Japan and the “all in” bet…

Some of our older readers may remember the 1980’s for more than discos and recreational drugs. In fact, they may recall the emergence of Japan as a growing power player in an increasingly globalized economy. At the time, Japan was making money hand over fist exporting cheap consumer products to American consumers hungry for a Datsun 240 Z, a Sony Walkman, or a Nintendo. The rush of cash filled the coffers of Japanese corporations and eventually made Japan the third largest economy in world. On the way, wealthy Japanese investors acquired iconic U.S. real estate and entertainment companies (Empire State Building and Columbia Pictures). Amazingly, this was all accomplished less than 50 years after an atomic bomb left Japan decimated. It’s no wonder this is referred to as the post-war miracle!

This economic miracle was built on an export model whereby Japan invested heavily in education, research, and manufacturing – all paid for by an accommodative monetary policy of credit creation at artificially low interest rates. Continued accommodative monetary policy kept the Yen from appreciating against foreign currencies, which sustained years of expanding exports and GDP growth. However, competitive products and changes in consumer behavior brought an end to Japan’s export supremacy and GDP growth began to wane. Unfortunately, without expanding exports and GDP growth, Japan’s credit-driven export model failed to support a Japanese economy that had become dependent on this winning formula. Today Japan has the highest debt-to-GDP (238%) of any developed country, a depreciating currency, and trade deficits at record highs. Exacerbating the situation is a demographic imbalance where 25% of the population is elderly and adult diapers surpass those of baby diapers – an equation that does not bode well for a growing workforce that supports an increasingly aging populace. One might argue that the government might do well to pay people to have babies, but even this would take at least a generation to yield benefits.

The Japanese financial challenge didn’t sneak up on anyone, least of all the Japanese people who have voted for a leadership change eight times since 2006 in hope of finding a solution. The latest Prime Minister, Shinzo Abe, introduced Abenomics at the end of 2012, his version of the quantitative easing policy promulgated by Ben Bernanke and a growing list of developed-country central bankers. While U.S. economic growth has picked up (some argue that continued QE has actually dampened economic growth), Japanese economic growth has been non-existent over the past four years and a deflationary mindset seems embedded in Japanese consumers. With mounting political and financial pressure, Japan announced a stimulus plan on October 31st that shocked the financial markets (no hyperbole intended). The scope and scale of the proposed stimulus is triple the size of the Bernanke/Yellen plan of Quantitative Easing (QE) on a relative basis. As such, some consider Japan’s plan to stimulate their economy to be “desperate” and tantamount to an “all-in” bet, while most consider the plan “extreme” relative to even the most radical of stimulus plans offered by other advanced economies over the past several years.

The announced plan calls for Japan’s central bank and main government pension fund to inject trillions of Yen ($1.4 trillion) into their economy in less than two years. Moreover, the liquidity injection would be used to buy not just bonds, but stocks and real estate as well. The numbers and timing are astounding. Japan’s central bank will be purchasing the equivalent of more than twice the amount of new bonds issued by the government, which means that they will be purchasing existing bonds in the open market, many of which will be bonds held by Japan’s $1.1 trillion Government Pension Investment Fund (GPIF). The GPIF announced that its sale of bonds would reduce its bond allocation to 35% from 60%, with the proceeds being used to more than double their equity allocation from 24% to 50%, equally split between Japanese and foreign stocks. In addition, the BOJ will triple its annual purchases of ETFs and other equity securities. The announcement moved the Nikkei Stock Average 7% higher on the week and the S&P 500 to an all-time high – and Japan hasn’t even begun their new bond and stock buying program. Increasing their equity allocation by 100% would be considered aggressive by any standard. To do so with the equity markets so far off their lows and some at their all-time highs provides an understanding of the term “desperate.” Moreover, the Japanese central bank is making an “all-in” bet that this stimulus plan will boost growth, lift inflation expectations, and end two decades of stagnation.

