AAII Baltimore Meeting

I was an amateur investor before I was a professional investor, and so long ago I joined AAII.  My mom was a member, and eventually I bought a life membership.  I still send them money once a year to keep my stock screener fresh.

The last time that I attended an AAII local function was in Philadelphia 15 years ago when John Neff came to speak, and there were 1000+ people there.  Well, today there were 32 people to listen to the Chief Economist of a major asset manager in Baltimore.  Of the listeners, I think I was the second youngest in the room.  I estimated the average age of the listeners to be in the high 60s.  Very few women.

I found myself disagreeing more than agreeing with the economist.  It was a very “Wall Street” “Consensus” view.   Things are getting better, ignore the negative data. Equity valuations are reasonable.  So long as real GDP has positive momentum, everything will be okay.

But what really gored the listeners was the idea that inflation was under control.  These people might be well-off, but they said food and energy prices have risen distinctly, and “core” inflation does not reflect their situation.  The speaker repeatedly made excuses for why inflation was temporarily high in both areas.  “Bad harvests,” “Speculation on energy through ETFs,”  etc.

He placed a lot of stock in the idea that reducing position limits for ETFs at the futures exchanges would bring down energy prices (a result of Dodd-Frank).  I’m still thinking about that one — if it happens, the large ETFs would have to replace front month positions with later positions, and maybe with swaps, where counterparties would hedge with futures.  On net, it might lessen backwardation, and lead to better management of the ETFs because they don’t ride the front month, but forcing the ETFs off the exchange seems dumb — it will just lead to another level of intermediation and expense.

The speaker did not get the idea that the replacement cost for a barrel of oil has risen significantly (also true for ounces of gold and other commodities).  He also felt a few simple “actuarial tweaks” would get Medicare on track.  Those “tweaks” are benefit decreases by another name, and if you listen to the loony left on the topic, they howl at every one — raising ages, means-testing, limiting benefits, etc.  Reasonable ideas all, but they will be roundly opposed.

Another concern of the listeners was the lack of safe opportunities to earn income.  As an economist, he was able to beg off, saying that he wasn’t a bond expert, but that he personally liked dividend-paying common stocks.  Again, a consensus opinion, and one that I have some sympathy for now, but dividend paying common stocks are a lot more risky in the short run than the long run.  If you went back five years ago, banks would made up a decent chunk of such a portfolio — guess what happened?  There might be another sector in the future that runs into dividend stress as a result of economic change.

He added that holding bonds to maturity would be an important strategy in the future as interest rates rise.  I found this to be ridiculous.  If rates rise, and your bonds are under par, it can be advantageous to sell bonds at a loss and reinvest in more promising bonds at higher yields, or even move to money markets, should monetary policy ever normalize.

Another concern of the listeners was the sustainability of government policy, and the speaker agreed in principle, but showed a dated graph from the CBO that showed that the problem was tractable.  He felt that deficits needed to be dealt with soon, but that loose monetary policy should continue.  Reduce the borrowing from the future fiscally, but continue it monetarily.

I found the talk unsatisfying, and afterward, I ended up having a dispute with him over mark-to-market accounting — shallow people think that it was a significant cause of the crisis, rather than MTM accounting revealing liquidity and cashflow mismatches.  Those with (expensive) long-dated, noncallable funding did not suffer during the crisis.  Only speculators with short-dated funding holding illiquid assets suffered, and they should suffer, because they relied on the idea that financing will always be available on favorable terms, and that is a profitable idea in the short-run, but deadly in the long-run.  My own ideas for bank reform would cause banks investing in assets that they can’t value to fund them with equity, or debt that lasts past the maturity of the asset.  No borrowing short and lending long — that is what leads to liquidity crises.

Quality of Investor Education

I haven’t gone to AAII local meetings for the most part because of speaker quality.  I am reconsidering that idea because I had a good talk with the vice-chair after the meeting.  He said it would be valuable to perhaps have meetings where the group could share ideas, because often speakers don’t leave any practical ideas behind.  I’m wondering what good I could do for local investors. (The same way I try to do so here — this is pro bono, even if I earn a little off of ads and book reviews.)

I am also wondering if it would be smart to have a joint Baltimore CFA Society- Baltimore AAII meeting where we could have panels attempting to understand and develop financial solutions for those frustrated by the current market environment.  My heart goes out to the average investor.  That’s a main reason I write this blog — to give something back.  The solutions aren’t easy, but unless you try, you’ll miss 100% of the shots you don’t take, as Gretzky would say.