Ray Dalio’s Short-Bet Puzzle Is Missing Some Pieces

Hedge fund titan Ray Dalio is famously enigmatic, but his latest wager may be the most puzzling yet.

Bloomberg News reported on Thursday that the fund Dalio founded, Bridgewater Associates, has made a $22 billion bet that many of Europe’s biggest companies in the blue-chip Euro Stoxx 50 Index are poised to decline.

Bridgewater didn’t respond to Bloomberg’s request for comment, so Dalio’s motivation is not entirely clear. But according to Bloomberg News’ Brandon Kochkodin, Dalio “has a checklist to identify the best time to sell stocks: a strong economy, close to full employment and rising interest rates.”

It’s an old idea. Economic fortunes are reliably cyclical, even if no one can precisely predict the turns. Booms tend to be followed by busts, and vice versa, and stock prices often go along for the ride.

By that measure, it seems like a precarious time for U.S. stocks. The U.S.’s real GDP has grown for eight consecutive years, by 2.2 percent annually from 2010 to 2017. Unemployment has declined to 4.1 percent from 10 percent in late 2009. And the yield on the 10-year U.S. Treasury is up to 2.9 percent from 2.1 percent in September — an increase of nearly 40 percent.

The problem with Dalio’s checklist, however, is that stock prices take their cue from companies’ fundamentals, not the economy. Yes, companies’ collective fortunes often reflect those of the broader economy, but not always. And when the two diverge, the relationship between economic results and stock prices breaks down, too.

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Investors Resist Golden Age of Active ETFs

ETF enthusiasts gathered recently in Hollywood, Florida, for the “Inside ETFs” conference, the industry’s biggest party of the year. By many accounts it was the swankiest celebration yet.

And for good reason. When Inside ETFs first convened in 2008, ETFs managed $500 billion, or one-twentieth of the money managed by mutual funds, according to Broadridge. ETFs now oversee $3.4 trillion, or one-fifth of mutual fund assets, according Morningstar data.

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Millennials, Born Under Sign of the Bull, Should Embrace the Bear

Remember, millennials: Red is good.

Millennials are probably tired of hearing that they’re not doing as well as their baby-boomer parents. But with every 1,000-point drop in the Dow Jones Industrial Average, their fortunes are brightening.

If they doubt it, millennials need look no further than mom and dad. The baby boomers entered the workforce from roughly 1966 to 1984. They couldn’t have timed it better because U.S. stocks were in an epic funk during those 19 years. The S&P 500 Index gained just 3.2 percent annually while inflation grew by 6.5 percent, which means the real value of U.S. stocks declined by a stunning 3.3 percent a year for nearly two decades.

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Stock Stumble Isn’t a Starting Gun for Hysteria

Panicking is never a good plan when it comes to investing, but it’s particularly silly now, because nothing truly eventful has happened yet.

Sure, the Dow Jones Industrial Average was down 1,175 points on Monday — the biggest one-day drop ever, before stocks fluctuated on Tuesday. In percentage terms, it was a 4.6 percent decline. Investors may not see that every day, especially recently, but it’s happened plenty of times in the past.

And yes, the S&P 500 Index was down 7.8 percent since Jan. 26 through Monday. But it’s nowhere near a 20 percent decline that constitutes a technical bear market. It’s not yet even a correction, which is a 10 percent decline.

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Dollar’s Wane Translates Into Investors’ Pain

A weaker dollar may be good for U.S. companies, but it’s no friend to many U.S. investors.

Treasury Secretary Steven Mnuchin rekindled concerns at the World Economic Forum in Davos last month that the Trump administration is fixing for a trade war. “Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin said.

If there was any doubt what Mnuchin meant, Commerce Secretary Wilbur Ross made it plain by adding that “a trade war has been in place for quite a little while, the difference is the U.S. troops are now coming to the rampart.”

The dollar quickly complied. The Bloomberg Dollar Spot Index, which tracks the performance of the dollar relative to a basket of 10 global currencies, fell 1 percent the day Mnuchin made his comments. It was down an additional 0.3 percent through Thursday even after Mnuchin sought to clarify his remarks and expressed support for a strong dollar.

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Low-Cost Care Threatens High-Quality Health Stocks

The health-care industry may have finally met its match.