It is interesting to note that this historic and radical monetary stimulus plan was not unanimously decided upon by the Bank of Japan, but rather a split decision with four of the nine BOJ decision makers dissenting. The success of Japan’s stimulus plan will be judged over the months and years to come. However, in the meantime the Yen will continue to depreciate, which reduces real wages further – a trend directly counter to increased spending and GDP growth. We are highly skeptical of the success of the reflationary efforts of the BOJ and, as such, we are 50% underweight Japan equities relative to the MSCI All Country World Index.

David Post
Chief Investment Officer

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This market commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client’s specific financial needs and objectives, goals, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

Scams Spread In Wake of Ebola Fears

This piece was posted on November 6th, 2014 on http://freep.com by Ziati Meyer, Detroit Free Press Staff Writer. Telemus Capital Partner and Senior Advisor, Lyle Wolberg, comments on how to react to the current Ebola situation.
(This Opinion piece presents the opinions of the author. It does not necessarily reflect the views of Telemus Capital, LLC)

Scams Spread In Wake of Ebola Fears

Hey, have I got a stock tip for you! It’ll make you millions of dollars in no time.

There’s this drug company that has discovered a cure for Ebola —

Stop right there. It’s a scam.

Experts are warning the public not to fall for get-rich-quick schemes like this, or for pitches by fly-by-night charities, claiming to aid Ebola victims.

The North American Securities Administrators Association found about 1,200 websites included “Ebola” in the domain name — from hotebolastocks.com and ebolafutures.com to ebolainvesting.com and fundsforebola.com — and about 15% of the organizations have identified as suspicious.

“What the scammers are looking for is to convince people they’re going to make a lot of money in a short period of time. Our thought on this is if it’s too good to be true, it probably is,” said Lyle Wolberg, partner and senior adviser at Telemus Capital in Southfield.

“Scammers rely on the fact that emotions and money usually are tied together and the greed factor is big part of these get-rich-quick cons.”

And even if there were a major Ebola breakthrough about to rock the pharmaceutical world you wouldn’t find out about via your junk folder.

“There are laws and regulations regarding insider trading. If an established company has a cure for some sort of disease, they’re going to publish that as soon as possible to get their stock price to go up. It’s not going to be a secret inside spam or an e-mail alert from a stranger,” Wolberg said.

Attorneys general in several states have issued warnings about scammers exploiting the public’s fear — or greed.

For example, in Illinois, people are getting offers for $29 “surplus personal protection kits,” which purport to protect people from contracting Ebola, particularly emergency responders.

In August, the U.S. Food and Drug Administration warned against buying supplements, alleging they protect those who take them from contracting Ebola to help cure it in those already infected.

Fake charities are popping up, too. Charity Navigator has found hundreds of them, so it’s advising would-be donors to give money only to vetted, known not-for-profits that are helping Ebola victims.

According to president and CEO Ken Berger, con artists use the vast expanse — distance and information — between the U.S. and west Africa to get people to open their wallets, plus the speed by which the illness spreads add a time element for them to pressure potential suckers to give without researching the charities first.

“Avoid telemarketers, crowdfunding sites, social media and e-mails. It’s the Wild West out there,” Berger said Oct. 31. “Just because something says Ebola or someone says they’re appealing for funds for someone suffering, err on the side of caution. … The scammers and thieves know the American public is the most generous in world and whenever there’s a disaster or crisis, millions and millions, sometimes tens of millions are being raise, so there’s a huge bucket of money. A lot of times, people give on impulse based on a photo or a story someone tells. They know it’s an opportunity to exploit the event.”

Contact Zlati Meyer: 313-223-4439 or zmeyer@freepress.com. Follow her on Twitter @ZlatiMeyer.

How to avoid Ebola scams

■ Think logically. If it were such an amazing stock tip, why would you be finding out about it via spam?

■ If it is a good information source, beware of insider trading issues.

■ Don’t open any e-mails with the word “Ebola” in the subject line, as it could contain malware.

■ Don’t suckered by a sad photo or story.

■ Report any Ebola treatment claims to the FDA.

■ Verify a charity by looking it up on www.charitynavigator.org or www.charitywatch.org or give only to well-established charities.

