Brad Zigler

Inflation to the Right, Inflation to the Left

Readers of Hard Assets Investors' daily column "Brad's Desktop" (www.hardassetsinvestor...) have been following gold's progress. The most recent update ("Gold's Price Brings Out Buyers" at www.hardassetsinvestor...) looked to the options market for pricing clues.

The short-term technical picture: if the 100-day support was taken out, a test of the 50% retracement (October-February rally) at $849 would be set up.

If support holds, there's likely more trading range ahead until fresh shocks are felt.


On Apr 07 11:18 PM tb1975 wrote:

> gold, like your article, has reached a pivotal point....so, what's
> your conclusion? What happens if it fails $870? Stays above?
>
> Wanting More,
> Your reader

Inflation to the Right, Inflation to the Left

We actually DO keep an eye on bread prices at Hard Assets Investor (HAI). And a lot of other staples for your table.

To go with your morning reading of the monthly Consumer Price Index (CPI) data, HAI publishes its "Breakfast Index," an indicator that tracks price trends in eight commonly consumed breakfast items (wheat, pork bellies [bacon], coffee, sugar, orange juice, cocoa, milk and butter).

Think of the Breakfast Index as the Distant Early Warning line for inflation/disinflation to come. The last edition ("Inflation's Sweet Side" at www.hardassetsinvestor...) clocked a continuing decline in wheat prices.

There are limitations with metrics like the Breakfast Index and the CPI, though. They're both trailing measures, giving you a look at past price behavior, with a month's lag to boot.

For a real-time measure of MONETARY (not price) inflation, we publish a daily rate as the subhead to each "Brad's Desktop" column (www.hardassetsinvestor...). You'll note the current rate at the top of article above.

That rate may seem high compared to the most recently published CPI figures, but you have to remember that the rate of currency devaluation against your self-avowed monetary standard--gold--is metered here, not the trend in consumer prices.

An explanation of the methodology behind the real-time indicator can be found in the HAI article "A New Low ..." at www.hardassetsinvestor...).

On Apr 08 01:17 AM psig wrote:

> Sure, inflation is coming but how much. Most gov'ts like the 5 to
> 6 per cent range and will accept more because it helps their debt.
> When you owe 12 trillion and run the printing presses on high speed
> like the U.S. is going to do what will happen? Can't be anything
> good.
> An oz. of gold has always bought approx. 600 loaves of bread. Thats
> what it did 2000 yrs ago and thats about what it does today. If a
> loaf of Wonder bread goes to .75 then gold will be about 450. Its
> more likely to go the other way once the pressure is on within a
> year or two and the higher it goes the more temptation there is for
> gov't confiscation not that it would do much good but when did that
> stop the gov't. Keep an eye on bread prices.

The Case for Indexing - More Evidence

Very few investors will become cognizant of the true costs of active management unless market observers and pundits start using metrics like Miller's.

Most, however, shun the mention of such yardsticks for fear of confusing investors.

Take the instance described in the Journal of Indexes back in 2006:


Journal of Indexes - January/February 2006

www.indexuniverse.com/...

The Curmudgeon
By Brad Zigler

"Hooray for 'new math'...
It's so simple,
So very simple
That only a child can do it!"

-Apologies to Tom Lehrer

Now, I'm not one to complain, but this column didn't get named Curmudgeon for nothing.

Readers of the November 2005 issue of Money magazine were treated to an article by Jason Zweig on the innovative work of Ross Miller, a risk consultant and finance professor at the State University of New York. Specifically, Zweig took aim at Miller's recently published paper (1) offering a novel, and mathematically simple, way to measure the true cost of active management by mutual funds.

Miller contends that a fund's variability-and its costs-can be parsed into active and passive components to better gauge a manager's value.

So, what's the problem?

Well, while Zweig acknowledged the sensibility of Miller's approach, he ends up pooh-poohing Miller's work because "the underlying math is too unwieldy."

Now what's so unwieldy about:

(See Web article at URL above for math formula)

As Miller puts it: "If you can use the memory function of your hand-held calculator, you can derive a portfolio's active weight." And with that in hand, he says, a fund's active expense ratio-the "true cost" of alpha seeking-and its active alpha can be readily derived. So basically, all you need to start peering under a fund's hood is its r-squared correlation cheerfully supplied by Morningstar or some other data vendor and your battery powered slipstick. How unwieldy is that?

By Miller's calculus, for example, about 26 percent (2) of TIAA-CREF's actively managed Mid-Cap Value Fund (TRVRX) has mimicked its Russell Midcap Value benchmark this year.

Knowing that, our 'new math' allows us to concentrate the fund's excess cost-that is, the premium over the cheapest available index fund's expenses-on the actively managed portion of the portfolio to come up with the ex-beta cost of 115 basis points. That's more than twice the fund's then-advertised ratio of 48 bps.

There's sense in knowing this. Why would anyone want to pay full boat for market tracking, after all, if there are cheaper options available?

Zweig says, "Miller's measure isn't ready to replace the cost standard we all use."

We all use?

Well, we all used horses as our primary means of transport once.

