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Three Things I Think I Think – I See Dead Mutual Funds

Summary:
Here are some things I think I am thinking about. 1) I see dead people. I mean, dead mutual funds. Back in 2012 I wrote an article about how horrible mutual funds are. I said: Mutual funds are a dinosaur product.  The higher fees, reduced tax efficiency, lack of liquidity, and weak performance continues to hurt the industry.  And this is only just beginning.  There’s still trillion in global mutual funds just waiting to find a new home.  This tidal wave of money will flow out of mutual funds and into ETFs and other more client friendly products and approaches in the coming decades.¹ In the last 6 months we’ve seen a tidal wave of fund companies converting old mutual funds to ETFs or starting new ETFs. Yesterday’s news that American Funds is starting ETFs was a total game changer.

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Here are some things I think I am thinking about.

1) I see dead people. I mean, dead mutual funds.

Back in 2012 I wrote an article about how horrible mutual funds are. I said:

Mutual funds are a dinosaur product.  The higher fees, reduced tax efficiency, lack of liquidity, and weak performance continues to hurt the industry.  And this is only just beginning.  There’s still $24 trillion in global mutual funds just waiting to find a new home.  This tidal wave of money will flow out of mutual funds and into ETFs and other more client friendly products and approaches in the coming decades.¹

In the last 6 months we’ve seen a tidal wave of fund companies converting old mutual funds to ETFs or starting new ETFs. Yesterday’s news that American Funds is starting ETFs was a total game changer. They’re the mutual fund company that I primarily sold when I was a broker at Merrill Lynch 82 years ago. I can’t lie – mutual funds were a big part of why I couldn’t work for a big brokerage firm. I just couldn’t stomach the higher fees, reduced tax efficiency and lack of transparency when I objectively knew that there were better products. So I guess I feel a little bit vindicated after all this time. But it’s not over. Not even close. And that’s a good thing. Fees are coming way down and tax efficiency is going way up. Good things are happening.

2) The Delta Airlines Variant is Coming For Our Jobs.

The Delta variant could be coming for our jobs. But not in the way we expected. Delta Airlines is apparently charging unvaccinated employees $200 a month to cover the surging cost of their COVID related health care costs.

This is one of those issues that makes people’s political brains melt. On the one hand people don’t want the government to tell them that they need to get vaccinated. But at the same time private businesses have the right to tell you what to do. They can make you wear a mask or get vaccines or whatever. It’s been one of the more interesting contradictions among the anti-mask and anti-vax crowd since any private business owner can and should have the right to force you to do certain things that you might not want to (like, wearing shirt, shoes or mask or a thong on your face if they want). It’s one of the cases where private property rights and first amendment rights get intermingled and messy. But at the end of the day a private business can make you wear a thong on your face so long as they make everyone wear a thong on their face because you’re entering their property and you can’t just do whatever you want on someone else’s property.²

But now this is morphing into a whole other issue. Personal health is becoming an employment edge. This is an issue I’ve long discussed as the obesity epidemic has ravaged the American healthcare system in the last 20 years. Basically, personal health is becoming an economic issue which is becoming an employment issue.

Look, I don’t want to politicize this whole thing. I mean, I’m generally not in favor of broad government mandates. But I am definitely in favor of corporate mandates if corporations want to impose those mandates in a non-discriminatory manner that helps them protect their private property rights. But one thing we should all agree on is that health really is the ultimate form of wealth and being healthy might just give you an edge in the labor market in the future.

3) Can We All Please Stop Measuring Inflation as an Increase in the Money Supply? 

There was this chart going around Twitter yesterday. It shows the S&P 500 divided by the M3 money supply. Ugg.

Okay, here’s the thing. First of all, this is a price chart of the S&P 500. It doesn’t even include dividends so it’s massively understated. So, strike one.

But also – why do so many people insist that inflation is an increase in the money supply? This makes zero sense. Here’s why – our economy is mostly a credit based economy. So, if I take out a loan for $100,000 then the money supplyThree Things I Think I Think – I See Dead Mutual Funds has technically increased by $100,000. But what if I don’t actually tap that loan? What if I borrow the money because, for instance, house prices just went up 25% and I want to have some cash around for emergencies? This doesn’t tell us anything about prices, living standards or really anything. But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.

Sometimes I feel like people read some econ 101 and the admittedly intuitive idea that inflation is “always and everywhere a monetary phenomenon”, but didn’t stop to think that it might be a lot more complex than that. That said, I am not saying that more money doesn’t there can’t be more inflation. Heck, I have been way more concerned about inflation in recent years specifically because the government created so many assets compared to 2008, but that doesn’t mean money = inflation. It’s more complex than that and saying inflation IS the money supply is oversimplifying things in a manner that distorts a very complex issue.

Anyhow, the bottom line is this – don’t use the money supply to measure inflation. And definitely don’t use price indices as a reflection of stock market returns. ³

¹ – One amazing fact about this is that, despite huge flows out of mutual funds and into ETFs, the markets have surged so much over time that the amount of money in mutual funds is….$24T in 2021. Ha. 

2- Thong – not a good substitute for a COVID-19 mask. 

³ – I feel like there’s a great joke about food and refrigerators, but I just can’t find it. Sorry. 

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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