■ Don’t give your credit card information to any telemarketer claiming to be calling on behalf of a charity for Ebola victims.

Source: Free Press research

11 Things to Consider When Examining Your Estate Plan

With the current estate tax exemption at $5,340,000 per person and a married couple’s tax exemptions at $10,680,000 due to spousal portability, many clients will not be subject to Federal estate tax obligations. However that does not mean proper estate planning can be ignored. Here are 11 tips to consider as you examine your own estate plan:

State estate taxes differ from state to state. 18 states have some form  of a “death or transfer tax” including New York, New Jersey, Connecticut and Massachusetts. Some states have exemptions significantly less than the Federal exemption, and most are not portable. Have you taken into consideration your state’s estate tax laws?

Probate can be costly and can add complications depending on one’s state of residence. However, if planned properly, probate can be eliminated. Have you properly considered probate?

• Have inherited assets been properly protected from unintentional use? Have beneficiary designations and trusts been properly worded to protect against creditors and unintended consequences?

• Is your family’s inherited asset tax basis step up plan maximized? While even non-taxable estates receive the “at death stepped up value of assets” benefit, planning is necessary to make sure the right assets get stepped up and who gets them.

Life insurance previously owned for estate tax reasons can be refocused towards other risk protection needs or to fund other life goals in the most tax efficient manner possible. Have you considered refocusing?

IRA and other retirement plans can have significant implications beyond the life of the client. With the recent rulings regarding the lack of bankruptcy protection for inherited IRA’s, have you considered naming specially designed trusts as beneficiaries to provide both stretch and protection benefits?

• For non-taxable estates, the key issues are how your legacy will impact the lives of future generations and how to protect and insure that the estate’s financial legacy will not adversely impact others. What are your key issues?

• When designing plans for non-taxable estates, it is important to balance charitable desires with family legacy issues. Do you feel your plan is balanced?

• Are beneficiary designations coordinated and consistent with your desires?

• Have you taken into consideration disability and health care needs? Are they a part of your total estate plan?

• Are you below the threshold of estate taxes? You still need to be sure you have planned how your financial legacy will impact others for years to come.

Are you planning to revise your estate plan in 2015? Call Andy Bass at 248.827.1800 or e-mail Andy at Andrew.Bass@telemuscapital.com to design the best strategy for you!

Executive Administrative Assistant

Telemus Capital, established in 2005, is a Registered Investment Advisor (RIA) with over $2 billion in assets under management and offices in Southfield and Ann Arbor, Michigan and Los Angeles, California. Telemus is now looking to expand nationally. Telemus is a Barron’s Top 100 Financial Advisor and a Financial Times Top 300 Independent Advisor and part of the Focus Financial Partners network.

Role Summary: 

This is a newly created position which will support all activities and run the offices of the Chairman/Founder of Telemus Capital and the company’s COO. In a critical role, this individual will represent these executives both inside and outside the organization and drive efficiencies and effectiveness of both individuals in these roles.

Beyond the typical managing of calendars, meeting preparation and administrative tasks, this individual will be expected to be proactive in creating new processes and ways of organizing and communicating; have the ability to effectively follow up on tasks and projects on behalf of these executives; create and manage agendas for meetings and prepare materials for same; aid in overall office administration as needed. This individual will be at the center of the business and must be able to push back, engage in the business and forge relationships with everyone throughout the organization and key external partners.

Key Responsibilities:

- Provide support and organization to daily and strategic duties of Chairman and COO
- Perform basic and complex administrative tasks easily and quickly
- Be creative in resolving conflicts, problems and in overcoming obstacles proactively
- Protect reputation and effectiveness of the offices
- Act as “Secretary” at management committee meetings and partners meetings
- Create agendas, presentations and basic spreadsheets as necessary
- Act as Chief of Staff in certain situations
- Develop and leverage strong partnerships with all functional areas
- General office duties and collaboration as needed in an entrepreneurial environment

Qualifications/Competencies:

- Minimum of 7-10 years of supporting senior executives in a high paced environment
- Understanding of the financial services industry is a plus
- Lively, proactive and positive attitude
- Excellent communication and influencing skills
- Advanced level of proficiency in Microsoft Office Suite among other programs
- Ability to handle challenging situations in a rational and level headed manner
- Highest standards of ethical conduct expected
- Comfortable with ambiguity

Competitive compensation and benefits offered commensurate with experience. References required. Please send your resume to careers@telemuscapital.com

Wealth Analyst Fall/Winter Part-Time Internship

Telemus Capital, established in 2005, is a Registered Investment Advisor (RIA) with over $2 billion in assets under management and offices in Southfield and Ann Arbor, Michigan and Los Angeles, California. Telemus is now looking to expand nationally. Telemus is a Barron’s Top 100 Financial Advisor and a Financial Times Top 300 Independent Advisor and part of the Focus Financial Partners network.

Role Summary: 

Telemus Capital is looking for a current college student to work part-time (~20 hours /week) in our Southfield, MI office.  As an intern, you will be expected to contribute to Telemus Capital while developing yourself and at the same time working with top wealth advisors.

This opportunity is ideal for a student seeking hands-on experience in the wealth management industry. You will gain a deep understanding of the RIA industry, its opportunities and how it is different from the traditional broker/dealer side of the business.  Furthermore, you will develop skills in project management, research; business writing, and what it truly means to put “Clients First.”

Key Responsibilities:

- Prepare and review client Performance Reports
- Assemble Investment Management Proposals
- Prospective Client Portfolio Analysis
- Update client records in our Customer Relationship Management system
- Participate in special projects to increase business development and improve internal operations

Desired Skills & Experience:

- Enrolled in a current undergraduate or graduate program tracking to a bachelors or master’s degree
- Ability to work part-time (approximately 20 hours per week)
- Strong computer skills, including proficiency in Microsoft Office suite
- Strong analytical skills to read and evaluate complex financial reports
- High accountability to ensure our client and team expectations are exceeded
- Demonstrated ability to manage diverse relationships within a team
- Persuasive communicator demonstrated through active listening, clear written and oral communication
- Strong desire to continually self-develop demonstrated through intellectual curiosity and personal learning

Competitive compensation and benefits offered commensurate with experience. References required. Please send your resume to careers@telemuscapital.com

Client Experience Associate

Telemus Capital, established in 2005, is a Registered Investment Advisor (RIA) with over $2 billion in assets under management and offices in Southfield and Ann Arbor, Michigan and Los Angeles, California. Telemus is now looking to expand nationally. Telemus is a Barron’s Top 100 Financial Advisor and a Financial Times Top 300 Independent Advisor and part of the Focus Financial Partners network.

Role Summary: 

We are seeking a dedicated, detail-oriented client service enthusiast with strong interpersonal skills and positive attitude to support our Advisors and their team in acquiring new clients and retain existing ones. In addition to being the liaison between clients and Advisors, this role provides administrative support across the Client Experience Team and organization.

Key Responsibilities:

- Prepare and process all documentation related to new clients and on-going maintenance including account applications, transfer documents and other forms as required
- Foster the client relationship by anticipating client needs, coordinating client meetings, and responding to client requests
- Respond to daily custodial alerts or other notifications
- Gather, organize, and input client data into the CRM
- Respond to task requests from Advisors in a timely and accurate manner
- Maintain the accuracy and integrity of all electronic recordkeeping
- Handle cashiering and money movement requests including distributions and asset transfers
- Act as back-up support to peers as well as for other administrative functions
- Act as back-up support for receptionist duties, including welcoming visitors, handling incoming telephone calls and mail delivery.
- Assists with clerical tasks which include scanning, filing, and processing of marketing and promotional materials as needed

Desired Skills & Experience:

- Bachelor’s degree preferred in a business related field
- Two+ years of client services experience preferably in the financial services industry
- High accountability to ensure our client and team expectations are exceeded
- Strong organizational skills with experience in delivering results in a fast-pace environment
- Demonstrated ability to manage diverse relationships within a team and cross-functionally
- Persuasive communicator demonstrated through clear written and oral communication and active listening
- Lively, proactive and positive attitude
- Proficiency in Microsoft Office Suite
- Highest standards of ethical conduct expected

Competitive compensation and benefits offered commensurate with experience. References required. Please send your resume to careers@telemuscapital.com

Wealth Analyst – Insurance

Telemus Capital, established in 2005, is a Registered Investment Advisor (RIA) with over $2 billion in assets under management and offices in Southfield and Ann Arbor, Michigan and Los Angeles, California. Telemus is now looking to expand nationally. Telemus is a Barron’s Top 100 Financial Advisor and a Financial Times Top 300 Independent Advisor and part of the Focus Financial Partners network.

Role Summary: 

Telemus Capital is looking for an experienced Analyst to join our growing insurance practice.  In this role, you will apply your product knowledge, financial acumen, and an understanding of client-specific needs to develop tailored plans and strategies.  In addition, you will participate in client conversations by actively listening to the client needs so that you can assist in the development of insurance plans that are reviewed and considered by the Wealth Advisor.

Key Responsibilities:

- Prepare client proposals, performance reports and recommendations based on plans, our client’s objectives, and Wealth Advisor recommendations
- Analyze plan options for current and prospective clients based on their needs, goals and risk tolerance
- Work collaboratively with Wealth Advisers, Analysts, Underwriters and Vendors to facilitate and maintain long-term trusted client relationships
- Process applications for Life Insurance, Long Term Care, Disability, Health Insurance and others

Desired Skills & Experience:

- Bachelor’s degree required, preferably in a business related field
- Two+ years of experience in the insurance industry
- State Life and Health license required and Property & Casualty desired
- Strong computer skills, including proficiency in Microsoft Office suite and Salesforce
- Strong analytical skills to read and evaluate complex financial products
- High accountability to ensure our client and team expectations are exceeded
- Demonstrated ability to manage diverse relationships within a team and cross-functionally
- Persuasive communicator demonstrated through clear written and oral communication and active listening
- Strong desire to continually self-develop demonstrated through intellectual curiosity and personal learning

Competitive compensation and benefits offered commensurate with experience. References required. Please send your resume to careers@telemuscapital.com

We Sold Our Business. Now What Do We Do?

Thinking Ahead

Tens of thousands of privately owned small businesses are expected to change hands in the next decades as Baby Boom business owners retire. They’re left with a wealth management challenge: how to invest the proceeds and plan for the new money in their estates. Crain’s Wealth asked David Post, partner and investment committee chair at Detroit-based Telemus Capital, LLC, to run through a typical scenario for readers.

The story A 60-year-old couple with three grown children and four grandchildren sells its California-based auto supply business to a regional company for $8 million. The sale is structured as an installment sale with $5 million paid up front and $3 million deferred and paid in three equal installments over the next three years.

The taxes: After paying capital gains tax of $1.65 million on the initial $5 million payment, the Smiths have net proceeds of $3.35 from the first leg of the installment sale.

Their existing estate: The Smiths were diligent over the years and the modest home they bought 20 years ago is now worth $1 million. They have contributed to a retirement plan, accumulated a nice nest egg, and paid for their kid’s college educations. With the net proceeds from the initial installment sale the Smiths now have just over $5 million to invest. Their only meaningful expenses are the payments on their $200,000 mortgage, a couple of vacations a year, and spoiling their young grandchildren.

The Smiths shared with their financial advisor very clear objectives:

• They want to retire and not worry that they would ever need to work again.
• They want to help provide educational expenses for their grandchildren.
• They are willing to take enough risk to allow the portfolio to grow over the next few decades.

The financial plan: Let us pretend for a moment that the Smiths situation is happening in real time and that we were selected as their advisor. That being the case, we would first suggest that they establish a 529 College Savings Plan for each grandchild and fund each with $28,000, the maximum annual contribution.

