FAIR Canada & IIROC Request for Comments re Client Relationship Model – Phase 2, Performance Reporting and Fee/Charge Disclosure

I would refer people to FAIR Canada’s submission on CRM phase II.  It makes some good points re the following:

A) discount brokerage disclosure,

B) definition of trailing commission,

c) points re the clients not directly paying trailer fees and such charges being for services rendered,

d) short term trading fees and deferred charges, and

e) re requirements to report on investments not defined as securities in legislation.


Exploiting the Volatility Anomaly in Financial Markets – CFA Institute Conference Proceedings March 2012

Is the Low Volatility Anomaly Universal- – S&P Dow Jones 2013

Finding opportunities through the low- volatility anomaly BMO 2013

EDHEC-Risk – Understanding the low volatility anomaly (2013)


Benchmarks as Limits to Arbitrage: Understanding the Low Volatility Anomaly 2010

Making Sense of Low Volatility Investing – Research Affiliates

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US Manufacturing new orders and the Fed Funds Rate…

Total new manufacturing orders rose 1.56% in February following declines in January (1.03%) and December (2%).  Orders are 0.6% below February 2013 levels.   The bigger picture is of the course the more worrying:


And the bigger picture is that historically declines in orders have always been accompanied by declines in the Federal Funds Rate.   I will not need to go too far into the fact that rates have not risen as they usually do.  So why is the Fed tapering?   Well, while asset prices have risen fine and dandy, underlying economic growth has not similarly responded. 

And we see the same picture with respect to producer price inflation:


If QE has not worked and interest rates are as low as they can go and sovereign debt is as high as it can go, where do we go from here?

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Further Multiple Expansion Possible (Horan) – I would not personally rely on expectations of multiple expansion though. 

Economic consequences of income inequality (Michael Pettis) – As a fellow protagonist of the “income inequality is dangerous” argument, this is a worthwhile read. I was interested, in particular, in the historical comments by Marriner Eccles. The backdrop to the great depression may well have been an overvalued stock market, but like now, rising inequality probably had a much bigger part to play than many have alluded to.

Blogs review: Does economic growth have a future in the United States? | Read more at Bruegel – a must read.  IMHO: low growth dynamics are being ignored in market valuation risk assessment.

Fed goes Keynesian, praises China’s fiscal blitz, abjures QE West (technical) & Is the banking system now even more dangerous? Central banks fear so (Telegraph)

[video] Risk assessment is upside down (beyondbrics FT)

The UK electoral cycle is alive and kicking (Bond Vigilantes)

Weak demand dynamics and final Q4 US GDP

I was just looking through the GDP revisions: real growth was higher because a decline in the GDP deflator and nominal GDP fell from the last revision.  Nominal net exports also fell while health care expenditure was a significant upward revision.  


My concern rests with the underlying growth rate of the US economy, especially domestic demand and the PCE component in particular.  I have referenced this issue before.

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My submission to the CSA re Risk Classification disclosure

Re: CSA Notice 81-324 and Request for Comment – Proposed CSA Mutual Fund Risk Classification Methodology for Use in Fund Facts

The part must relate to the whole and the whole to the part and the both must know of it:

The CSA in their consultation paper fail to explain how the risk classification methodology proposed for use in the point of sale documents is to be used by investors to make informed decisions, and how advisors are to use the same to determine suitability.

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IIROC’s guidance for leveraged investment

I can see that IIROC have put some real work into this and have largely done as much as they can given the constraints they are operating under: they cannot rule against leveraged investment or unilaterally move outside of a transaction remuneration regime; this is the main securities regulator’s job, if not a government level responsibility.    

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Income inequality and the asset side of the equation…some interesting charts…


If we have income inequality we are likely to have an increasingly asset focussed capitalist system.  That is the demand for non productive assets and securitised indirect investment in productive capital should increase as demand for goods and services as a proportion of national income declines. 

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Income disparity and capitalism may be an increasingly squeezed play in a robot world

Capitalism is not about wealth, it is about capital and its continuous productive employment.  Increasing inequality combined with rising wealth in non productive assets is essentially anathema to a structurally sound capitalist framework.

A big part of the problem is that key elements of the operational economic model, that which determines revenues and that which determine costs, have become disassociated from each other – marginal costs and marginal revenues need to be related.    Additionally the model itself is also suffering from leakage as less profit is reinvested and earnings are increasingly distributed to those who will accumulate and not eventually consume, with consequences for asset prices, which themselves have a feedback loop into the economic engine.

I was reading a couple of posts on FT’s Alphaville (Robots won’t make you rich for long & The UK’s squeezed bottom, charted) and a Stiglitz piece on Project Syndicate (Stagnation by Design).  The second Alphaville post provided a link to an important document on income disparity, produced by the Resolution foundation

I disagreed with the gist of the Robots won’t make you richer (a repost to Martin Wolfe’s Enslave the robots and free the poor), largely because the post confuses the price of an asset in the stock market (GM stock) with the value of the actual capital invested to produce the goods and earn the profits, but I felt that there was a thread between the subject matter of these different views that was worth expanding on. 

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US employment data…perspective 3

This is the third perspective dealing with concerns over US employment and related US growth dynamics:

A great deal of the growth in employment over the last few decades has been concentrated in the health and education sectors.  Student debt has become a major problem post the onset of the current financial crisis and health care has likewise become, over time, a tremendous economic cost and a structural barrier to growth.

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US employment data…perspective 1

The last two employment reports have been casting a shadow over the strength of the economic recovery.  

Just focussing on the last two months of data probably does some disservice to the underlying fundamentals.  October and November were relatively strong months, and although we can see a slowing trend (blue line, 4 month average), the last two months may be more correctly viewed as an adjustment.  The weather may or may not have had an impact. 

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Principle based versus rule based regulation and the hidden benefits of a best interests standard.

Regulation and investor protection begins at home, not at the regulatory level or with the courts.

There is a lot of confusion amongst the regulated that a move towards a best interests standard will lead to more rules.  This is incorrect.  They will lead to more principles and fewer rules, less conflict and better outcomes, greater self regulation and higher levels of investor protection and much reduced regulatory intrusion.  But not overnight!

The ability to deliver best interests standards depends on well structured processes that depend on a well defined set of decision rules.  Strong processes need only be regulated by principles, as the processes contain all the rules.   The trick is to make these processes transparent and accountable to a standard (best interests).  

Regulation + process = leverage. 

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Q4 US GDP, some further thoughts

I will touch on some of my views regarding the significance of all this in a later post and there is a disturbing significance.

Q4 US GDP (provisional estimate) was helped by a) an increase in personal consumption expenditure that may have more to do with earlier weakness than a strengthening trend, b) a continued rise in inventories and c) a significant increase in net exports (close to 40% of the increase in GDP). 

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Fostering a culture of compliance, an alignment of regulation and incentives, through best interests standards.

Whether he realises it or not, Bill Rice has unwittingly argued for the introduction of best interests standards as a solution to the regulatory burden.

I wanted to make a further comment on a topic that spins nicely off Bill Rice’s Keynote speech, that applies to everyone who opposes the introduction of a best interests standard. 

“It is important to securities regulators that intermediaries are as effective as possible and, in that regard, that they be as skilled and experienced as possible, and are motivated by incentives to do as good a job as possible.”

That topic is compliance and the benefits of encouraging a culture of compliance.  At the moment the focus is on balancing the opposites of advice based service requirements and transaction based remuneration.   Compliance and incentives are in conflict and the hammer and the nail will always be needed to keep the two together. 

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