Longboat Retirement Solutions LLC

Why Asset Allocation Doesn’t Matter In The Long Run June 27, 2015


Part Three: Self Directed Retirement Questions May 19, 2015

This is the third installment in the Self Directed Retirement Questions, Answered.

These are questions I’ve been asked, my answers to those questions, and some commentary.

Question:  What is the difference between a Self Directed IRA and a Solo 401k?

Answer:  A Self Directed IRA requires a Custodian.  Custodians are generally banks and investment houses.  These Custodians charge fees to baby sit your money and tell you where you can and cannot invest your savings.  An SDIRA is far better than a standard IRA, but it can still have high management fees, hoops to jump through, and limitations in what you can invest in.

A Solo 401k, which is designed for the self employed, enables you to invest in anything that the IRS allows.  You become the Custodian; therefore you don’t have any filters on your investments (within the framework of the IRS’s allowed investments).  You basically don’t have to ask permission to use your own savings as you see fit.  Since it is a 401k, you can also borrow up to 50% of the value, up to $50,000.  And again, you don’t have to ask permission or fill out piles of paperwork to take out a loan.  You draw up the terms, put the terms in your safe, write a check from your 401k to you, and then just make the monthly payments to your 401k.  Because you are making payments to your 401k, the interest is essentially free – you are paying yourself!  A Solo 401k also enables you to contribute as the employee and the employer; in other words you can contribute over $50,000 a year to your retirement account – or over $100,000 if your spouse is a partner in the business.  This is a BIG deal.

My thoughts on the two different approaches boils down to this:

If you can, go with the Solo 401k.


Sitting on The Fence May 9, 2015

Do you consider yourself a market timer?

Are you a market maker?

Do you know when the next market crash will happen?

Can you call the peak?

Do you have insider information regarding when Goldman Sachs will pull the carpet from under the U.S. stock market?

Is Janet Yellen your cousin?  Does she give you tips?

If your answer is no to all of these questions, then why aren’t you taking this opportunity to divorce yourself from this bubble while it’s still inflated?

It is amazing to me that more people are not taking this amazing opportunity to take profits, and instead are electing to roll the dice on market timing or give the keys to their future to some guy who has no stake in their success.

I know that I should not be surprised, as history seems to repeat itself every 7 to 10 years these days.  People have exceedingly short memories and attention spans that can only be measured in milliseconds.

I really don’t want to be that guy who said “I told you so”…or “I tried to tell you”.  I get no joy in hearing sob stories about how people waited too long and got wiped out by the debt tsunami.

The current market value has no basis in reality.  When it goes pop, it is going to destroy the retirement of millions of Americans who blindly followed the pundits on CNBC.

Please, Americans, spend more time thinking about your future and less time getting re-educated by mass media.

Lars Forsberg
Longboat Retirement Solutions LLC

Call for a FREE consultation


The Fed’s Presence In The Markets Is Pretty Clear January 27, 2013

BY: Lance Roberts, Street Talk Live

Jan. 25, 2013

There has been an burst of exuberance as of late as the market, after four arduous years, got back to its pre-crisis levels.  Much has been attributed to the recent burst of optimism in the financial markets from:

1) Better than expected earnings – not counting the fact that expectations had been dramatically lowered over the last quarter.  If you lower the bar enough you will get better results.  However, if expectations levels had remained where they were previously every single report would have missed so far.

2) Stronger economic growth ahead – expectations are once again, as we have seen over the last 3 years, that the economy will grow at 3% or better in the coming year.  Unfortunately, most of the economic data suggests that 2013 will remain mired closer to 2% after a very lackluster first half of the year.

3) The end of the bond bubble is near – like the economy; bond bears have been calling for the end of bond bubble.  Will 2013 be the year?  Most likely not as the chase for yield continues as masses of baby boomers move into retirement needing income to maintain their standard of living.

4) The long term outlook is getting better – this is true but how much of the long term outlook is already priced in?  How much of the long term outlook is due to artificial stimulus versus organic economic growth?

5) Valuations are cheap – the argument of cheap valuations is a hollow one.  First, comparing forward operating earnings expectations to trailing reported GAAP earnings is apples and oranges.  Using the Shiller 10-year median P/E – valuations are at levels normally associated with bull market peaks.  Secondly, the argument of earnings yield compared to bond yields is garbage.  Bond yields are being artificially suppressed which distorts the argument from reality.  Furthermore, investors do not receive the earnings yield from stocks but they DO receive the interest income from bonds.

