Financial Times Blog

22 March 2019

 

Question: According to MSN: Money, what is the average home value?

 

Fed has shifted to a far more appropriate stance – Pg. 8

–          ….2019 would be the first year since 2014 in which it would not raise interest rates

–          The Fed left interest rates on hold at a range of 2.25-2.5%, where they had been since December.  It also said that from September it would stop automatically reducing the Fed’s balance sheet, still swollen from the vast bond holdings bought up during its programmes of quantitative easing

–          The BoE, meanwhile, which rightly left interest rates on hold on Thursday, is in a far less comfortable position, through no fault of its own.  As well as facing a distinct lack of vim in the UK economy, the BoE is trying to set policy in face of a series of wildly varying potential outcomes of the Brexit negotiations while being bound by convention to assume that the government policy of a smooth exit from the EU will in fact take place.  If ever there was a situation which cried out for a central bank to hold its nerve but be prepared to move extremely rapidly if called upon, this is it

 

A shift away from Libor could threaten stability – Pg. 9

–          Global regulators are cheering a transition from Libor, the now infamous London interbank offered rate that underpins $370tn in financial contracts, to a slow of new benchmark rates

–          …the shift from Libor to a new reference rate may seriously undermine financial stability

–          Libor has been used for decades to determine interest rates on everything from student loans to complex derivatives

–          The total value of financial contracts pegged to the rate is more than 18 times the US’s GDP

–          …in 2017, the UK’s Financial Conduct Authority announced that it will stop requiring banks to estimate the various Libor rates beyond 2021 – effectively benching Libor

–          There are two reasons Libor is being pulled from the game….the rates have become theory rather than reflecting actual costs

–          Second, it turned out that asking bakers to estimate Libor was a bit like asking…..both led to manipulation.  Banks have paid nearly $10bn in penalties for rigging Libor during the financial crisis to boost profits or hide balance sheet weakness

–          In the US….a new player….secured overnight funding rate (Sofr), this rate is based on actual transactions, in the Treasury repurchase market, where a wide array of financial services firms use Treasuries as collateral to borrow and lend overnight

–          …daily volume of trading in Sofr-based products is now around $780bn, much larger than that for Libor

–          …Sofr has issued too…there is only one maturity, overnight (Prof Note: laughing hysterically!  Classes are going to LOVE this!  The most common and incorrect answer to my question, “How many Libors are there?” is, “One.”  Sounds like all these students may have been correct all along, just for Libor’s replacement, i.e. they were apparently thinking ahead! J)

–          The Sofr benchmark has also been more volatile than Libor, particularly at the end of the quarter or year when firms convert assets into cash, pushing up rates

–          Shifting existing contracts from Libor to Sofr will be rocky.  More than 80% of Libor-linked financial instruments will mature by the end of 2021, but many will be renegotiated, and the rest must be converted.  Libor is unsecured and Sofr uses collateral, so rates for the former should be higher. The transition will create winners and losers and with it a legal feeding frenzy (Prof Note: I am currently negotiated with a bank the lending rate on a new facility.  They are insisting on Libor with the caveat there is language in the loan document for the transition.  My comment, “The language is untested in court.”  Our tanks are gathering at the border…more to come…)

–          ….more than 40% of outstanding Libor-based residential mortgage loans mature after 2021.  If Libor vanished, most floating-rate loans would be fixed at the last quoted Libor rate, which is not what those homeowners signed up for (Prof Note: This boils my blood!  This is why I feel mortgages should have an entrance examination.  Individuals must understand what they are signing!)

 

Bull run longevity under threat after Fed’s dovish message – Pg. 19

–          Global equities have gained 12% in 2019 – the best start to a year in two decades.  Yet government bonds have rallied, with the yield on the 10-year US Treasury now close ot the level it was at when the Fed began lifting rates in 2015

 

Answer: $225,300

21 March 2019

 

Question: According to MSN: Money, what are eight (8) things that you probably did not realize are taxable?

