When investment funds will start pulling off?

I am not a world known business analyst but I would assume I am not a bad one either considering my 12-year experience in Business Development. During this period I have dealt with a wide range of business opportunities.

I also realized that due to a substantial number of factors involved, all details require careful consideration. To sum up, business development is about two major aspects: (i) it is true that devil is in the details; (ii) it is a very tough job as you need to produce assessment result which shall be as objective as humanly possible regardless of what management want to hear. 

Recently I found an Article “Why is Business Analysis So Hard?” which describes the scope in details. The author has explained perfectly what it takes to be a business analyst.

The reason I said it, is because people who know how to analyze can see potential directions and likely outcome by connecting dots. Business development analysts, unlike most of other professionals, have to have a certain level of knowledge related to economics, finance, technical, legal, human resources, social, negotiation and communication skills as well as knowledge of differences in business cultures. Recently, one more component was added  – emotional intelligence skills.

Unfortunately, the same ability makes the job tough because business analyst usually is the first to detect an upcoming problem. But because other people cannot see it yet, it often leads to unfair accusations.

Of course, when the unwelcome event finally arrives and begins “to knock the door”, everyone suddenly remembers what analyst tried to explain. Although it is good to be acquitted, but it doesn’t help because by the time the public understands, usually, it is too late.


When presidential election campaign started in the United States, all I knew about Donald Trump was that he “miraculously” managed to transform a billion net negative to a billionaire businessman. I also knew that he has his own show, “Apprentice”. That would be it.

However, when he started to follow the process, I noticed numerous mismatches in his statements and, at times, openly racists remarks. Of course, I decided to check his history. The information I found online was enough to identify a number of disturbing signs.

The entire history of Trump contains plenty of evidence (I could not find anything positive) and what I observed during the election campaign didn’t suggest optimistic outlook. In addition, the inconsistency of his statements, over-rated self-assessment, total lack of experience in politics, poorly covered racial intolerance and his attitude towards women and much more, made me understand that, if elected, he is unlikely to deliver something positive.


The vividly noticeable difference between his words and actions and what people he picks for key positions in his administration, allowed me to come up with analysis which is mostly confirmed by what has actually happened so far. I just hope that the last part of my analysis will never materialise.


I notice one very interesting trend. Despite the rules of conventional logic, the leading financial institutions were forecasting a boost in economic growth. Initially, I couldn’t understand why they ignore the obvious signals. But now I begin to understand why they did that.

The stock market is more about sentiments and less about solid fundamentals. I would also assume that such over-optimistic forecasts were made with the hope that investors, closed-end and open funds would get excited and it will keep financial markets afloat for a while.

What remains a mystery to me is how could they seriously assume that the fundamentals of the global economy will follow artificially boosted sentiments.

The New York Times in it Article “G.D.P. Report Shows U.S. Economy Off to Slow Start in 2017” wrote that Americans say they feel more optimistic about the economy since President Trump was elected. But they certainly are not acting that way, and that is shaping up to be a challenge for his administration.

Consumers pulled back sharply on spending in early 2017, the Commerce Department said on Friday, reducing the economy’s quarterly growth to its lowest level in three years. In fact, the 0.7% annual growth rate for the period is far below the 2.5% pace in President Barack Obama’s final three months in office, let alone Mr. Trump’s 4% target.

The caution among consumers was particularly notable on big purchases like automobiles. Other indicators were stronger — businesses invested at a healthy pace — but that was not enough to offset the headwinds from feeble retail sales and falling inventories.


The New York Times also confirmed my suspicions by indicating that years of a fundamentally tepid recovery, the promise of stronger economic growth that is always just around the corner has had a waiting-for-Godot quality. Investors and Wall Street seem confident that this time, the predictions will finally come true — hence the 11 percent surge in stocks since the election — but some independent economists are wary.


The softness last quarter also provides crucial ammunition for the Trump administration’s arguments that big tax cuts and regulatory rollbacks are necessary for the economy to grow the way it did in the 1980s and 1990s.