6) The great rotation is here – for the third year in a row we are once again hearing that the “mountains of cash” piled on the sidelines is about to flow into the markets.  That has yet to happen and there is little indication as of yet that 2013 will be any different.

The point to made here is that each time the market has rallied the media, and analysts, try to attribute the rally to a fundamental support.  In most cases the arguments boil down to“hope” more than “reality.”   However, what is really driving the current rally is likely far more simplistic:  $85 billion a month.

With the Federal Reserve currently engaged in two simultaneous quantitative easing programs (QE 3 and 4) totaling $85 billion a month in purchases of both mortgage backed and treasury bonds – the excess reserve accounts of the banks have soared in recent weeks.   There is a very high historical correlation (85%) between the expansion of the Fed’s balance sheet and the stock market.

The chart below shows the relationship between the financial market and the expansion/contraction of excess reserves held by banks.  Historically, these excess reserves, prior to 2008, averaged about 18.9 billion.  Today those excess reserves amount to $1.58 Trillion.




Each market rally is always expected to continue indefinitely into the future.  The reality is that this is never the case and that the inevitable correction is always completely “unexpected.”  The current rally, as shown in the next chart and table, will likely proceed along the same course as we have seen with each previous QE program.  Our current target for the rally is 1560 on the S&P 500 which would be an 11% return from the start of QE3.  Should this target be reached it will continue the pattern of diminished rates of return as these liquidity driven surges have become more fully priced into the markets.



It is clear that the visible hand of the Federal Reserve is firmly in control of the markets at the moment as liquidity flows are increased. However, extrapolating the current advance indefinitely into the future becomes somewhat dangerous.  Each previous program cycle has ended with a fairly nasty decline, in both the markets and the economy, as the fundamental drivers were being supported solely by artificial interventions.  Those declines would have likely been far worse had they not been halted by the next round of “liquidity injected goodness.”   

While the Fed programs that we have witnessed since the financial crisis are historically unique – liquidity driven markets are not.  We have witnessed the effects of excess liquidity in the bull market cycle prior to the 2008 financial crisis.  The only difference during that cycle was that, through government intervention, real estate was turned into an ATM allowing mortgage equity withdrawals to be the liquidity source for the economy and the markets.  The chart below shows the extremely high correlation between these two bull market cycles.



There are many similarities between the peak of the market in 2008 and today.  Investor sentiment is pushing extreme levels, the markets are exceedingly overbought, earnings are weakening, complacency is higher, multiples are expanding, the consumer is beginning to sputter and headlines are beginning to push the boundaries of manic optimism.

One doesn’t haven’t to think back too far to remember that at the peak of the markets in 2008 there was no recession in sight, even though it had already started, as it was a “goldilocks”economy.  Earnings were expected to continue to grow into the coming year and equities were the only investment of choice.  Come to think of it – that is what we heard in 1999 as well.

David Rosenberg summed this up well in his most recent missive:

“As imperfect souls, we as human beings simply don’t see that the existing situation will somehow be resolved and come to an end, and that in the ensuing three to five years, we will either be belly aching over a new bear market or celebrating a bull phase.  And in either case, it’s called ‘living in the moment.’  But the most dangerous thing anyone can do is extrapolate the most recent experience, as enduring as it may seem, into the future.  Good, bad or indifferent, we will be talking about something completely different three to five years from now than we have been for the past number of years.”

The point here is that there are times when one should step back to look at the forest for the trees.  The catalysts that brought the financial markets to its knees in 2000-2002 or 2008-2009 will likely not be the same ones in the future.  Will the markets continue to play out as the chart above potentially forecasts?  I haven’t a clue.  With the Fed fully engaged in stimulus programs domestically, as well as the ECB and Japan globally, there is excess liquidity sloshing throughout the financial system.  The market rally could well rise farther, for longer, than most would expect possible.

The current belief is that the central banks will have the foresight to withdraw the stimulus before the next bubble is formed, unfortunately, there is no historical precedent that supports that claim.  However, with the markets fully inflated, we have reached the point that where even a small exogenous shock will likely have an exaggerated effect on the markets.  There are times that investors can safely “buy and hold” investments – this likely isn’t one of them.


