Breaking up is hard to do – Global Central Banks Struggle with Normalization: Event Recap

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By Eric Jacobs, Economics Student at the University of Minnesota

On Wednesday, April 3rd, the CFA Society of Minnesota had the privilege of hosting Marvin Loh, Senior Global Rates Strategist and Emily Weis, Emerging Market Strategist of State Street. Mr. Loh and Ms. Weis presented their ideas on central banks, global custodial flows, investor holdings, and more, in their presentation Breaking up is hard to do – Global Central Banks Struggle with Normalization.

They discussed how, for the first time since the crisis, central bank balance sheets are expected to shrink. However, in this new normal environment for central banks, balance sheets still remain historically high. The G4 bank balance sheet has increased 400% since the crisis. Of the major world banks, the Fed has made the biggest strides in reducing its balance sheet, while the ECB and BOJ still remain high. Yet, going forward, the Fed will begin to wind down its balance sheet selloff practice as they pivot more dovish. In 2021, Mr. Loh believes we will hit an inflexion point and the Fed will begin to expand their balance sheet again, to keep cash levels consistent with excess reserves.

What caused this shift? Market jitters can explain a lot. The volatility from the December 2018 selloff has not been seen since the crisis, and caution remains in the market as recessionary sentiment continues to grow. Also, some market charts may be signaling trouble. GDP growth begins to roll over after two years of gains, and global expectations are beginning to slow.

How did we get this environment? Trend productivity growth and wealth shifting help explain what we are seeing. Productivity has been continuing to fall among developed markets since the mid 1990’s, and when combined with declining aged population growth, this creates adverse effects on real GDP growth. The shift of wealth concentration can also help explain the new environment. In the current environment, labor income as a percent of gross domestic income is declining while corporate profits, as a percent of gross domestic income, rises. The lowest median household income earners are now seeing salary decrease annually. This leads to a decrease in developed market consumption growth. Given this effect, central banks are pushed to policy to replace income with temporary wealth effects, pushing assets into bubbles. Going forward, this leads to slow growth and longer business cycles. In the future, sector stagnation or stagflation may be the next challenge for central banks.

What are investors doing? In the emerging markets, investors are getting back into currencies, however we have yet to see flows back into EM stocks. In the equity market, most investor money is still sitting in domestic markets, and hasn’t made it back to emerging markets.

In fixed income markets, investors are still cautiously watching the yield curve. While inversions have predicted the last seven recessions, there is at least some reason to believe that this time could be different. In the last 7 inversions, 3m-10yr, 2y-10y, and 5y-30y spreads have all inverted before the recession. This has not happened yet, as only the 3m-10y has inverted. Additionally, in each of the last 7 inversions, the Fed continued to tighten the fed funds effective rate. The Fed is predicted not to tighten anymore, as they try to construct a soft landing. When State Street surveyed institutional investors on whether or not this inversion would lead to a recession, 33% didn’t see a recession, 33% saw one within 18 months, and the rest were mixed in the 3-12 month range. In short, institutional investors are still split on what this current inversion means.

Fixed income investors are buying U.S. treasury bonds across all maturities. From a holdings perspective, investors are holding the ends of the curve, possibly creating upside on the 3-7 year maturities. Emerging markets bonds are also seeing increased capital flows. In currencies, The US dollar is currently in a weaker position compared the DM currencies, but still remains one of the best risk hedges. The Euro remains on the low end of its average, but if Brexit goes relatively smoothly there is upside.

WIIF Women in Investment & Finance: a swing and a miss – a series exploring why companies aiming for diversity are striking out

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A Student Perspective

My name is Bridget Murphy and I am a senior studying accounting and finance at Bethel University in Saint Paul, Minnesota.

I had the privilege to compete in the 2019 Midwest Regional CFA Research Challenge, where my team and I presented our hold recommendation on a biotechnology company that we had researched over a period of five months. During this time, we examined the company’s financials, management team, and business strategy as well as the competitiveness and risks of the industry as a whole. The opportunity to compete in this challenge was immensely beneficial to me. Compiling a research report on a complex company allowed me to apply my knowledge from almost all of my business classes into one project. Even though this was an investment report, I was able to use my accounting background to provide a new way of looking at things. My favorite part about competing was being able to work alongside my team and bring all of our different ideas together into one comprehensive report.

I decided to participate in this competition to step outside of my comfort zone. Though one of my majors is finance, I am going into the public accounting field, and after graduation (spring 2019) I will be working at an accounting firm as an auditor. Even so, I recognized that getting more experience in finance would be beneficial to my learning and push me to explore all my options. Working on this project allowed me to understand what finance has to offer. It gave me hands-on experience of the technical knowledge I have gained in my courses at Bethel.

