Monthly Archives: June 2014

How is the Bond Market Like a Roach Motel?

check out any timeThis posting about The Bond Trap by Peter Schiff of Euro Pacific Capital tells how the American financial establishment has an incredible ability to celebrate the inconsequential while ignoring the vital. Last week, while the Wall Street Journal pondered how the Fed may set interest rates three to four years in the future (an exercise that David Stockman rightly compared to debating how many angels could dance on the head of a pin), the media almost completely ignored one of the most chilling pieces of financial news that Peter has ever seen.

The Bond Trap ,June 23, 2014
by Peter Schiff of Euro Pacific Capital

The American financial establishment has an incredible ability to celebrate the inconsequential while ignoring the vital. Last week, while the Wall Street Journal pondered how the Fed may set interest rates three to four years in the future (an exercise that David Stockman rightly compared to debating how many angels could dance on the head of a pin), the media almost completely ignored one of the most chilling pieces of financial news that I have ever seen. According to a small story in the Financial Times, some Fed officials would like to require retail owners of bond mutual funds to pay an “exit fee” to liquidate their positions. Come again? That such a policy would even be considered tells us much about the current fragility of our bond market and the collective insanity of layers of unnecessary regulation.

Recently Federal Reserve Governor Jeremy Stein commented on what has become obvious to many investors: the bond market has become too large and too illiquid, exposing the market to crisis and seizure if a large portion of investors decide to sell at the same time. Such an event occurred back in 2008 when the money market funds briefly fell below par and “broke the buck.” To prevent such a possibility in the larger bond market, the Fed wants to slow any potential panic selling by constructing a barrier to exit. Since it would be outrageous and unconstitutional to pass a law banning sales (although in this day and age anything may be possible) an exit fee could provide the brakes the Fed is looking for. Fortunately, the rules governing securities transactions are not imposed by the Fed, but are the prerogative of the SEC. (But if you are like me, that fact offers little in the way of relief.) How did it come to this?

For the past six years it has been the policy of the Federal Reserve to push down interest rates to record low levels. In has done so effectively on the “short end of the curve” by setting the Fed Funds rate at zero since 2008. The resulting lack of yield in short term debt has encouraged more investors to buy riskier long-term debt. This has created a bull market in long bonds. The Fed’s QE purchases have extended the run beyond what even most bond bulls had anticipated, making “risk-free” long-term debt far too attractive for far too long. As a result, mutual fund holdings of long term government and corporate debt have swelled to more $7 trillion as of the end of 2013, a whopping 109% increase from 2008 levels.

Compounding the problem is that many of these funds are leveraged, meaning they have borrowed on the short-end to buy on the long end. This has artificially goosed yields in an otherwise low-rate environment. But that means when liquidations occur, leveraged funds will have to sell even more long-term bonds to raise cash than the dollar amount of the liquidations being requested.

But now that Fed policies have herded investors out on the long end of the curve, they want to take steps to make sure they don’t come scurrying back to safety. They hope to construct the bond equivalent of a roach motel, where investors check in but they don’t check out. How high the exit fee would need to be is open to speculation. But clearly, it would have to be high enough to be effective, and would have to increase with the desire of the owners to sell. If everyone panicked at once, it’s possible that the fee would have to be utterly prohibitive.

As we reach the point where the Fed is supposed to wind down its monthly bond purchases and begin trimming the size of its balance sheet, the talk of an exit fee is an admission that the market could turn very ugly if the Fed were to no longer provide limitless liquidity. (See my prior commentaries on this, including may 2014’s Too Big To Pop)

Irrespective of the rule’s callous disregard for property rights and contracts (investors did not agree to an exit fee when they bought the bond funds),the implementation of the rule would illustrate how bad government regulation can build on itself to create a pile of counterproductive incentives leading to possible market chaos.

In this case, the problems started back in the 1930s when the Roosevelt Administration created the FDIC to provide federal insurance to bank deposits. Prior to this,consumers had to pay attention to a bank’s reputation, and decide for themselves if an institution was worthy of their money. The free market system worked surprisingly well in banking, and could even work better today based on the power of the internet to spread information. But the FDIC insurance has transferred the risk of bank deposits from bank customers to taxpayers. The vast majority of bank depositors now have little regard for what banks actually do with their money. This moral hazard partially set the stage for the financial catastrophe of 2008 and led to the current era of “too big to fail.”

