The job of the Federal Reserve is ‘to take away the punch bowl just as the party gets going’ as one Fed Chairman once said. Typically the process has started with a hike in short-term interest rates, a step toward the exit with the punch bowl in hand indicating the economic party was getting raucous.

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As part of what one of our managers described as “a bull market in fear,” 2012 was a year in which central banks around the world ganged up against savers and forced them to choose between monetary debasement and navigating a minefield trying to escape it.

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We believe many of the uncertainties that clouded the horizon in 2012 are slowly being resolved or constructively contained. In fact, we also see domestic economic strength that would indicate an earlier hike in interest rates than is currently priced into the market.

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It’s been said physics explains 99% of the world with three laws, while economics explains 3% of the world with 99 laws. We found the data in the table interesting for a number of reasons, but namely for the fact that it would be nearly impossible for a trained economist to make sense of the past five or so years given these snapshots in time.

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The professional investor who is benchmark agnostic, who doesn’t seek to eke out every penny of return at the expense of risk, who focuses on downside protection, and who is not handcuffed by a certain business model – be it active, passive or otherwise – has better odds of controlling for volatility.

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Of all the experts that we would expect to undermine the basis of passive (index) investing, Standard and Poor’s, the creator of the widely-followed S&P 500 Index, was not high on our list. However, in a recent piece The Low-Volatility Effect: A Comprehensive Look, the company inadvertently does just that.

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