My team was comprised of five individuals, and I was the only female. I was also the only female competing in the regional finals. Though I have gotten used to being the only, or one of a few, females in my business courses, I was very surprised that I was the only one among all five teams presenting at the CFA Research Challenge. Before this experience, I was aware that finance was a male-dominated field, but had not personally experienced it. Being the only female was a bit discouraging. At the beginning of my college career I will admit that, at times, I felt intimidated to be surrounded by males in my finance courses. However, as I gained knowledge and started to understand what I was learning, I was no longer intimidated. I am also very lucky to have supportive professors who instilled in us that we have a voice and we are equal. Through school and internship experiences, I have met many women who I consider to be role models, and they encourage me to work my hardest and push through trials. I would encourage women who are thinking about majoring in finance to not be intimidated, and to step outside their comfort zones. I believe that women will continue to pursue finance as more women already in the field continue to share their experiences and strengths with others.

#changingperceptions

Are you interested in contributing a blog to this important series? E-mail Diane at support@cfamn.org to volunteer.

WIIF Women in Investment & Finance: a swing and a miss – a series exploring why companies aiming for diversity are striking out

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Spring Training

Spring is nearly here. In spite of the seemingly never-ending snow and cold, the days are getting longer, and the sun just a bit brighter. With a new season just around the corner, optimism is in the air. There is always so much hope in the beginning – so many promises, so much potential, young rising stars, and real progress seems just around the corner. And then – WIIF! We are hit smack in the face with reality.

I am speaking, of course, about another International Women’s Day. Another year where we proclaim the importance of expanding diversity in the investment business, diversity in executive ranks. We women all march off to our conferences where we learn about the many ways in which we are inhibiting our own careers. We listen to inspirational stories from incredible women who have succeeded against the odds. We learn yet again how important diversity is to organizations, as they affirm their commitment to our careers.

And yet the numbers are not budging. According to research by the New York Times women represent just 10% of portfolio managers. CFA Society Minnesota’s own numbers show the number of women who hold a CFA remains stuck in the teens. We have adopted this notion that we just need to introduce women to the business sooner, we need to make them aware earlier. If we could just let them know when they are Sophomores in college, First years, high school students, toddlers. None of that explains, though, why boys somehow figure out there are good career options, and girls don’t.

Maybe girls are not stupid. They are, perhaps, responding appropriately to the very limited set of career options they see as available to them. The are rejecting a culture that appears to them to herald The Wolf of Wall Street, a frat-ish atmosphere that seems anything but welcome. They are reminded of the sense of powerlessness that haunts so many of them in so many ways as they realize what the world has in store for them.

If we expect girls to embrace opportunities in the investment business, they need to see that there is a future for them. They need to see powerful, smart intelligent women succeed in the business – not because they need role models, but because they need to believe that success is possible. It’s hard to see that success is possible when for women, it has been so rare.

Here’s my suggestion for demonstrating that success is possible: Hire and promote talented senior women. We are all weary of hearing that “the women just aren’t there.” Go out and find them.  The last time your organization had a senior opening, what did you do to identify a diverse candidate? Was any compensation or bonus tied to success in finding diversity? Did anyone work on a strategy for identifying diverse talent? Did you do anything different from your normal process? If nothing different is attempted, it’s hard to imagine different results.

This is a country that has put a man on the moon. We carry computer/television/phone/gps tracking devices in our pockets. We have developed a pillcam to take pictures of the small intestine, antibacterial nanoparticles, autonomous vehicles. But somehow, we are unable to figure out how to hire diverse candidates to manage our portfolios? This is not even plausible, and lays bare the insincerity of the effort.

It’s time to stop pretending that you want diversity, while doing nothing about it. If you say you want to succeed in this game, then take a swing. Every strike will bring you closer to the next home run.

#changingperceptions

Are you interested in contributing a blog to this important series? E-mail Diane at support@cfamn.org to volunteer.

CFA Society Minnesota Annual Dinner Recap

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By Claire Underhill, undergraduate Finance major at the Carlson School of Management. Claire is also on the Healthcare team of the Carlson Growth Equity Fund, and has been involved with the program on a volunteer basis for over a year. 