 

Fed expected to hold rates amid slowing momentum – Pg. 2

–          The Federal Reserve is likely to refrain from raising interest rates for the rest of the year…cementing the US central bank’s sharp shift towards a “patient” approach to monetary tightening in the face of waning economic momentum in the US and abroad

–          …unanimously to keep the target range for the Federal Funds rate between 2.25% and 2.5%, where it has been since December, as widely expected by economists

–          …UC central bankers downgraded their expectations for US economic growth this year to 2.1% from 2.3% in December

–          …the US central bank announced plans to end the reduction of its balance sheet that had been under way since 2017 to shed some of the assets it built up during multiple rounds of quantitative easing during the financial crisis

–          Most economic data in recent weeks have supported the Fed’s move towards a more dovish approach to interest rate increases.  Inflation data have been relatively soft, while the latest reading on job creation and industrial production have been weak

–          Some of the biggest external risks to the US economy and financial sector, such as the fate of Brexit and the US-China trade talks, are still present and laden with uncertainty

 

Trump-Conway psychodrama keeps Washington transfixed – Pg. 2

–          (Prof Note: I am becoming embarrassed to be an American!  This is simply embarrassing!)

 

Australia to reduce immigration and tie visas to regions – Pg. 4

–          Australia plans to cut its annual immigration intake by 15% and make some arrivals live in regional areas in an effort to ease pressure on roads, housing and other infrastructure

–          A high immigration rate – one person arrives to live in Australia every minute – has helped the economy rack up a record 27 years without recession and established the country as one of the most multicultural in the developed world

–          ….raising public concerns about pressure on housing and other public infrastructure, as well as claims that Australia is veering towards a “European separatist multicultural model”

–          Under the regional visas policy, migrants will be encouraged to settle away from big cities and qualify for permanent residence after spending three years living in a regional location

 

US chiefs’ economic confidence falls – Pg. 13

–          Business confidence is receding in the US from the heights it reached after Donald Trump’s election, as friction with trading partners and a slowing global economy weigh on chief executives’ expectations for hiring, investment and growth

–          CEOs also lowered their estimate of US GDP growth for the year, from 2.7% three months ago to 2.5%

 

Landmark for Saudi stocks as index providers become kingmakers – Pg. 19

–          …the world’s three largest index providers will funnel billions and billions of dollars into Saudi Arabian stocks after admitting them to benchmarks whose influence has mushroomed alongside the growth of passive investing over the past decade

–          The process, which began this week when FTSE Russell and S&P Down Jones added the stocks to their indices, raises questions over what investors will be buying given Aramco, the country’s largest and highest profile company, remains state-owned

–          It also underlines the outsized role that index creators now have in directing capital into countries with authoritarian regimes such as Saudi Arabia, which just five months ago was accused of orchestrating the killing of journalist Jama Khashoggi

–          Exchange traded funds created to follow these indices will be forced to mirror the weighting of Saudi stocks

–          The biggest sector within the stock market is financials, essentially a play on the health of the Saudi economy, followed by materials – largely petrochemicals and fertilisers

 

Costs cut as ‘feemageddon’ bites hard in equity funds – Pg. 19

–          Fees on US equity funds fell to a new record low last year as relentless pressure from cheaper index-tracking rivals forced asset managers to slash costs in a bid to staunch heavy outflows

–          The average “expense ratio” of an US equity mutual fund dipped to 0.55% in 2018, down from 0.59% the year before and almost half the cost charged by asset managers at the turn of the millennium, …

–          Expense ratios track the percentage of assets deducted each year for costs associated with management, record-keeping and other administration

–          In addition to pruning fees on active strategies, many asset managers have launched competing passive funds at rock-bottom prices to gain market share.  The ferocious priced war has intensified this year with investment groups such as BlackRock and JPMorgan Asset Management cutting fees to stay competitive

 

Answer: (1) Social Security retirement benefits; (2) Alaska Permanent Fund dividends; (3) Bribes; (4) Illegal activity; (5) Alimony; (6) Cancelled debts (Prof Note: This is a HUGE shock when debts are “restructured” and those feeling they had a ‘windfall’ receive a taxbill for said “windfall”.  Nothing is free!); (7)  Gambling winnings; (8) Bartering

20 March 2019

 

Question: According to MSN: Lifestyle (Brides), what are five (5) signs your marriage is headed towards divorce?