Subsequent contributions to the grandchildrens’ 529 plans would be determined by the individual circumstances of each grandchild and their educational needs. Additional 529 contributions should be funded out of the after-tax proceeds from the next three installment sale payments.

The portfolio: Given the Smiths’ straightforward goals and objectives for their initial $5 million is it $5 million? yes of investible assets, we would suggest the following allocation:

• 30% equities
• 30% alternative assets
• 35% fixed income
• 5% cash

Given the Smiths’ moderate living expenses, as well as the forthcoming $3 million of installment payments, our suggested allocation would provide current income in the range of $175,000 per year, as well as an opportunity for the portfolio to grow in the years ahead. This portfolio allocation, along with expected installment sale proceeds would provide more than sufficient liquidity for the Smiths in case of an emergency. What kind of income are they generating?

The equity allocation: Within the equity sleeve of the portfolio, we would recommend a 55% allocation to international equities and 45% to domestic equities. Given the current stage of the bull market, we would suggest tilting the allocation toward equities with value characteristics, including a very healthy allocation to dividend paying stocks. We would also favor an over- allocation to international equities, with a tilt toward Europe and the Emerging Markets. In the case of Europe, the economy has not yet turned the corner and valuations are attractive. Equity allocations would be spread among large, medium, and small capitalization companies.

As for Emerging Markets, the prospects for long-term economic growth are greater than almost any other market. On the domestic front, we would recommend a tilt toward dividend paying companies with strong balance sheets and energy-related MLPs.

Alternative investment allocation: Our recommendation for the alternative investment sleeve of the portfolio would be to allocate among multi-strategy hedge funds, income producing real estate strategies, and insurance-related assets. Insurance related assets, such as participations in reinsurance, catastrophe bonds, and life settlement contracts are non-correlated to the financial markets. A combination of these alternative investment strategies will provide meaningful portfolio diversification and dampened portfolio volatility (reduce risk).

Our recommendation for the bond portion of the portfolio would be a mix of open and closed-end municipal bond funds combined with credit sensitive taxable bond funds, such as distressed debt and other non-traditional strategies that are more dependent on improving prospects for the economy and the underlying companies rather than changes in interest rates.

Future: The portfolio needs to be regularly rebalanced and, at least on an annual basis, the couple’s risk tolerance should be reassessed. Cognitive bias can be a tricky thing. The couple’s assessment of their risk profile may change substantially in the case of a stock market downturn or life event.

If, after getting to know the Smiths better, we determine that their risk profile is less tolerant than they had assumed, we would use the after-tax proceeds from subsequent installment sale payments to shift the portfolio allocation appropriately.

Posted by Crain’s Detroit Business, see the original article here.

A Demographic Ephiphany

It all started last weekend when my wife texted me a picture of months-old babies lined up on a couch at a friend’s house. While the photo included five tiny tots, actually, there were a total of 10 babies on display!  The very next night we had a group of friends to our house for dinner and there were no fewer than four young couples that will likely celebrate their nuptials within 18-24 months, and we all know what happens then. The fact that I received news this morning that a young man in our office was now the proud father of a healthy 8 pound 7 ounce baby boy only adds to the anecdotal evidence of some larger demographic happening. However, a closer look at the facts informs us that a new demographic trend is developing and it offers meaningful economic hope.

Demographers generally define those people currently between the ages of 18 and 37 as Generation Y or Millennials, most having entered adulthood after the turn of the century.  Interestingly, these Millennials snuck up on us, not only in terms of their numbers, but their spending power as well.  Generation Y is now 86 million strong and currently represents 27% of the population – outnumbering the baby boom generation, which has just over 80 million members and represents 25% of the U.S. population. When factoring in immigration, the Millennials could grow to over 88 million by 2020. As for spending power, the Millennials represent huge potential.  Consider for a moment that the baby boomers reached their peak spending years in the 1990s and were largely responsible for an average 3.4% GDP growth during those years.  If a similar pattern occurs with Generation Y, GDP growth could be boosted a full percentage point or more from current levels.  To be sure, 3.5% growth is the elusive economic elixir necessary to combat mounting debt levels.