Gold-Investment Demand in China to Advance 10%, ICBC Says June 13, 2012

June 11, 2012

BY: Bloomberg News

Gold-investment demand in China may gain more than 10 percent this year as buyers seek a haven from Europe’s debt crisis and the prospect of weakening currencies, according to the country’s largest bullion bank.

“Investors here want to hold part of their assets in gold to hedge for the risks, especially now that the financial crisis has evolved into a sovereign crisis,” Zheng Zhiguang, general manager of the precious metals department at Industrial and Commercial Bank of China Ltd., said in an interview in Shanghai.

China will topple India this year as the largest bullion market as rising incomes bolster demand, the World Gold Council forecasts. Gold may gain for a 12th year in 2012 as European policy makers strive to avoid a breakup of the euro zone and the U.S. Federal Reserve weighs more stimulus to aid the recovery. Investors in China, facing lackluster equity markets and property curbs, are looking more to the metal, Zheng said June 6.

“It’s necessary for individual, institutional or even government investors to hold gold when the value of money is decreasing at a time of possible quantitative easing or excessive money-printing practices,” said Zheng.

Investment demand in China was a record 98.6 metric tons in the first quarter, 13 percent higher the same period in 2011, according to figures from the producer-funded council. Last year, it climbed 38 percent to 258.9 tons compared with 2010, as overall demand gained 20 percent to 769.8 tons. China’s total gold demand may reach 1,000 tons this year, the WGC has said.

Debt Crisis

Gold for immediate delivery traded at $1,598.02 an ounce at 4:03 p.m. in Shanghai, 2.2 percent higher this year. The price touched $1,526.97 on May 16, the lowest level since December, as Europe’s debt crisis weakened the euro and investors favored increased dollar holdings.

While a stronger dollar may pressure bullion, “I’m optimistic on the gold prices in the long term because of the China demand,” said Zheng. “There are too many uncertainties now in the global economy, politics and the financial sector.”

ICBC represents more than 20 percent of the turnover on the Shanghai Gold Exchange, China’s largest spot market for precious metals, and more than 30 percent of the gold-leasing business in China, according to Zheng. The lender accounted for about 16 percent of nationwide bullion sales last year.

Gold imports by mainland China from Hong Kong climbed 65 percent to a record 103.6 tons in April, according to data from the Census and Statistics Department of the Hong Kong government released on June 5. The increase came even as Lao Feng Xiang Co. (900905), the mainland’s biggest gold-jewelry maker, said in May that gold-demand growth in China may stagnate this year as falling prices put off investors and an economic slowdown crimps sales.

Hurt Exports

The second-largest economy expanded 8.1 percent in the first quarter, the slowest pace in almost three years as Europe’s crisis hurt exports. Should Greece exit the euro, the expansion may slow to 6.4 percent in 2012 without stimulus, China International Capital Corp. said on May 23.

China, which on June 7 announced the first cut in borrowing costs since 2008, has curbed property investments to avoid a bubble. The Shanghai Composite Index (SHCOMP) declined 15 percent in the past year, while spot bullion gained 5.4 percent.

On a three-month basis, gold demand in China eclipsed India’s over the past two quarters, according to the World Gold Council. The increased wealth of China’s middle class is helping to drive consumption,

Albert Cheng, the council’s Far East managing director, said in an interview in May.

Last Resort

Greek voters are set to go the polls for the second time in two months on June 17 in a vote that may determine whether the country stays in the 17-nation euro. Goldman Sachs Group Inc. (GS) said gold remains the so-called currency of last resort, forecasting a rally by year-end, according to a May 9 report.

Spanish Economy Minister Luis de Guindos said on June 9 that he would request as much as 100 billion euros ($126 billion) in emergency loans from the euro area to shore up the country’s banking system.

That, coupled with weekend trade data from China, helped to boost stocks and commodities today.

As China allowed investors to buy and hold gold only in recent years, “there’s explosive, pent-up demand because the Chinese have an attachment to gold,” said Zheng, predicting that growth in investment demand will beat the expansion in jewelry sales. “There’s great potential for expanding China’s physical gold investment market.”