a hedge against inflation, which as mentioned accompanies rising interest rates.

Interest rates are an integral part of an economic system that affect nearly everyone. Borrowing money at higher interest rates is not preferable, however, the slow expected rise in rates doesn’t have to be detrimental and can actually benefit segments of the economy and population.



Global Debt Levels

Debt crisis flowchart on a chalkboard with globe showing USA

Content provided by Scott Kubie, CFA, CLS Chief Investment Strategist

The recent short-term rally in global stock markets has boosted optimism towards equity investments. While always glad to see our clients benefiting from market increases, CLS portfolio managers continue to keep a vigilant eye on market risk. In addition to our Risk Budgeting Methodology, we also regularly identify specific risks of greatest concern. (You can follow our list of key concerns by reading our quarterly CLS Reference Guide or Monthly Perspectives.)

Currently, global debt levels trouble CLS more than any other specific risk. While the risks of the 2008 global financial crisis are in the past, the debt used to help spur the economy past the crisis remains. This post seeks to explore different ways global debt levels might slow stock market returns in 2017. Before exploring the details, keep in mind the previous sentence included the word “might.” While these risks will shape markets in 2017, the most likely outcome is global governments will muddle through and markets will rise.

High Government Debt to GDP

At this point in the economic cycle, moderate GDP growth should be eclipsing deficit growth, meaning government debt is becoming easier to service. Keep in mind, governments rarely pay down debt by running surpluses. Instead, GDP grows at a faster pace than the deficit. Assuming taxes grow proportionately with GDP, government debt becomes less burdensome. So debt levels are often measured as a percentage of GDP. The table below summarizes debt levels of some key countries.


Research shows that the when debt levels rise above 90%, concern about increased taxes, higher inflation, and regulation slow GDP growth by 1% per year. None of those changes benefit stock markets in the long-term. This thesis is hotly debated, but the slow U.S. recovery and anemic recoveries in Japan and Europe support the conclusion that high debts pose a risk for global economies.

Bank Debt Becomes Government Debt

While Italy’s debt levels are terrible, the table above understates them. Italy’s third largest bank, Monte dei Paschi, was recently taken over by the government. Analysts estimate 20% of the bank’s loans are not performing. That figure overwhelms any capital buffers and leaves the Italian taxpayer with $6 billion in losses to cover. Monte dei Paschi is likely the most problematic bank in Italy, but it isn’t the only one. Italy’s already large debt would be higher if the number included debts the country would likely absorb when recapitalizing banks.

China, whose public debt is only 17.7% of GDP, faces similar challenges. Chinese banks continue to roll over loans to companies rather than forcing restructuring. Many of the problem borrowers in China are state-owned enterprises (SOEs) and the government is loath to pull the plug on its own businesses.  While 17.7% looks good, it is widely assumed that the government would step in and cover the problem loans if necessary, thus piling on more debt.

Borrowing in Dollars

The final debt challenge results from a mismatch between debt currencies and home currencies. Many emerging markets, needing capital from abroad, borrow it in U.S. dollars and service their debt by converting taxes paid in their home currencies to dollars. Since the dollar has been rising compared to most global currencies, supporting dollar-based debt has become a larger challenge.

Conversely, Japan continues to run a massive deficit without as much risk because it borrows from its own citizens in yen at very low interest rates. While its debt levels are massive, its risks aren’t as high as in some emerging market countries.

Muddling Through

Even with these challenges, countries will most likely muddle through. While this piece focuses mostly on risk, should any of these countries make the right set of structural reforms, the risk factors above may drop and stock markets could rally. Remember, investing provides its greatest rewards for bearing risks that others don’t want to bear.

This information is prepared for general information only.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice.