● The Coffee Can Investor: A Stock-Picker’s Journey to Build Generational Wealth
Neeraj Khemlani
Summary via publisher (Columbia U. Press)
What would happen if you bought a handful of stocks and then left them alone for some time, like stashing valuables in a coffee can? If you picked the right ones, you might wake up one day with life-changing wealth. Neeraj Khemlani introduces readers to this investing philosophy through the eye-opening story of a portfolio manager who has put it into practice. Matt Ankrum researched 100-baggers—stocks that have multiplied in value a hundred times over multiple decades—looking for what they have in common. Drawing on these clues, he hunts down and buys shares in what he thinks are tomorrow’s breakout companies, planning to gift his children a coffee can portfolio that could someday be worth half a billion dollars.

● Financial Mathematics for Cryptocurrencies
Tom J. Espel
Summary via publisher (Wiley)
Financial Mathematics for Cryptocurrencies by Tom J. Espel combines two of today’s most dynamic fields – quantitative finance and cryptocurrencies – in a comprehensive guide that addresses the unique mathematical challenges faced by everyone involved in the crypto markets. Espel draws on his extensive experience in frontier assets to explain the analytical frameworks you’ll need to make informed investment decisions, identify pricing opportunities, and manage risk in this volatile asset class. The book adapts relevant quantitative finance methodologies specifically for digital assets, bridging the gap between traditional financial mathematics and the distinctive characteristics of blockchain-based instruments.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

The iShares MSCI USA Momentum Factor ETF (MTUM) is leading the field by a wide margin for performance since the war began. The fund is the clear upside outlier, posting a 3.8% gain since the close on Feb. 27, the eve of the conflict’s start. Several other factors have rebounded, but none come close to momentum’s surge.

A number of equity factors remain underwater. The biggest loser since the war began is low volatility (USMV), which has declined 3.6%.

The broad stock market is also posting red ink for the war‑regime period. The SPDR S&P 500 ETF (SPY), despite a sharp rally in recent days, is down 0.6% since Feb. 27.

The revival of risk appetite remains precarious, hinging on the outcome of ceasefire negotiations that begin tomorrow. Markets will be keenly focused on the macroeconomic stakes, which are tied to control, stability, and predictability in the Strait of Hormuz—a chokepoint through which roughly a fifth of global energy supplies flows. At the center of these negotiations is the question of whether energy markets can avoid prolonged disruption—and whether the global economy can withstand the shock if they cannot.

“This is the most effective bargaining chip that Iran has got, and will always have,” said Martin Kelly, the head of advisory at EOS Risk Group, a consulting firm. “This is going to have a huge impact on global trade and the global economy.”

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A fragile ceasefire suggests the macro healing can begin, but the conflict’s consequences will take time to assess. Meanwhile, the government’s initial estimate of Q1 GDP is expected to post a 2.3% increase, based on the median nowcast compiled by CapitalSpectator.com from a range of sources. If correct, output in Q1 will recover from a weak 0.7% rise in Q4.

There are several caveats to consider for today’s update. For example, one of the inputs — the Atlanta Fed’s GDPNow model — has downgraded its Q1 nowcast in recent weeks. The current reading estimates growth at 1.3% (as of Apr. 7), down from 2.8% two weeks ago.

A survey-based estimate of GDP has also been revised lower recently. The S&P Global US Composite PMI was cut last week, aligning with a roughly flat performance for US economic activity in March.

“The PMI survey data show the US economy buckling under the strain of rising prices and intensifying uncertainty, as the war in the Middle East exacerbates existing concerns regarding other policy decisions in recent months, notably with respect to tariffs,” says Chris Williamson, chief business economist at S&P Global Market Intelligence. A key source of weakness is the services sector, which “has slipped into contraction for the first time since January 2023,” he reports.

The softer GDPNow and PMI inputs have yet to affect the median estimate, but incoming data between now and the Q1 report due on Apr. 30 are expected to trigger downside revisions.

The odds that a US recession has started or is imminent remain low, based on modeling updated weekly in The US Business Cycle Risk Report. But with the war’s effects still swirling, and uncertainty about the ceasefire, the near-term risks remain elevated.

Mark Zandi, chief economist at Moody’s, writes: recession risks are “uncomfortably high.”

Confidence will rise in the coming weeks for confirming, or rejecting, Zandi’s view. For now, one of the most important risk indicators is evolving in real time: the stability of the ceasefire.

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Let’s start with the stock market. The S&P 500 Index has already been rallying off its recent low, and the recovery is likely to continue today.

One of the many technical profiles of markets I’ll be monitoring is this variation of my estimate of overbought-oversold conditions for the S&P. As of yesterday’s close, hints of recovery have emerged in recent days.

The performance of Treasury yields will be even more critical this week and beyond. The 10-year yield, for example, has pulled back from its recent runup. The risk appetite’s recovery for the near term will rely in no small degree on the bond market remaining calm. The key variable is whether the expected rebound in war-related headline inflation stays modest and short-lived.

Economic risk will come into sharper focus in the weeks ahead. The Atlanta Fed’s GDPNow model continues to downgrade the expected rebound in output for the first quarter. Yesterday’s nowcast was downgraded to a soft 1.3% for the upcoming Q1 report (due on Apr. 30). That still marks a recovery from Q4’s stall-speed 0.7% gain, but the current Q1 estimate suggests that the war’s effects will remain a headwind for an already struggling economy in Q2.

Inflation will also remain a critical factor for market behavior in the weeks ahead. The concern is that repairing damaged energy infrastructure in the Middle East will take months, perhaps years in some cases, and so relief for headline measures of inflation will arrive slowly.

The initial reaction of US consumers on the inflation outlook since the war started raises a warning flag. Median inflation expectations rose to an expected 3.4% annual pace for the year-ahead outlook, according to the New York Fed’s survey. The question is whether the bump is temporary, or the start of an extended reflationary run for the public’s perception. The Federal Reserve will be closely watching as it determines how or if to adjust its target interest rate in the months ahead.

Speaking of the Fed, keep an eye on how the policy-sensitive 2-year yield evolves from current levels. As I noted yesterday, this key rate has recently shot above the median Fed funds rate, signaling that the market is pricing in a modest rate hike. The futures market disagrees, but sentiment in Treasuries still matters and so the 2-year yield’s path ahead could play a key role in determining the risk appetite for the near term.

The main test will be the durability of the ceasefire. Talks between the US and Iran are scheduled to start on Friday in Islamabad to discuss Iran’s 10-point plan, which President Trump said was a “workable basis” for negotiations in a social media post. Meanwhile, Iran’s foreign minister Abbas Araghchi announced that Tehran would allow two weeks of “safe passage” of energy shipments through the Strait of Hormuz.

It’s unclear how much give and take each side will tolerate in the upcoming talks. For now, a precarious peace prevails.

“Markets will be able to breathe for at least a few days,” said Michael Alfaro, chief investment officer at Gallo Partners, a US hedge fund.

There’s still no quick fix for the energy shock, even if the war is truly over.

“Presuming traffic begins to flow through Hormuz, trade flow normalization will take months, not weeks,” predicts Zhuwei Wang, director of research and analysis at S&P Global Energy.

The good news is that the repair process, for infrastructure and sentiment, can start today. It’s a recovery… if Washington and Tehran can keep it.

The Cleveland Federal Reserve president, Beth Hammock, underscored this point in an interview with AP on Monday. Noting that keeping the Fed’s target rate steady for the near term “for quite some time” is her preference, “I can foresee scenarios where we would need to reduce rates … if the labor market deteriorates significantly,” she added. “Or I could see where we might need to raise rates if inflation stays persistently above our target.”

The Treasury market has recently recalibrated its outlook and is now firmly pricing in a higher probability of a rate hike in the near term after an extended run of dovish pricing. The policy-sensitive 2-year yield (3.84% as of Apr. 6) continues to trade above the median effective Fed funds rate (3.64%), marking a clear change in sentiment toward a hawkish bias for the first time since 2022.

The degree of future inflation risk remains debatable, as does the potential for a slowdown in economic growth. But the odds are widely perceived as higher for one or both sides of this coin.

“All roads now lead to higher prices and slower growth,” predicts IMF managing director Kristalina Georgieva. “We are in a world of elevated uncertainty,” she told Reuters yesterday, pointing to a variety of risk factors, including geopolitical tensions, technological advancements, climate shocks and demographic shifts. “All of this means that after we recover from this shock, we need to keep our eyes open for the next one.”

Current Fed policy is still modestly tight, based on a simple model using the unemployment rate and the year-over-year change in the headline Consumer Price Index. That gives the central bank space to take a wait-and-see approach and monitor incoming numbers.

Chicago Fed President Austan Goolsbee, however, suggests that a rate hike could be near. Asked to characterize the state of risk for the economic outlook using a four-color template, ranging from “the house is on fire” red to “everything is looking swell” green, he responded. “At least orange. Orange with ​a chance of meatballs; it hasn’t been great.”

The Treasury market is inclined to agree lately. But inflation and economic data arrive with a lag, and so the Fed will continue to wait to develop a clearer view of how the economy’s reacting to the war with Iran.

The challenge is not waiting too long, lest inflation and/or slower growth move too far ahead of policy, which would leave the Fed in the difficult position of trying to play catch-up. That was the case when the central bank was slow to raise rates when inflation spiked in 2021-2022, and so avoiding that mistake is very much a priority just a few years after that policy mistake.

At the same time, the risk of acting too early could make a bad situation worse, on either the inflation or growth fronts.

In the end, the Fed’s challenge is less about choosing the perfect policy setting and more about staying nimble in a world where the ground keeps shifting. The only certainty is that the next move—whenever it comes—will be made under conditions that are anything but certain.

Until energy exports through the Strait return to something approximating normal levels, a global shockwave will continue to reverberate across the world economy. The US is partly insulated because it is a net exporter of total petroleum, but oil is a globally priced commodity, so rising prices abroad still lift energy costs at home. Higher fuel prices will spill over into the broader economy, pushing up headline inflation and slowing growth to some degree. Uncertainty about the extent of these risks will keep markets on edge for the foreseeable future.

Investors have repriced assets accordingly since the war began, and this shift in risk appetite remains intact. With the exception of commodities, all major asset classes have declined in the regime shift triggered by the conflict with Iran.

Using a set of ETFs through Thursday’s close (Apr. 2), a broad commodities portfolio (GCC) is the lone upside outlier, rising 2.9% since the war began. At the opposite extreme, the biggest loser is global property stocks ex‑U.S. (VNQI), which have fallen nearly 12%.

In a sign of the times, the Global Market Index—a passive benchmark holding all major asset classes in market‑value weights except cash—has dropped 4.8% during the war. That’s a reminder that most globally diversified strategies have probably taken a hit during the war.

The crucial question for markets is when normal (or near‑normal) energy exports will resume. The odds of a quick resolution remain low, based on the latest news reports. Notably, President Trump on Sunday threatened to destroy Iran’s critical infrastructure unless it allows energy shipments to move through the Strait. Iran responded that new attacks on its civilian infrastructure would intensify Tehran’s strikes on energy facilities in the Gulf region.

As the war drags on, it is becoming clear that Iranian control over the Strait will not easily be dislodged without a deal with the government in Tehran. On that basis, a quick resolution may remain elusive.

Professor Robert Paper, a professor of political science at the University of Chicago who studies military strategy and international security, summarizes the challenge, warning that “The War Is Turning Iran Into a Major World Power.”

Modern economies do not simply require oil. They also require oil delivered on time, at scale and with predictable risk. When that reliability breaks down, insurance markets tighten, freight rates spike and governments begin to look at energy access as a complex strategic challenge rather than a simple market transaction.

The problem for the United States is one of asymmetry. Protecting each and every oil shipment that passes through the Strait of Hormuz against potential attacks — mines, drones, missile strikes — is a full-time operation. It requires continuous military presence. Iran needs only to hit an oil tanker once in a while to cast doubt on the reliability of the world’s oil shipments.

President Emmanuel Macron of France said as much on Thursday when he declared that it was “unrealistic” to open the Strait of Hormuz by force and that “this can only be done in concert with Iran.” He was all but admitting that the flow of oil cannot be guaranteed without Iran’s agreement.

Short of a complete regime change, Iran appears set to maintain significant influence over the flow of Middle East energy exports. Before Feb. 28, this risk factor was essentially off the radar for global markets. Now that it has become central to setting risk premiums and recalibrating risk appetite, markets are likely to remain volatile.

How long this transition lasts is anyone’s guess, but the aftershock of the war with Iran may last longer, and run deeper, than optimistic estimates suggest.

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● Investment Philosophies: Successful Strategies and the Investors Who Made Them Work (3rd Edition)
Aswath Damodaran
Summary via publisher (Wiley)
In the revised third edition of Investment Philosophies, Aswath Damodaran delivers a deep dive into a variety of investment philosophies, exploring the assumptions and beliefs that underlie each of them. You’ll explore the investment strategies that arise from each philosophy, as well as what you – as an investor – need to bring to the table to make the philosophy work in the real world. Rather than present one philosophy as the “one best” philosophy for all investors, the book presents a variety of choices, letting investors pick the one that best fits their personal beliefs about markets and personalities.

● The Wage Standard: What’s Wrong in the Labor Market and How to Fix It
Arindrajit Dube
Excerpt via Big Think
What determines the extent of employers’ wage-setting power? It boils down to how easily — borrowing Beyoncé’s phrase — you can “release your job” when pay isn’t good enough. But how simple is it for someone to quit Walmart if they are dissatisfied with their wage?
To answer this question, my collaborators Suresh Naidu and Adam Reich and I surveyed about 10,000 Walmart workers in 2019 using a Facebook-based strategy, similar to the Shift Project. As we saw previously, Walmart, the nation’s largest private employer, has long been associated with low pay. In 2019, its voluntary company-wide minimum wage stood at $11 per hour, lagging behind competitors like Target and Costco. If paying jobs were truly easy to replace, one would expect Walmart jobs to be among the easier to quit and move on from, or market pressure would already have pushed Walmart wages to match those competitors.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

If financial markets continue to fall, at some point the decline will lift long-run performance expectations by more than a trivial degree. But in the context of our modeling for the long-term horizon (outlined below), last month’s slide in asset prices has been a marginal factor.

Today’s updated long‑term forecast for the Global Market Index (GMI) is relatively steady at a 7%-plus annualized total return. GMI’s projected long‑run outlook continues to run well substantially below its trailing ten‑year performance. It all adds up to a case for managing expectations down for performance relative to recent history – a shift that predates the war and, for now, doesn’t appear likely to change in the immediate future.

GMI is a market‑value‑weighted mix of the  major asset classes (excluding cash) via ETF proxies. The forecast is calculated as the average of three models (defined below). The current 7.2% annualized estimate for GMI is slightly below the previous estimate, and remains well below GMI’s trailing 9.0% annualized return for the past decade.

Roughly a third of GMI’s components are projected to generate weaker returns relative to their respective results over the past ten years (indicated by the red boxes in far-right column below). The same subpar performance applies to GMI, which is currently projected to earn a materially softer return compared with its realized performance for the trailing ten‑year window through March.

GMI represents a theoretical benchmark for the “optimal” portfolio that’s suited for the average investor with an infinite time horizon. Accordingly, GMI is useful as a starting point for customizing asset allocation and portfolio design to match a particular investor’s expectations, objectives, risk tolerance, etc. GMI’s history suggests that this passive benchmark’s performance will be competitive with most active asset-allocation strategies, especially after adjusting for risk, trading costs and taxes.

It’s likely that some, most or possibly all of the forecasts above will be wide of the mark in some degree. GMI’s projections, however, are expected to be somewhat more reliable vs. the estimates for its  components. Predictions for the specific markets (US stocks, commodities, etc.) are subject to greater variability compared with aggregating the forecasts into the GMI estimate, a process that may reduce some of the errors through time.

Another way to view the projections above is to use the estimates as a baseline for refining expectations. For instance, the point forecasts above can be adjusted with additional modeling that accounts for other factors and assumptions not used here. Customizing portfolios for a specfic investor, to reflect risk tolerance, time horizon, and so on, is also recommended.

For perspective on how GMI’s realized total return has evolved through time, consider the benchmark’s track record on a rolling 10-year annualized basis. The chart below compares GMI’s performance vs. ETFs tracking US stocks and US bonds through last month. GMI’s current return for the past ten years is a robust annualized 9.0%.

Here’s a brief summary of how the forecasts are generated and definitions of the other metrics in the table above:

BB: The Building Block model uses historical returns as a proxy for estimating the future. The sample period used starts in January 1998 (the earliest available date for all the asset classes listed above). The procedure is to calculate the risk premium for each asset class, compute the annualized return and then add an expected risk-free rate to generate a total return forecast. For the expected risk-free rate, we’re using the latest yield on the 10-year Treasury Inflation Protected Security (TIPS). This yield is considered a market estimate of a risk-free, real (inflation-adjusted) return for a “safe” asset — this “risk-free” rate is also used for all the models outlined below. Note that the BB model used here is (loosely) based on a methodology originally outlined by Ibbotson Associates (a division of Morningstar).

EQ: The Equilibrium model reverse engineers expected return by way of risk. Rather than trying to predict return directly, this model relies on the somewhat more reliable framework of using risk metrics to estimate future performance. The process is relatively robust in the sense that forecasting risk is slightly easier than projecting return. The three inputs:

* An estimate of the overall portfolio’s expected market price of risk, defined as the Sharpe ratio, which is the ratio of risk premia to volatility (standard deviation). Note: the “portfolio” here and throughout is defined as GMI

* The expected volatility (standard deviation) of each asset (GMI’s market components)

* The expected correlation for each asset relative to the portfolio (GMI)

This model for estimating equilibrium returns was initially outlined in a 1974 paper by Professor Bill Sharpe. For a summary, see Gary Brinson’s explanation in Chapter 3 of The Portable MBA in Investment. I also review the model in my book Dynamic Asset Allocation. Note that this methodology initially estimates a risk premium and then adds an expected risk-free rate to arrive at total return forecasts. The expected risk-free rate is outlined in BB above.

ADJ: This methodology is identical to the Equilibrium model (EQ) outlined above with one exception: the forecasts are adjusted based on short-term momentum and longer-term mean reversion factors. Momentum is defined as the current price relative to the trailing 12-month moving average. The mean reversion factor is estimated as the current price relative to the trailing 60-month (5-year) moving average. The equilibrium forecasts are adjusted based on current prices relative to the 12-month and 60-month moving averages. If current prices are above (below) the moving averages, the unadjusted risk premia estimates are decreased (increased). The formula for adjustment is simply taking the inverse of the average of the current price to the two moving averages. For example: if an asset class’s current price is 10% above its 12-month moving average and 20% over its 60-month moving average, the unadjusted forecast is reduced by 15% (the average of 10% and 20%). The logic here is that when prices are relatively high vs. recent history, the equilibrium forecasts are reduced. On the flip side, when prices are relatively low vs. recent history, the equilibrium forecasts are increased.

Avg: This column is a simple average of the three forecasts for each row (asset class)

10yr Ret: For perspective on actual returns, this column shows the trailing 10-year annualized total return for the asset classes through the current target month.

Spread: Average-model forecast less trailing 10-year return.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno

The only place to hide was in raw materials. The iShares S&P GSCI Commodity-Indexed Trust (GSG) soared more than 24% last month, and is now the top-performer over several trailing windows. To the extent that a given portfolio strategy is ahead of its rivals, there’s a decent chance that a relatively high weight in commodities and/or cash explain the alpha.

Red ink dominated the performance ledger otherwise in March. Global property shares ex-US (VNQI) were hit especially hard, tumbling more than 12% last month.

Despite the widespread selling, all the major asset classes are posting gains in year-over-year terms and for the trailing 3-year window. With reports emerging that the war could soon end, the optimists are arguing anew that March could soon be viewed as another painful but temporary diversion in an ongoing bull trend.

Repair and recovery, when it does begin, will certainly be welcome after last month’s carnage. The Global Market Index (GMI) in March posted its biggest monthly decline in 3-1/2 years. For perspective, keep in mind that the benchmark had been running hot for an extended period before the war, posting 11 straight months of gain, the longest stretch of wins in nine years. Something had to give, and in this case the war was the catalyst.

GMI is an unmanaged benchmark (maintained by CapitalSpectator.com) that holds all the major asset classes (except cash) in market-value weights via ETFs and represents a competitive benchmark for globally diversified, multi-asset-class portfolio strategies.

“Inflation expectations do appear to be well anchored beyond the short term, but nonetheless, it’s something we will eventually maybe face the question of what to do here,” Powell said on Monday at a talk at Harvard University. “We’re not really facing it yet, because we don’t know what the economic effects will be, but we’ll certainly be mindful of that broader context when we make that decision.”

The bond market is already mindful that the risk calculus has changed since the war started. The 2- and 10-year Treasury yields, for example, have shot up since the war started on Feb. 28. Although both rates are still trading at middling levels relative to their ranges in recent years, the rapid jump is hard to miss and is likely driven by concerns that inflation risk at the headline level is rising.

In line with the shifting sentiment, short-term inflation-indexed Treasuries (STIP) are the top performer this year for a set of bond-market ETFs through yesterday’s close (Mar. 30).

Headline inflation will almost certainly pulse higher in the near term in the wake of the sharp runup in energy prices, but some economists predict that the rise will be short-lived.

“Risks to inflation should rise initially but then fall if the shock is large enough, due to demand destruction,” economists at Bank of America Research estimated last week. “Negative wealth effects from a sustained equity selloff would exacerbate downside risks to labor and limit the upside to inflation.”

Rate hikes are still considered unlikely for the near-term outlook, but so are rate cuts, based on the implied probabilities via Fed funds futures.

The Treasury market’s implied inflation forecast via 5-year maturities has been breaking higher relative to the 10-year maturities. The implication: the market expects any increase in inflation pressure to be relatively short-lived. Note, too, that the Treasuries’ inflation outlook has yet to decisively break above recent peaks, which suggests that the crowd is not yet fully convinced that inflation is a threat that will outlast the war’s end.

Meanwhile, the longer the conflict lasts, the less patience the bond market will exhibit for tolerating the Fed’s preference to leave monetary policy as is. In that sense, President Trump has acquired a degree of power to effectively run Fed policy by determining when the war ends. Whether this influence will satisfy his preference for rate cuts, however, remains in doubt for the foreseeable future.