Millennials got off to a very slow start as the first decade of their adult lives was plagued by two recessions, one classified as the Great Recession in recognition of its magnitude and its historical significance.  Moreover, the stock market was flat for Millennials over their first decade as investors. This slow start delayed Gen Y’s job development and household formation, two huge contributors to economic growth. However, the Y Generation now accounts for $1.3 trillion of consumer spending and they are just hitting their stride.  The job situation for Millennials is improving and with it the prospect for increased spending on places to live, food to eat, clothes to wear, and cars to drive.  Notwithstanding a late start, Millennials are not only well educated but also understand the harsh realities of underfunded entitlement programs, which have made them more skeptical of and less reliant on future government assistance. According to Vanguard, Gen Y is investing and they aren’t afraid of stocks.  Mr. Market’s relentless move up to the right may, indeed, be discounting more than short term improving economic fundamentals and may be taking notice of the meaningful Millennial fire power in the years to come.

The demographic trends preceding Generation Y tells a story all its own. The aging baby-boom generation here in the U.S., once a magnificent growth engine, has peaked and now provides little help in pushing GDP growth to historic norms. There are now more Americans age 65 or older than at any time in US history and the number is estimated to more than double by 2050.  Not only are baby boomers getting older, but improving healthcare has lengthened life expectancies, the combination of which has swelled the ranks of those eligible for the entitlement programs known as Social Security, Medicaid, and Medicare.  It is no wonder that these programs are underfunded and subject to ongoing debate as to their fate.

If ever there was a poster child for the woes of an aging population it would have to be Japan. Japan’s demographic reality has been discussed for years by economists who have attempted to predict the country’s fate and by hedge fund managers who have bet that the aging population of Japan will be ruinous to their economy and their currency. While Japanese Prime Minister Shinzo Abe’s structural reforms (Abenomics) and the Japanese Central Bank’s American-styled quantitative easing policy ignited a rally in Japanese equity markets, it now appears that Japan’s bad demographics may be too much to overcome. There are a growing number of believers that Japanese demographics have baked-in a very dire outcome for the country. Time will tell.

Generation Y is a massive differentiator when comparing the impact of demographics on the US and Japan. The size and nature of the Millennial Generation has the potential to have a hugely positive impact on the economy.  Forbes Magazine noted the following: “No generation before has had as much access, technological power, or infrastructure to share their ideas as quickly as Millennials. They are used to speed, multi-tasking, and working on their own schedule. These can be great assets in a knowledge-based economy that values end results over process.”

Of course, Generation Y is not without its challenges.  Profligate spending of previous generations has burdened this new generation with a huge mountain of debt, the cost of which is mitigated by low interest rates, but the principal balance remains. Moreover, Generation Y has been saddled with a diet of trans-fatty foods and an exercise regimen of video games, the tragic combination of which has led to an obesity epidemic. It is sad to acknowledge that Millennials could be the first generation in over 100 years to see their lifespan level off or even decline.

The Millennial Generation appears to be relatively well-equipped to meet their inherited challenges and those yet to come. Generation Y has a deep bench of well-educated, socially-connected, tech-savvy Americans that will likely exceed the economic growth engine of the Baby Boom generation. Time will tell. 

David Post
Telemus Capital Investment Committee Chair
September 20, 2014

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This market commentary is a matter of opinion and is for informational purposes only.  It is not intended as investment advice and does not address or account for individual investor circumstances.  Investment decisions should always be made based on the client’s specific financial needs and objectives, goals, time horizon and risk tolerance.  The statements contained herein are based solely upon the opinions of Telemus Capital, LLC.  All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

Energy Prices and the Middle East Conflict

History is littered with transformational changes resulting from new discoveries, inventions, and technologies. Over the past several years there have been significant energy‐related technological improvements which have the potential to be truly transformational in terms of the impact on our decades‐long dependence on imported oil and changing a geo‐political dynamic that has been in place for nearly 50 years.