In an attempt to reduce the risks that the banking system imposed on taxpayers, the Dodd/Frank legislation passed in the aftermath of the crisis made it much more difficult for banks and other large institutions to trade bonds actively for their own accounts. This is a big reason why the bond market is much less liquid now than it had been in the past. But the lack of liquidity exposes the swollen market to seizure and failure when things get rough. This has led to calls for a third level of regulation (exit fees) to correct the distortions created by the first two. The cycle is likely to continue.

The most disappointing thing is not that the Fed would be in favor of such an exit fee, but that the financial media and the investing public would be so sanguine about it. If the authorities consider an exit fee on bond funds, why not equity funds, or even individual equities? Once that Rubicon is crossed, there is really no turning back. I believe it to be very revealing that when asked about the exit fees at her press conference last week, Janet Yellen offered no comment other than a professed unawareness that the policy had been discussed at the Fed, and that such matters were the purview of the SEC. The answer seemed to be too canned to offer much comfort. A forceful rejection would have been appreciated.

But the Fed’s policy appears to be to pump up asset prices and to keep them high no matter what. This does little for the actual economy but it makes their co-conspirators on Wall Street very happy. After all, what motel owner would oppose rules that prevent guests from leaving? The sad fact is that if investors hold bond long enough to be exposed to a potential exit fee, then the fee may prove to be the least of their problems.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

© Euro Pacific Capital

Did you know there is more inflation than you think?

babycompassI first noticed this phenomena when my kids were in diapers- P&G would keep the price the same but the package and its contents kept getting smaller. Imagine that this happens more and more in your purchasing life. Isn’t it really the same as getting the same quantity at a higher price? Well you don’t have to imagine it because it’s happening to you in fact.

kleenexToilet-Tissue ‘Desheeting’ Shrinks Rolls, Plumps Margins*
… [E]ach box has 13% fewer sheets than before.
Consumer products makers call this “desheeting”—reducing the number of sheets of toilet paper or tissues in each package while holding retail prices constant.
… companies, particularly in the food business, have long shrunk packages as an alternative to hiking prices in the face of higher raw-material costs. … [A] regular Snickers bar now weighs 1.86 ounces, down from 2.07 ounces in the past, which Mars says was done to cut calories to 250 per bar. Tropicana Pure Premium orange juice is now sold in 59 ounce bottles, versus 64 ounce cartons prior to 2010. Prices of eucalyptus pulp, a key material for Kimberly-Clark, are up 3% this year, while prices of another kind of virgin pulp known as Northern bleached softwood kraft are up 9%, according to a Barclays report.


courtesy of North Peak Asset Management

Susan Scheide

Her Surprising Claim to Fame! Meet Office Manager Susan Scheide

Every firm has people who operate largely behind the scenes. People who, on a daily basis, make things happen and keep an office running. At Compass Capital, we have a lot of Trusted Financial Advisors, and some staff. I am one of those staff.

This past year, I have been writing a series of “get to know us” profiles for our company’s blog. We thought it might be time to share my story with you. So here goes! This is the story of me, Susan Scheide, the one who sends you your quarterly client mailings.

I was born in West Hartford, Connecticut where I lived until age 10, when we moved to Rolling Hills, California. I am the youngest of three, and have two older brothers.

Rob, Bill, and Susan Scheide circa 1962

Rob, Bill, and Susan Scheide circa 1962

It was a pretty big deal, moving three kids and two dogs to California, but the entire family absolutely loved living in Southern California. While there, I took up horseback riding, and we purchased two horses. Within three years of first sitting on a horse, I was town champion of the 13-17 year olds.

Susan and Kate, 1974 (yes, we won!)

Susan and Kate, 1974 (yes, we won!)



