The whirlwind that is CFA has ended, leaving us some time to gather our thoughts, and summarize the ideas shared by some of the speakers we found most interesting.
We had the chance to enjoy a presentation from Randall Kroszner discussing monetary policy from an insider’s perspective. Kroszner is a professor of economics at the University of Chicago, and served as a member of the Board of Governors of the Fed from 2006-2009. His talk, entitled “The Search for Stability: Regulation, Reform, and the Role of Monetary Policy,” highlighted some great information regarding the Fed’s response to the 2008 financial crisis.
For one, in Kroszner’s view Bernanke gets a great deal of credit for being able to sell the Fed’s board of governors on his policies. You see, back in the 1913 when the FED was established (under the Federal Reserve Act) its charter required super majority for fiscal stimulus policies to be implemented, and that meant 5 of the 7 governors. However, the board of governors has had 2 vacancies since the Bush administration – this meant that during the Global Financial Crisis, each and every governor had veto power. No matter what side of the decisions you fall on it sounds like we should all be looking to hire Bernanke to our sales staffs.
The question and answer session also provided a great insight into Kroszner’s thoughts on the unintended consequences of fed balance sheet expansion. In his view, the biggest challenges facing the Fed are twofold – is the Fed willing to act if inflation creeps in, and can the Fed avoid responding to political pressure? Given the role that economic health plays in elections, he foresees a Fed that is going to be subject to much more pressure from those outside, hoping to influence it one way or another.
Post CFA, Kroszner was off to Washington to sit on a Senate Banking Committee panel to discuss Dodd Frank and specifically the Volker Rule. Here is the update from the debate where he and fellow panelists Bob Corker and none other than Paul Volker all agreed that market making should not be considered proprietary trading.
Eugene Fama, professor of finance at the University of Chicago Booth school of Business, shared his perspective on financial research and the global financial crisis. He made the point that the most problematic aspect of the global financial crisis has been the “too big to fail” financial institutions, and the moral hazard created by the government backstop (bailout) and continued low interest rates. In his opinion, the best way to fix the situation is to introduce far higher capital requirements for large financial institutions – 25% or more – to protect from the kind of contagion effect that caused the crisis to quickly spread across the world in 2008.
As far as his recent research, he argues that active management strategies are a zero sum game, because some managers are simply taking alpha from others. As a result, he believes only about 3% of managers will outperform their benchmarks by a large enough margin to make their fees worthwhile, so in his opinion, the best option for most investors is to invest in stock and bond index funds.
Some other interesting points Professor Fama raised: State and local pensions have used overly optimistic forecasting models, assuming a 7-8% return when they should have assumed 2-3%. As a result, he expects some big state pension fund to go bust at some point in the future, necessitating a federal bailout. Professor Fama also prefers a much longer-term view than most, saying that track records of 5-10 years worth of returns are worthless; he believes you need 30+ years to garner any meaningful information from a track record.
Sam Zell, chairman of his private investment firm Equity Group Investments, presented on “Searching the World for Growth: Opportunities in Emerging Markets Real Estate and Infrastructure.” Sporting jeans and a blazer (I guess you can roll like that when you are a billionaire), Zell outlined his views on investing; namely, that it is not nor has it ever been easy. He reminded the crowd to turn right when others are turning left; aim to be a professional opportunist. He also explained that his company would not invest in anything they could not step in and run in a terrible situation. As he put it, his goal is to be the “chairman of everything and CEO of nothing.”
As far as his specific investing strategy, he was in real estate until 1990, shifting to 50% real estate after that and today allocates just 30% to real estate. He was especially heavy in foreign real estate, focusing on growing economies like Brazil and India. What did his experiences there teach him? For one, the importance of surrounding yourself with people who know more about their specific areas of expertise than you. Especially when investing in foreign real estate, he believes you must have a local partner.
His thoughts reminded us of the old adage about not going to an eye doctor for heart surgery. Or, in the case of managed futures investing, don’t go to your mutual fund provider for managed futures advice.