The Investment Scientist

On August 15th, 1971, President Nixon announced that the US would no longer redeem US dollars for gold, thus formally ending the gold standard. During the gold standard, the dollar bill was a certificate of deposit of gold which was redeemable to the bearer on demand. Post-gold standard, the dollar bill is pure paper money, what the academics call fiat money. Read my previous article The Gold Standard.

One immediate consequence was that the government could now issue money at will. And indeed, since 1975, the US has increased the money supply tenfold. As you can see from the chart below, the money printing accelerated in 2009, after the Great Recession. With this level of money printing, we actually need a lot of cheap imports to keep inflation at bay or else there would be too much money chasing too few goods.

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The Trade Deficit: Who Is The Winner?

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The June module at Oxford was all about macro-economics. The course was taught by a world-renowned economist, Professor Oren Sussman. There was so much I learned in the class that I can’t wait to share with my clients and readers.

The first topic I’d like to discuss is the Gold Standard. This will help us understand President Trump’s trade policy.

The gold-standard dollar
Below is a 100 dollar bill issued in 1888. Printed on the right side are the words “Gold Certificate.” From top to bottom, it reads “This certifies that there have been deposited in the Treasury of the United States One Hundred Dollars in Gold Coin.” Right below it is the italic “repayable to the bearer on demand.”

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This is actually a response to a client who asked to know what I do regularly that might benefit him. There are many things I could suggest, but I’d like to highlight just three.

Follow academic research

Those of you who have followed me for a while know that I am disdainful of financial news. I liken it to highway noise and I think that listening to it won’t get you anywhere. I am, however, an avid reader of peer-reviewed journals like the Journal of Finance, Review of Financial Studies, etc. These journals contain the best and most rigorous research on the subjects of finance and investment. That’s why I can confidently tell my clients, whatever I do with their money, that I can back up my actions with rigorous peer-reviewed research from the best minds of the world.

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The trade deal between the US and China fell through a few weeks ago. Since then, I’ve read at least three versions of what happened, ranging from Trump applying maximum pressure, to Xi reneging, to Xi wanting to do the deal but not being able to get the politburo to go along. Wall Street is hoping Trump and Xi, who will be meeting at the G20 a month from now, can magically salvage the deal. Based on what I’ve read in Chinese media, I am a lot less hopeful. Prior to Trump’s last-minute maximum pressure surprise, I saw the state media was preparing people for a deal; after that, it was preparing people for a long fight.

Bloomberg recently published a study of the economic impact of tariff escalation (see chart below.) As you know, I generally don’t react to the news, but this is looking like a structural change to the world economy that may warrant a reduction in risk exposure. If you are worried, feel free to schedule a time with me to talk about it:

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ON-CM130_bank04_B620_20180330091324.jpgShortly after I sent out the last newsletter, my father-in-law told me that his lost money was credited back to his BOA account. This just shows how powerful my newsletter is!

OK, I was kidding. Here is what really happened.

After BOA denied his claim twice based on the 60-day excuse, even though the police had already identified the fraudster’s bank account at another bank, my father-in-law filed a claim with CFPB and OCC. (Pop quiz: what are they?) He then wrote a long email to Holly O’Neal, Head of Consumer Client Services of BOA in which he admonished and implored the bank:

Bank of America’s lack of ordinary due diligence in detecting fraud and failing to perform its fiduciary duty resulted in my lost retirement funds. It is disappointing, deplorable and shameful that a global company like Bank of America is dismissive and choosing not to investigate this type of crime, and, instead, closed the fraud claim fast, without offering support or common courtesy to a loyal customer. It is an inhumane treatment of a consumer.

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bank.jpgMy father-in-law traveled to Taiwan for a few months. When he came back, he went to Bank of America where he maintains a money market account and a checking account to get some money. To his shock, his money market balance which was over $100k before he left was wiped clean, there was not a single dime left.

It turns out someone had forged his signature in order to create an Electronic Fund Transfer. The forgery is pretty lousy; it does not look like my father-in-law’s signature at all. But that didn’t matter, BOA set up the EFT and proceeded to transfer out all the money, down to the last dime.

He got absolutely no notifications when this was taking place .

You would think that BOA would take responsibility for their oversight. They won’t. They claim that since my father-in-law failed to report the fraudulent transactions within 60 days of their occurrence, they are not responsible for them. Never mind that he was out of the country while his account was being plundered.

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unnamed.pngA few days ago I got a question from a client.

Why don’t we move the money to T-Bills to avoid market volatility, and get back to full market exposure only when the market is on an up-trend?

It is all too human to only want to take the upside risk without the downside risk. However, study after study has shown that investors who do that usually end up hurting themselves financially.

Look at the chart. In the fifteen years between 12/31/02 and 12/31/17, missing just 10 of the best return days of the S&P 500 Index would mean that you gave up 66% of the total return during the whole period.

I conjectured that the best return days usually happened at the depth of a bear market when fear and desperation were highest and investors were quitting the market in droves. I asked my assistant Taro to look up historical data to verify that, and here is what he found: the first nine out of the ten best return days in the last fifteen years happened during the Great Recession, just as I had thought!

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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