In days gone by a crisis in the Middle East caused the price of oil to shoot higher and economic prospects to be impacted negatively. It has been interesting to see the price action in the energy market and the impact on the US economy in the face of the most recent conflict and escalation of hostilities in the Middle East. In fact, Brent crude is actually cheaper today than it was three months ago and new highs in the equity markets are signaling no adverse impact on the US economy. What makes today different than in years past? Our dependence on Middle East oil has been greatly diminished as a result of a huge North American energy boom. Today the US imports more oil from Canada than from all the major oil producers in the Middle East. Furthermore, US energy production is climbing at a record pace and satisfying a greater and greater percentage of our domestic energy needs.

The Return of the American Energy Boom

It’s been a long while since the words “America” and “energy production boom” have been used in the same sentence, but that is exactly what’s happening today. The Energy Information Administration (EIA) has reported that not only has the US oil production renaissance decreased our reliance on imported oil, it has also successfully stabilized world oil prices. Strong energy output is expected to grow rapidly over the next few years from the Bakken, Eagle Ford, and Permian regions. Coincident with this growth in supply, US energy demand is expected to increase only slightly. Multiple data points confirm that the current growth of domestic energy production will ultimately lead to energy independence, perhaps sooner than we ever thought possible. In fact, many economists and energy experts believe that America could be energy independent by 2020.

What Changed?

The obvious question is how did the energy dynamic change so quickly? The answer is twofold. First, technology‐driven improvements in horizontal drilling and hydraulic fracturing (fracking) have not only facilitated the discovery of new fields, but also served to dramatically increase production in fields whose reserves were either thought to be unrecoverable (reserves trapped in shale formations and in deep‐water locations) or exhausted. The U.S. Department of Energy (DOE) now estimates that our current reserves provide us with a 90‐year supply of natural gas! In just the past decade, America has gone from an expected importer of natural gas to potentially the world’s largest exporter of natural gas.

In order to ship natural gas around the world, it must be converted to liquefied natural gas (LNG). Once converted, it can be shipped via tanker all around the world. Even though the U.S. does not currently have sufficient infrastructure (LNG export terminals) to export natural gas on a broad scale, many projects are currently under construction and/or awaiting DOE approval, with the first terminal expected to come online by 2015. Eventually, LNG exporting could be a boon for the U.S. economy resulting in increased local and state revenues from taxes and licensing and increased demand for workers to construct these terminals. Moreover, an increase in exports will allow for a much needed reduction in our trade deficit.

How The US Energy Renaissance Impacts Investment Strategies 

Importantly, the energy production boom is impacting other sectors of the economy that are dependent on plentiful and inexpensive natural gas. For example, according to PwC (PricewaterhouseCoopers, LLP), while the U.S. manufacturing resurgence has benefitted from rising labor costs in markets such as China and South America, cheap and abundant domestic energy are playing a more prominent role in the decision by manufacturers to re‐shore or on‐shore to the U.S. Even the agricultural sector has been impacted as domestic fertilizer businesses realize the competitive advantages of an increasing supply of cheap natural gas. The US energy renaissance is creating a growing supply of energy and an increasing need for energy-related infrastructure to collect, store, and transport the product.

This dynamic has created some very interesting investment opportunities. While a number of our Telemus model portfolio investments are positively impacted by the growth in US energy production, none more than our investments in the energy MLP (Master Limited Partnership) space. We have made a “passive” investment in the Alerian MLP Index (AMJ) and an “active” investment in Salient MLP & Infrastructure II (SMLPX), both of which have meaningfully out-performed the equity markets in 2014i. Moreover, Salient has proven to be among the best in the MLP space with a number one ranking for the 3, 6, and 12 month-periods ending June 30, 2014. We believe that our investments in energy infrastructure have been well-placed and will likely be part of the portfolio as long as the current dynamic in the US energy markets remains in place.

David Post
Telemus Investment Committee Chair

iYTD through August 26, 2014 the S&P 500, AMJ and SMLPX are up 8.2%, 15.1% and 24.5%, respectively.

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This market commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client’s specific financial needs and objectives, goals, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.