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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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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Calm Markets Are No Reason to Bid Up Stocks

Low volatility is great, but it doesn’t mean investors should pay more for stocks.

It’s been an unusually quiet time for U.S. equity markets. Stock watchers’ favorite barometer of volatility, the CBOE Volatility Index, or VIX, has averaged just 11.1 so far in 2017 through Monday, making it the calmest year on record. (The lower the VIX, the lower the volatility, and vice versa.) The gauge has averaged 19.4 since its inception in 1990.

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Rise of Indexes Threatens to Eclipse Their Creators

Index providers have won big in the great migration from high-priced active management to low-cost index funds. But their fortunes are set to turn.

The same trend that brought index providers to prominence is now coming for their profits: Investors are in no mood to pay fees. Investors plowed a net $2.5 trillion into mutual funds and ETFs that charge 0.2 percent a year or less from 2007 to 2016, according to Broadridge, which tracks data from 80,000 funds globally. That’s more than twice what they invested in all other funds combined.

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This Wealth Plan Beats Death and Taxes

As House and Senate Republicans pursue competing tax overhaul plans, one big disagreement is the estate tax. House Republicans want to repeal  it in 2024 while their Senate colleagues  want to preserve it.

The House’s repeal plan would be a windfall for a small number of the richest Americans. My Bloomberg View colleague Al Hunt notes that the estate tax affects only 0.5 percent of all estates. Both the Senate and House plans would double the estate tax exemption to $11 million from $5.5 million per individual, which would further shrink the percentage of affected estates.

Nevertheless, average Americans dislike the estate tax. A variety of polls over the years have shown that most Americans want to repeal it. Ipsos recently conducted a survey for National Public Radio and found that 65 percent of respondents favor repeal.

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