Letter from the Chairman…
April 6, 2020
Letter from the Chairman…
“There are no great men, only great events to which ordinary men must rise.”
Adm. Wm. J. Halsey, USN
In 1350, three years from the time the bubonic plague first invaded Europe, Pope Clement VI declared a jubilee in Rome, announcing that all1 should come to praise God and give thanks for the end of the “Black Death.” They did, causing the plague to reignite, killing countless thousands more. Surely, when the surge in our current pandemic passes, many containment protocols will need to remain in effect for months to come. The crisis will not truly come to a halt until an effective immunizing vaccine brings an end to new cases worldwide.
As the graph on the back of this page shows, the municipal market took a crash dive two weeks ago. While highly rated bonds due in ten years or less have since recovered about two-thirds of their declines, spread products (lower rated or non-rated bonds) have only recovered about one-third of their much greater losses.
The level of fear associated with the COVID-19 pandemic triggered a panicked scramble to raise and horde cash as well as empty store shelves of food and supplies. The liquidity crisis was stemmed by the aggressive intervention of our Federal Reserve. Through a number of maneuvers, it effectively opened the flood gates on the world’s primary reserve currency and it is working. Tenuous to be sure, but working.
The dislocations in the muni market and tidal wave of forced selling by mutual funds have presented a once-in-a-decade opportunity to improve municipal bond portfolios. While eagerly embracing these favorable circumstances, we are not among those anticipating a “V” shaped recovery. For starters, the arc of the pandemic will take some time to play out and we must protect against prematurely letting our guard down. China, for instance, has had to reimpose some restrictions such as re-closing movie theaters. The huge explosion of debt, coupled with a huge implosion of revenues, will curtail public spending for years to come. Corporations, lacking the required liquidity, will cease buying back their own shares, a significant impetus behind the eleven-year bull market in stocks. The money sent to families around the country may pay for food and medicine, but will leave nothing for discretionary spending, robbing the economy of any surge in hiring. Unemployment will surpass 15%, especially if you add in those not counted by the Bureau of Labor and Statistics, because, hoping to be rehired, they are not technically looking for work.
We are encouraged by the hundreds of clinical trials being conducted here, in China and elsewhere, searching for effective medicines as well as a vaccine. We are encouraged by Congress’s acknowledgment that they must do much, much more. And we can take heart in the courage and sacrifices of our medical professionals and first responders. We are less encouraged by the response to date of our executive branch, however there remains much that can still be accomplished, both tactically and logistically. To “…provide for the common defense…”2 is a federal responsibility.
One thing is for certain, the munis that are most exposed (such as revenue bonds for venues that have been closed) will have a diminishing chance of recovery the longer the pandemic lasts. Federal assistance is needed here as well. Sending aid to the various states and letting them administer the temporary rescue measures for these bonds makes the most sense.
When the bubonic plague of the mid-14th Century hit London, it’s citizens, citing the Papal Bull of Pope Gregory IX that declared black cats were demons, started killing them. The frenzied mobs soon started killing all cats, black or not. The only natural predator to the plague flea carrying rat was wiped out. We should not allow issuers of municipal bonds to be wiped out due to the imposition of constraints aimed at combatting COVID-19.
1 The Pope stayed safe in Avignon, sending a Cardinal in his place.
2 Preamble to the United States Constitution
Letter from the Chairman…
To Our Valued Clients:
On February 27, 2020, the Orange County Board of Supervisors, along with other county boards throughout California, declared a state of public health emergency in light of the increasing spread of the coronavirus to more California locations. Under the circumstance we understand that you may have concerns about the continuity of our business operations.
Should evidence of a sustained person-to-person transmission of the virus become apparent, CFI anticipates there may be regulatory mandates that would affect or curtail our daily trading and clearing activities. Our firm is committed to taking all necessary steps to protect its staff while ensuring the oversight of our clients’ investment portfolios. Policies and procedures are in place, all equipment has been readiness tested, and vendors notified to ensure a seamless transition to offsite work locations should this become necessary. In addition, all staff members have been informed of self-monitoring procedures, minimization of congregate settings, and the essentiality of self-isolation at home at the first signs of illness themselves and/or among family members.
Please be assured that we are monitoring the situation closely and know that we stand ready to assist whenever and in whatever manner appropriate. Updates on our work status will be sent on an as-needed basis. We hope you and your family stay healthy during these uncertain times. Should you have any questions or concerns, please do not hesitate to call us at 949-296-3970.
All the best,
Charles W. Fish, CEO/CIO
January 6, 2020
Letter from the Chairman…
“We are not enemies, but friends. We must not be enemies.”