Tax cuts, regulatory relief, trade renegotiations and an unfettered energy sector are needed “to overcome the dismal economy inherited by the Trump administration,” said Commerce Secretary Wilbur Ross. “Business and consumer sentiment is strong, but both must be released from the regulatory and tax shackles constraining economic growth.”

The New York Times also points out that Q1 2017 fade is also sure to be noticed by the Federal Reserve as it contemplates whether to proceed with two more interest-rate increases planned for this year. Federal Reserve policymakers are set to meet next week, and while there is little expectation that an interest-rate increase will be announced when the meeting ends on Wednesday.

Jason Furman, chairman of the Council of Economic Advisers under Mr. Obama, said he found the disconnect between findings of optimism and actual behavior puzzling, though he added, “It’s possible it was a blip.”

On the other hand, something more significant may be happening. The rising cost of necessities like health care, housing and education are crowding out discretionary spending for middle-class Americans, said Stephanie Pomboy, founder of MacroMavens, an independent economics consulting firm in New York. She added that the tax cuts the administration is proposing are unlikely to reverse that trend, she added.

What Stephanie Pomboy said is absolutely correct. Although, if I may add, there is no reason for worries. Recently announced “one-page plan” for reforms of the United States Tax Legislation, the #1 economy in the world, leaves no reason for us to worry because it shows that Donald Trump and his administration don’t have any plan.  

However, it is also a disturbing signal suggesting that they are clueless. Otherwise, it would be crystal clear to them that decision to present a so-called Tax Reform Plan that fits A4 size paper to the American public and the entire world community is nothing but stupid. 


If we look at the components, we would appreciate the complexity of the U.S tax regulations. But this is only the major elements. I can only assume that there are hundreds of sub-laws and related laws. I think if we just list down titles of those laws it might take at least 10 pages.


The New York Times also indicates that the White House administration left unaddressed, a tax treatment enjoyed by some of the richest people on Wall Street. It is reasonable to seek clarification because, during the presidential campaign, Mr. Trump pledged to close the loophole and make its beneficiaries, private equity and hedge fund executives among them, pay their fair share of taxes. He once proclaimed that “hedge fund guys are getting away with murder.”

Carried interest, which is essentially the profits reaped by hedge fund managers and private equity executives, is currently taxed at a long-term capital gains rate that is about half the roughly 40% ordinary income rate for the highest earners. Critics argue that these executives should pay the full rate, while industry groups say they are entitled to the lower rate because they are taking entrepreneurial risks.

According to the New York Times, several tax experts and Wall Street lawyers said that by not mentioning the matter at all, the administration seemed to be signaling that the tax proposal would effectively eliminate the unique taxation of carried interest. It does not mean carried interest would be taxed at a higher rate than it is today. Instead, experts say, the tax rate for carried interest may well go down.

That reading is based on the proposal subjecting pass-through entities — which include partnerships like private equity firms and hedge funds — to a 15% tax rate, which is lower than the rate on capital gains and much lower than the top rate on ordinary income. In other words, it appears that if the Trump plan is enacted, private equity executives would not just avoid higher taxation; their taxes would actually decline.

The other interesting factor is that the Standard & Poor’s 500-stock index has risen about 5%, in what supporters have called a “Trump bump.” 

In November 2016, analysts and bankers predicted a bump in the S.&P., based in part on the promises of an overly business-friendly presidency. Trump has promised to lift regulations that he described as obstacles for businesses and implement both big tax cuts and greater infrastructure spending.

Since Trump deregulated financial and energy industry, the business community was looking forward to the announcement of tax reforms. But because Donald Trump does not know how to filter words, his statement that he “inherited a mess” from Mr. Obama, the economy that he took over has shown some fundamental resilience coincided with the White House announcement on tax.



The Standard & Poor’s 500-stock index fell 4.57%, or 0.2%, to 2,384.20. The Dow Jones industrial average gave up 40.82 points, or 0.2%, to 20,940.51. The Nasdaq composite lost 1.33 points, less than 0.1%, to 6,047.61.

The Dow Minute by Minute

The Standard & Poor’s 500-stock index fell 4.57%, or 0.2%, to 2,384.20. The Dow Jones industrial average gave up 40.82 points, or 0.2%, to 20,940.51. The Nasdaq composite lost 1.33 points, less than 0.1%, to 6,047.61.