There have been many efforts to reform the U.S. health-care system over the years, but the one announced on Tuesday by the triumvirate of Amazon.com Inc., Berkshire Hathaway Inc. and JPMorgan Chase & Co. may be the most ambitious yet.

The announcement was light on detail, but it hinted at big plans. JPMorgan CEO Jamie Dimon said the “goal is to create solutions” that deliver “transparency, knowledge and control” to the three companies’ employees “when it comes to managing their health care.” Those qualities are conspicuously missing from the U.S. health-care system.

As my Bloomberg Gadfly colleague Max Nisen pointed out, a key line in the release is that the new venture will be “free from profit-making incentives.” That’s a big deal. Just ask low-cost investing pioneer Vanguard Group what’s possible when profits aren’t a consideration.

The obvious question for investors is what impact the effort will have on the health-care industry. Amazon is a formidable foe, as every industry that competes against it will attest. But health-care companies are no pushovers. Or, as factor investing aficionados might put it, health-care companies are high-quality businesses.

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Wall Street Can’t Hold Back Vanguard’s Low-Fee Ocean

The Vanguard Group is bringing down the cost of investing and there’s nothing Wall Street can do about it despite its best efforts.

The Wall Street Journal reported on Sunday that some financial firms are making it more expensive — and in some cases impossible — for their clients to buy Vanguard mutual funds and ETFs.

Fidelity Investments, for example, will charge “some new corporate customers that hire the firm to run their 401(k) plans a fee of 0.05 percent on assets invested in Vanguard funds.” TD Ameritrade dropped 32 Vanguard funds from its commission-free lineup of ETFs, and Morgan Stanley banned “its financial advisers from selling clients new positions in Vanguard mutual funds.” (Disclosure: My asset-management firm uses TD for custody and Vanguard funds in some accounts, including my own.)

It’s a naked ploy to prop up their fees and it won’t work. This isn’t the first time that Wall Street is on the wrong side of history. When Vanguard founder Jack Bogle introduced the first index fund in 1976 — the iconic Vanguard 500 Index Fund — Wall Street famously dubbed it “Bogle’s Folly.”

Four decades later, Bogle has the last laugh. Vanguard took in a record $236 billion in net assets in 2015 and an additional $305 billion in 2016. In November, outgoing CEO Bill McNabb said that the firm was on pace to collect an additional $350 billion in 2017. Vanguard is now the second-largest money manager in the world with roughly $5 trillion in assets — multiples bigger than Wall Street firms such as Goldman Sachs and Morgan Stanley.

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Slumbering Bear Holds a Lot of Answers

It has been almost nine years since the last U.S. bear market, as defined by a 20 percent or more decline in the S&P 500 Index. That’s the second-longest stretch without one since 1928, according to Yardeni Research Inc. Only the period from December 1987 to March 2000 was longer.

That’s a long time for questions to pile up that can only be answered by the next downturn. Here are some of the most burning ones:

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For Hedge Funds, the Bear Can’t Come Too Soon

No one is more eager for the next bear market than long-short hedge funds.

Long-shorts had a good year in 2017. The HFRI Equity Hedge Total Index — an index of long-short equity hedge funds — returned 13.5 percent last year, its best performance since 2013.

But as my Bloomberg View colleague Barry Ritholtz pointed out last week, it wasn’t good enough. The equity hedge index trailed the S&P 500 Index by 8.4 percentage points last year, including dividends. It was the ninth consecutive year that long-short hedge funds trailed the broader market, and the S&P 500 outpaced the equity hedge index by a stunning 8.1 percentage points annually over that period.

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Discount Brokers Act Like Wall Street on Fee Conflicts

For those who think a fiduciary-type rule is unnecessary, think again.

The Wall Street Journal reported last week that “advisers at some of the biggest discount brokerage firms make more money if they steer clients toward more-expensive products.” That includes the big three discount brokers, Fidelity Investments, Charles Schwab Corp. and TD Ameritrade Holding Corp.

According to the Journal, for example, “Fidelity representatives are paid 0.04 percent of the assets clients invest in most types of mutual funds and exchange-traded funds,” but they earn 0.1 percent on investments that “generate higher annual fees for Fidelity, such as managed accounts, annuities and referrals to independent financial advisers.”

It’s hardly necessary to point out why such a compensation scheme is problematic. It means that representatives of broker dealers 1) are conflicted when giving investment advice to investors, and 2) have an incentive to recommend costlier investments over cheaper ones.

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