The 2019 CFA Society Minnesota Annual Dinner featured a conversation with author Bethany McLean, moderated by Andrew Rem, CFA (CFA Society of Minnesota Board member), and aided by Past President Josh Howard, CFA. McLean is currently a contributing editor at Vanity Fair, and has also written multiple books such as “The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron.” The evening featured a wonderful discussion as McLean tracked the progression of her career from starting as an analyst at Goldman Sachs, to joining Fortune Magazine as a fact-checker, which ultimately led to her first novel and current role.

Her latest work, “Saudi America: The Truth about Fracking and How It’s Changing the World,” explores the economics around fracking. McLean is skeptical of the drive for energy independence, and makes the case for how fracking might change the geopolitical landscape – though not in the way you might think.

Throughout her career, Mclean has documented multiple instances of business gone wrong and has learned a few things about what she calls “the progression of rationalization.” She talked about the need we have as a society to find who the bad guys were in the wake of crisis, and punish those responsible. Oftentimes, though, the world is not so clear-cut. The line between a visionary and a fraudster can become blurred by the complex human drama and emotions that naturally surround the process of building something innovative. McLean’s key tool in deciphering these dramas? Curiosity. When asked about how she gets people to talk to her, McLean stated that being genuinely interested in what people have to say goes a long way. Through this approach, McLean has developed a unique lens for people who have crossed ethical lines. Good people taking gambles to cover-up for their last mistake. Powerful culture that inflates egos.  

What can be done to fix these problems? McLean said the challenge with regulation is that it is always backward looking and often lacking in imagination. Regulators are always stuck trying to fix yesterday’s problems without the ability to predict what might happen next. Furthermore, even if all accidents are prevented, McLean argues that creativity would also leave the system. This system has failed in front of McLean many times, yet she still views business as a signal of hope. After spending so much time writing about unethical behavior, McLean describes herself as a skeptic, not a cynic, and loves to see the transformative power that business can have in a community.

Managing Me Event Recap

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By Matt Chruscielski, Society intern, recent University of St. Thomas MBA graduate and CFA level III candidate

It’s a new year which means it’s time for resolutions to become better versions of ourselves. One thing I’m sure we all struggle with is managing our time. Much like losing ten pounds, it’s something many of us want, but few achieve. Balancing time between family, career and ourselves can seem like we are on a treadmill repeating the same steps over and over without getting closer to our long-term goals. In the Managing Me session put on by CFA Society Minnesota last week, University of Minnesota, Carlson School of Management Professor, Arthur Hill, talked about how it is possible to identify the trivial things that eat up our time. Time that could be spent doing the important tasks on our to-do list.

In the hour session, Professor Hill led an engaged audience through an interactive presentation on the six steps to better manage ourselves: aim, sort, select, do, review and break, all summarized below. Professor Hill’s process encourages one to write on sticky notes to help visualize the steps and ideas, because what’s in our heads does not seem as daunting once it is written down.

Aim: Define roles and responsibilities. Set daily, weekly monthly and longer-term goals that are regularly assessed. Schedule more difficult tasks early in the day and save easier or favorite tasks for later making up energy with passion.

Sort: Process inputs through filters to assess when to respond. Professor Hill described six filters related to how valuable, actionable, incremental, outsourceable, timely and capable the input is along with a filter for new projects.

Select: Use goals to pick the best task from the list. Only consider tasks that we have the time, energy and tools to do in the present. Prioritize tasks based on importance and urgency. Avoid multitasking when we are trying to complete a task that has a high cognitive demand.

Do: Complete selected tasks with focus and discipline. Focus on just a few goals. Take breaks but avoid distractions and interruptions as it can take up to ten minutes to get fully focused once disturbed. Avoid reading emails first thing in the morning. Emails can quickly derail a day as some of the audience attested to having over a thousand emails unread emails that day.

Review: Reflect, evaluate, celebrate and improve. This is to help with Aim. Did we take a step closer to goals this day, week, month? What did we learn? How can we improve? This is where we can keep track of our habits and create new ideas the next time we Sort. Don’t forget to celebrate reinforcing the good habits we want.

Break: Take breaks to recharge both at and away from work. We need to take regular breaks to replenish our attention and refresh our energy throughout the day. Pursue activities that boost energy. When away from work, really unplug. Don’t sneak a peek at the work email. Live in the moment and enjoy the time with family and friends. Work on a hobby or new skill to keep the mind fresh.

Overall, the session provided helpful tips and tools, and will hopefully allow for better time management in 2019. As Professor Hill said, “we are all guilty of letting ourselves get overwhelmed by the amount of noise in our lives which is why it is so important to have someone teach us how to filter out the small things so that we can focus on what really matters.” Judging by the large crowd in attendance it seems we all can use a friendly reminder now and then.