It is unclear where the markets go from here. The Federal Reserve has signaled that it expects to continue raising interest rates in the interest of sustaining what its chairwoman, Janet Yellen, called “a healthy economy.”


Besides, the IBD/TIPP Economic Optimism Index declined 3.6 points in April, or 6.5%, to 51.7, from 55.3 in March. February’s number stood at a 10-year high of 56.4. Due to the failure of the Republicans’ ObamaCare replacement bill, which Trump backed, and the increased media coverage of Russia’s meddling in the 2016 election. The index is half a point above its 12-month average of 51.2, and 1.5 points above its all-time average of 49.2. It’s 7.3 points above the 44.4 level of December of 2007, the month that the U.S. officially entered the recession.


The Six-Month Outlook is a forward-looking gauge of how consumers feel about the economy’s prospects over the next half year. The index fell 2.5 points, or 4.7%, to 51.1 in April. By comparison, it stood at 32.1 in December of 2007, as the economy fell into recession. The index’s slight drop comes as reports swirl of a possible quarter-point rate hike by the Fed as early as next week.


The gauge of how Americans feel about their own finances in the next six months slipped 1.3 points, or 2.1%, to 61.3 in April, down from 62.6 in March. This is one of the most consistently optimistic indexes in the IBD/TIPP data set. April’s reading is still 4.4 points above the long-term average of 56.9. But it remains below the high of 65.3, set in January of 2004 as the Bush-era tax cuts began.


A measure of Americans’ confidence in government, the Federal Policies component was the biggest loser of all in April, dropping 7 points, or 14.1%, to 42.6 from 49.6 in March. This index had briefly returned to optimistic territory in February for the first time since February 2007. But confidence plunged following the failure of an ObamaCare replacement bill and ongoing questions about the Obama administration’s role in spying on domestic political opponents. Intended to give a reading on how Americans view government policies put in place by the president, Congress, the courts and the Federal Reserve, the Federal Policies Index has consistently been the least optimistic of the three subindexes that make up the Economic Optimism Index. Its decline suggests some Americans may have increased doubts whether President Trump can keep his promises to cut taxes, reduce regulation and “drain the swamp” in Washington.


Some analysts believe that there is hope for recovery in Q2. I think it might be possible provided, however, that the country’s leadership is a team of highly experienced and visionary people. As long as the current administration remains in the White House, there is no reason to hope for such recovery.

We also need to remember that due to the dramatically increased role of U.S.-registered investment companies and exchange-traded funds (ETF), Trump’s administration could spell a disaster.

According to the 2016 Investment Company Fact Book, the largest segment of the asset management business in the United States is made up of registered investment companies. U.S.-registered investment companies play a major role in the U.S. economy and financial markets, and a growing role in global financial markets.

These funds managed $18.1 trillion in assets at year-end 2015, largely on behalf of more than 90 million U.S. retail investors. Over the last twenty years, strong demand from households due to rising household wealth, the aging U.S. population, and the evolution of employer-based retirement systems resulted in strong growth of the industry. Funds supplied investment capital in securities markets around the world and were among the largest groups of investors in the U.S. stock, commercial paper, and municipal securities markets. 

In 2015, U.S.-registered investment companies* managed $18.1 trillion in assets at year-end 2015, approximately $0.1 trillion less than at year-end 2014. 



The U.S. mutual fund and exchange-traded fund (ETF) markets—with $17.8 trillion in assets under management at year-end 2015—remained the largest in the world, accounting for 48% of the $37.2 trillion in regulated open-end fund assets worldwide.


The majority of U.S. mutual fund and ETF assets at year-end 2015 were in long-term funds, with equity funds comprising 56%. Within equity funds, domestic funds (those that invest primarily in shares of U.S. corporations) held 41% of total assets and world funds (those that invest significantly in shares of non-U.S. corporations) accounted for 15%. Bond funds held 21% of U.S. mutual fund and ETF assets. Money market funds, hybrid funds, and other funds—such as those that invest primarily in commodities—held the remainder – 23%.