Abraham Lincoln’s Inaugural address, March 4, 1861
Our 16th president also told us that to “abandon truth was to abandon freedom.” Here are a few truths that hyper-partisanship has been drowning out:
• Our population growth rate, due to increasing deaths in our aging citizenry, declining fertility rates and restricted immigration, is the lowest it has been for over 100 years. This has profound implications for our economy, especially with regard to supporting Social Security and other pension obligations.
• Decreasing rates tend to have lessening simulative effect on the economy. Negative rates, moving to even more negative levels, are incapable of promoting growth. How many times can you take 6 from 30? Infinitely, if you allow negative values? Five times if you don’t? Neither; the answer is once! This is because subsequent to once, you are subtracting from 24 and further diminishing values, not 30.
• Pension funds, insurance companies and individual savers, all need higher returns than the bond markets (even junk) can now provide. It is only natural that an ever-large percentage of their assets will be diverted to equities and other alternative investments until they too become vulnerable asset bubbles. I suspect that the canary in the coal mine, when it comes, will be real estate.
Two thousand nineteen was a banner year for all asset classes, including municipals. The 10-year Treasury note dropped in yield from 2.69% a year ago, to 1.92%. The 10-year high grade munis went from 2.28% a year ago, to 1.45% at the end of 2019. The distinction to note is that the percentage of muni yield to Treasuries that was 84.76% in 2018, has decreased to only 75.52% today. Demand for municipal bonds continues to surge ahead of supply and risk premiums for lower rated and non-rated bonds is about half of what it was three years ago.
The State of California is estimating a $7 billion budget surplus and the Securities and Exchange Commission appears to be about to broaden their 37-year-old definition of an “accredited investor.” Good news on both counts. The compression in risk premiums confronting a portfolio manager now is bad news. “Better, cheaper, faster” may serve for manufacturing, but not muni credit analysis. Be sure the advice you’re getting is sound and thorough.
The Japanese stock market peaked in 1989. Since then, it has actually declined 40%. Their national debt is a staggering 300% of GDP. In this country, the gap between the very wealthy and the rest of us is widening. Business investment is weak. The Federal Reserve is once again growing its balance sheet. U.S. national debt is expanding rapidly, both in nominal terms and as a percentage of GDP. The quicksand of deflation is very scary. Just ask the Japanese.
My greatest fear is the low priority many states and political subdivisions give to pension reform. Winston Churchill famously defined tact as “the ability to tell someone to go to hell in such a way that he is looking forward to the trip.” Unfortunately, I lack Sir Winston’s tact. The complacency, over decades, of communities with grossly underfunded pension liabilities is the product of perpetually consigning the problem to a third-tier status. Nothing happens and the problems compound. Steps should have been taken long ago. They still can.The retirement age can be gradually increased. They can stop using ridiculously high performance assumptions. They can insist on reasonable vesting periods. Most importantly, they can start enrolling new employees in defined contribution plans instead of the defined benefit plans that the private sector abandoned 50 years ago. By disguising, burying, or simply ignoring the problem year after year after year, a community will eventually dig itself a hole so deep that the only recourse is bankruptcy. Sadly, the courts to date have favored pensioners at the expense of bondholders.
Wishing you a happy, healthy and prosperous new year.
3rd Quarter Letter 2019
1st Quarter Letter 2019
4th Quarter Letter 2018
3rd Quarter Letter 2018
2nd Quarter Letter 2018
1st Quarter Letter 2018
The contents herein are for informational purposes only, and under no circumstances are they to be construed as a recommendation of a solicitation. The information and opinions herein are subject to change without notice and CFI does not undertake to advise the reader of changes in opinion or information.
ARC: Annual Required Contribution
ADC: Actuarially Determined Level
COLA: Cost of Living Adjustment
CSME: Cost Sharing Multiple Employer
FNP: Fiduciary Net Position
GASB: Governmental Accounting Standards Board
OPEB: Other Post-Employment Benefits
TPL: Total Pension Liability
UAAL: Unfunded Actuarial Accrued Liability
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Charles Fish Investments, Inc. (CFI) founded in 1984, is a Registered Investment Advisor with the Securities and Exchange Commission under the Investment Act of 1940 and notice filed with the California Department of Business Oversight. The firm, which is wholly-owned by its employees, is not affiliated with any broker/dealer. CFI's revenues are derived exclusively from the fees received for the investment advisory and/or management services provided.
ADV Part 2 A
ADV Part 2 B
Portfolio vs Funds