 

Why further financial crises are inevitable – Pg. 9

–          We learnt this month that the US Federal Reserve had decided not to raise the countercyclical capital buffer required of banks above its current level of zero, even though the US economy is at a cyclical peak

–          It also removed “qualitative” grades from its stress tests for American banks, though not for foreign ones

–          ….the Financial Stability Oversight Council…removed the last insurer form its list of “too big to fail” institutions

–          …show that financial regulation is procyclical: it is loosened when it should be tightened and tightened when it should be loosened

–          …with average ratios of assets [banks] to core capital of about 17 to one, their loss-bearing capacity remains limited

–          We can see four reasons why this [procyclicality] tends to happen: economic, ideological, political and merely human

–          There is a tendency for risk to migrate out of the best regulated parts of the system to less well regulated parts

–          The big economic reason is that over time the financial system evolves

–          It is hard for regulators to catch up with the evolution of what we now call “shadow banking”

–          The ideological reason is the tendency to view this complex system through a simplistic lens

–          Politics are also important.  One reason is that the financial system has control of vast resources and can exert huge influence

–          Borderline or even blatant corruption also emerges: politicians may ben demand a share in the wealth created in booms

–          Then there is the human tendency to dismiss long-ago events as irrelevant… (Prof Note: One point of ire that I have is the time I spent in high school learning about European Wars.  I would have been better off learning about global financial crises.)

 

China lenders in a $260bn hold after responding to stimulus – Pg. 15

–          Listed Chinese banks will need to raise about $260bn in fresh capital over the next three years as regulations force shadow-bank loans back on balance sheets and global rules on systemically important groups impose extra requirements on the largest lenders

–          China’s regulator has forcefully implemented Basel III rules on capital adequacy as it seeks to fortify lenders against risks from a decade of debt growth, which is leading to record defaults

–          Bank of China, the country’s fourth-largest lender, in January became the first Chinese bank to issue a perpetual bond, which qualifies as additional tier one capital under the Basel rules

–          …additional tier one and tier two capital represent less than a tenth of China banks’ capital needs

–          Beyond Basel III, the largest China lenders face additional requirements for “total loss-absorbing capacity”.  This requirement applies to lenders that the Financial Stability Board, an arm of the G20, has designated as globally systemically important banks

–          For emerging markets, including China, such banks will have to meet total loss-absorbing capacity requirements beginning in 2025, with a higher requirement taking effect in 2028

–          Chinese regulators led by the People’s Bank of China said last year that they would take inspiration from the global framework and designate some lenders as domestically systemically important banks.  The banking regulator has set the minimum capital adequacy ratio for domestically systemically important banks at 11.5% of risk-weighted assets, compared to the normal 10.5%

 

Answer: (1) There is a sense of contempt; (2) You are fighting about money; (3) You are fighting about chores; (4) You have stopped communicating; (5) You are unhappy

19 March 2019

 

Question: According to MSN: Money, what are seven (7) reasons not to pay off your mortgage before retiring?

 

Business is brisk for Ivy League gatekeepers – Pg. 4

–          Interlaced with the promise of Yale, the company also offers what may be unnerving advice for anxious parents: they should start early – ideally signing their children up by the time they are in the eighth grade – and be prepared to spend upwards of $100,000

–          …US university places had remained stagnant even as applications surged in recent years, including many abroad

–          Services range from test preparation and helping students select suitable schools to coaching them on application essays and, in some cases, building an application over years

–          ….the mere existence of admissions consultants raises questions over a US higher education system that presents itself as striving for fairness but looks to many critics like a game rigged for the wealthy

 

China shadow banking sector cools – Pg. 15

–          As China’s $9.1tn shadow lending industry cools for the first time in a decade, private corporate defaults are on the rise

–          Shadow banking, an industry of loosely regulated, high-yield lending outside the formal banking sector, has attracted the wrath of the country’s watchdogs

–          …equal to 23.5% of China’s total banking industry assets and 68% of its GDP, …

 

Saudi exchange takes first step into global equity benchmarks – Pg.

–           Saudi Arabia’s $636bn stock market took its first step into the world’s main equity benchmarks yesterday when it was admitted into indices run by FTSE Russell and S&P Dow Jones

–          Saudi Arabia’s stock market, known as the Tadawul, is projected to be the eighth-largest bourse in the MSCI EM index by September – when it is fully included – with a weight of 2.7%,…that is greater than Mexico, Indonesia and Poland

–          Investors outside the Gulf owned just 5.1% of the market as of last week,…

–          Tighter US monetary policy, transmitted to Saudi Arabia via the currency peg it has with the dollar, has helped improve margins for the large financial sector, …

 

Answer: (1) You plan to sell your home; (2) You plan to rent out your home – or a room; (3) It’s ore important to repay debts with higher interest rates; (4) You are still saving for retirement; (5) You are low on cash reserves; (6) You would rather maximize your income through investments; (7) You want to deduct your mortgage interest (Prof Note: In general I am not in agreement.  That said, each case is individual.  There is a mental health issue with paying off one’s mortgage.  In my opinion, better to have that occur as early in life as possible.)