Households make up the largest group of investors in funds, and registered investment companies managed 22% of household financial assets at year-end 2015. 


From 2006 to 2015, households invested an annual average of $366 billion, on net, in long-term registered investment companies, with net investments each year except 2008. In contrast, households sold an annual average of $274 billion in directly held equities and bonds, on net.


The growth of individual retirement accounts (IRAs) and defined contribution (DC) plans, particularly 401(k) plans, explains some of the increased household reliance on investment companies during the past two decades. At year-end 2015, households had 9.6% of their financial assets in 401(k) and other DC retirement plans, up from 7.6% percent in 1995. Mutual funds managed 54% of the assets in these plans in 2015, more than double the 26% in 1995.


IRAs made up 10.4% of household financial assets at year-end 2015, with mutual funds managing 48% of IRA assets that year. Mutual funds also managed $1.2 trillion in variable annuities outside retirement accounts, as well as $5.7 trillion of other assets outside retirement accounts.


A variety of financial services companies offer registered funds in the United States. At year-end 2015, 79% of fund complexes were independent fund advisers, and these firms managed 67% of investment company assets. Other types of fund complexes in the U.S. market include non-U.S. fund advisers, insurance companies, banks, thrift, and brokerage firms.


Unit investment trusts (UITs) are registered investment companies with characteristics of both mutual funds and closed-end funds. But unlike either mutual funds or closed-end funds, UITs have a preset termination date based on the portfolio’s investments and the UIT’s investment goals. Units of UITs investing in long-term bonds might remain outstanding, or in circulation, for 20 to 30 years depending on the maturity of the bonds they hold. UITs investing in stocks might seek to capture capital appreciation in a few years or less. When a UIT is dissolved, proceeds from the securities are paid to unit holders or, at a unit holder’s election, reinvested in another trust.


Among all U.S. households, the percentage willing to take above-average or substantial investment risk tends to move with stock market performances a result of 2007-2009 financial crisis. However, since mid-2013 the stock market bottomed out, followed by the willingness to take investment risk.



Retirement assets include individual account–based savings (e.g., IRAs and DC plans) and assets held in DB plans. Traditional DB plans promise to pay benefits in retirement typically based on salary and years of service, and assets held in those plans represent funding for those promised benefits. Some DB plans do not have sufficient funding to cover promised benefits that households have a legal right to expect; the total unfunded liabilities of DB plans were $3.8 trillion at year-end 2015.

Underfunding is more pronounced in government-sector pension plans. As of year-end 2015, private-sector DB plans had $2.9 trillion in assets and only $0.3 trillion in unfunded liabilities. On the other hand, state and local government DB plans had $3.6 trillion in assets and $1.7 trillion in unfunded liabilities, and federal DB plans had $1.5 trillion in assets and $1.8 trillion in unfunded liabilities.

This is remarkable and disturbing sign that unfunded liabilities amount to almost $4 trillion dollars. As far as I recall, to save the U.S. economy during the 2007-2009 financial crisis, it required slightly less than $1 trillion.


Energy sector was in decline within segnificant period of time.  It is given that the energy and materials sectors are closely closely tied to the prices of raw materials. It is also expected that crude oil prices may not recover soon. 


If we look at the top right corner of the abover chart, we can see that the Energy sector status was changed from “Underweight” to “Overweight”. The chart below shows that Energy sector is showing a consistent negative signal with uncertainty ahead. The question is when funds will stand to pull off. 


For any business sector, stability and clarity or “investors confidence” are fundamental factors. Considering a long-term nature of investments in oil and gas projects, the importance of stability and clarity increases by folds.

I believe that Donald Trump’s outrageous inconsistency and complete lack of leadership qualities have finally brought investors down to earth.

The presented one-page plan on tax reforms and Trump’s complaints that he did not expect that the job of the president of the United States is actually really tough, sent strong signal to investors that they should not expect much. The question is when funds will start to pull off.

Taking into account that long-term investors are not the major market players and the fact that about $4 trillion of the investments belong to pension funds, IRA, DC plans, etc., suggest only one thing. When overall weakness of the economy lines up with Donald Trump in the White House, it means that the perfect storm is coming.

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