Our house was never without a dog. In fact when our dog Sam died at the age of 15, my father vowed never to have fewer than two dogs, as it was too painful for him to be without a dog. Our dogs were primarily hunting dogs, but we did have a show dog that was fairly successful, who fathered a litter of pups.

After four fun filled years in California where I met and started dating a former child television star (Mike Lookinland, TV’s “Bobby Brady” and I dated for three years—my claim to fame!), my father gave us the exact same speech about “If you could live anywhere, where would it be?” that he had given us four years earlier, and told us we were moving to Dover, Massachusetts.

Susan Scheide & Mike Lookinland

Susan and Mike Lookinland, 1976, Nantucket

Let me tell you, the attitude of three kids moving from West Hartford, CT to Southern California is very different from the attitude when you tell those same three kids they’re moving to Dover, Massachusetts! But Dad had been made an offer by the now-defunct New England Merchants Bank, and it was too good to pass up, so my parents moved three teenagers, four dogs, and two horses 3,000 miles back east.

Susan and brothers; dogs Madaket, Bo, Abby, and Jeb

Susan and brothers; dogs Madaket, Bo, Abby, and Jeb

Partly due to the move, I ended up attending four different high schools. In fact, I was in ninth grade for two years, and skipped eleventh grade entirely! My schools were Chadwick, in California; Dana Hall, in Wellesley, MA; Westminster, in Simsbury, CT (my father’s school); and Dover-Sherborn Regional High.

I attended the University of Massachusetts in Amherst, and graduated with a B.A. in English. I had entered the university as an animal science major, but just didn’t do well enough in chemistry to proceed on to my dream of going to vet school. I spent my college summers working at a YMCA camp in Lakeville, CT where I taught children how to ride horses. It was a lot of fun, but the pay was really bad! In 1983, when I graduated, trying to get a job with an English degree and no experience at anything other than teaching horseback riding was near impossible. So I went to the Katharine Gibbs school and learned how to type, file, and take stenoscript.

And that’s how I met Tim Shanahan in 1984. My first job (with A.C. Nielsen) didn’t work out, so I had gone to the placement office of Katharine Gibbs looking for a new job. Tim was just starting Compass Capital Corporation, and he knew from experience that Katy Gibbs Girls were the best, and placed his office manager job listing with them. Tim enrolled me in the College for Financial Planning’s ParaFinancial Planner program and I was one of the first (and maybe the last as well) in the US to earn the ParaFinancial Planner certificate. Those of you who read the prior blog entry about “Tim and Me” will know that I worked for Tim for a year before moving on, but returned about 12 years ago for this, my second stint at Compass. Between my first and second times with Compass, I spent several years with Price Waterhouse, and 10 years at Middlegreen Associates in Boston. During my time at Middlegreen, I attended night school at Bentley, and earned my certificate in Computer Information Systems, with honors.

I live in Canton, MA, not too far from Tim. I have a retired racing Greyhound, George

Susan and George, 2014

Susan and George, 2014

(formerly known as Driven by Chile when he raced at Raynham Park for three years), an Oriental Shorthair cat named Mister Bigglesworth (also known as You Little Bastard, as he is a very active and somewhat naughty cat) and a Siamese named Ming that I adopted at the age of 11 when his owner passed away. Anyone interested in discussing Greyhound adoption should contact me through my Facebook page. I enjoy relaxing with my pets, gardening, writing, and what small DIY projects I can come up with in my small condo. I am also a huge NFL and PGA Tour fan. I am very active fundraising for “The Greyhound Health Initiative,” that helps fund the work of a canine cancer researcher who has a special interest in Greyhounds, Dr. Guillermo Couto.

I have worked in the financial services field since my first go-round at Compass in 1984. I find I have a knack for paperwork and office management. Something no one ever really aspires to, but something that is very necessary. I also seem to be able to figure out most any office equipment, technology, and web issues. That too is something no one grows up dreaming of doing, but it needs to be done and makes me a valued part of the Compass team.

I feel fortunate to be at Compass. Not only do I have ready access to all kinds of experts on many topics that I am NOT an expert in, I have seen first hand how a firm can grow through hard work, determination, and by providing a service that people need in a way that truly helps them.