More properly, I think, pundits like Zweig aren't ready to give up the buggy whip of fund-manufactured data. Miller's math offers fine detail about the operation of funds that many portfolio runners would like to keep hush-hush.

Oddly enough, index fund managers may have the most to hide. Let's go back to TIAA-CREF for an example. In addition to the actively managed TRVRX portfolio, TIAA-CREF also offers a passive portfolio-TRVUX-which tracks the Russell Midcap Value Index. Over the past few months, TRVUX's r-squared coefficient has been .9958, which seemingly makes the fund a doppelganger for the Russell benchmark (TRVRX's contemporaneous correlation was .8946).

Miller's math, however, tells us that a sliver-six percent-of the portfolio is gamed. This intuitively makes sense when you consider that some dodging and weaving must be done by the fund's managers to avoid being picked off when index reconstitutions force them into the market to buy and sell holdings.

Our calculus now allows us to readily quantify the price of index portfolio gamesmanship. If an active weight of six percent is "normal," we should be able to easily tell when an index manager develops wanderlust.

More importantly, we can see how much that ticket costs. TRVUX's active expense ratio is 338 basis points, nearly eight times its published cost. Active management "around the edges," it seems, can be very costly.

Now where'd I put my calculator?

Endnotes:

(1) Measuring the True Cost of Active Management by Mutual Funds at papers.ssrn.com/abstra...= 746926.
(2) Based on weekly data, February 22 -November 18, 2005.

The Case for Indexing - More Evidence

Very few investors will become cognizant of the true costs of active management unless market observers and pundits start using metrics like Miller's.

Most, however, shun the mention of such yardsticks for fear of confusing investors.

Take the instance described in the Journal of Indexes back in 2006:


Journal of Indexes - January/February 2006

www.indexuniverse.com/...

The Curmudgeon
By Brad Zigler

"Hooray for 'new math'...
It's so simple,
So very simple
That only a child can do it!"

-Apologies to Tom Lehrer

Now, I'm not one to complain, but this column didn't get named Curmudgeon for nothing.

Readers of the November 2005 issue of Money magazine were treated to an article by Jason Zweig on the innovative work of Ross Miller, a risk consultant and finance professor at the State University of New York. Specifically, Zweig took aim at Miller's recently published paper (1) offering a novel, and mathematically simple, way to measure the true cost of active management by mutual funds.

Miller contends that a fund's variability-and its costs-can be parsed into active and passive components to better gauge a manager's value.

So, what's the problem?

Well, while Zweig acknowledged the sensibility of Miller's approach, he ends up pooh-poohing Miller's work because "the underlying math is too unwieldy."

Now what's so unwieldy about:

(See Web article at URL above for math formula)

As Miller puts it: "If you can use the memory function of your hand-held calculator, you can derive a portfolio's active weight." And with that in hand, he says, a fund's active expense ratio-the "true cost" of alpha seeking-and its active alpha can be readily derived. So basically, all you need to start peering under a fund's hood is its r-squared correlation cheerfully supplied by Morningstar or some other data vendor and your battery powered slipstick. How unwieldy is that?

By Miller's calculus, for example, about 26 percent (2) of TIAA-CREF's actively managed Mid-Cap Value Fund (TRVRX) has mimicked its Russell Midcap Value benchmark this year.

Knowing that, our 'new math' allows us to concentrate the fund's excess cost-that is, the premium over the cheapest available index fund's expenses-on the actively managed portion of the portfolio to come up with the ex-beta cost of 115 basis points. That's more than twice the fund's then-advertised ratio of 48 bps.

There's sense in knowing this. Why would anyone want to pay full boat for market tracking, after all, if there are cheaper options available?

Zweig says, "Miller's measure isn't ready to replace the cost standard we all use."

We all use?

Well, we all used horses as our primary means of transport once.

More properly, I think, pundits like Zweig aren't ready to give up the buggy whip of fund-manufactured data. Miller's math offers fine detail about the operation of funds that many portfolio runners would like to keep hush-hush.

Oddly enough, index fund managers may have the most to hide. Let's go back to TIAA-CREF for an example. In addition to the actively managed TRVRX portfolio, TIAA-CREF also offers a passive portfolio-TRVUX-which tracks the Russell Midcap Value Index. Over the past few months, TRVUX's r-squared coefficient has been .9958, which seemingly makes the fund a doppelganger for the Russell benchmark (TRVRX's contemporaneous correlation was .8946).

Miller's math, however, tells us that a sliver-six percent-of the portfolio is gamed. This intuitively makes sense when you consider that some dodging and weaving must be done by the fund's managers to avoid being picked off when index reconstitutions force them into the market to buy and sell holdings.

Our calculus now allows us to readily quantify the price of index portfolio gamesmanship. If an active weight of six percent is "normal," we should be able to easily tell when an index manager develops wanderlust.

More importantly, we can see how much that ticket costs. TRVUX's active expense ratio is 338 basis points, nearly eight times its published cost. Active management "around the edges," it seems, can be very costly.

Now where'd I put my calculator?

Endnotes:

(1) Measuring the True Cost of Active Management by Mutual Funds at papers.ssrn.com/abstra...= 746926.
(2) Based on weekly data, February 22 -November 18, 2005.