Financial Times Blog

30 August 2018

 

Question: According to MSN:Money, what are five (5) things to do now so you can retire before age 40?

 

Fed chiefs face political backlash over push to bolster bank buffers – Pg. 1

–          Jay Powell faces an intensifying debate within the Federal Reserve over calls for it to boost big lenders’ capital requirements to rein in financial risks – a move that would trigger fierce blowback from Republicans eager to ease regulation

–          …the decision rests with the Fed’s board, chaired by Mr Powell, who insisted in June there was no current need to lift the buffer because financial stability risks were under control

–          The buffer – which is part of the post-financial crisis regime and has never been imposed – would require banks to build an extra margin of capital over a period of up to a year, giving them extra scope to support lending in a downturn

 

Argentina requests early release of IMF bailout funds – Pg. 2

–          The turmoil in emerging markets has called into question how Argentina will meet its $82bn financing needs for this year and next, while navigating a looming recession and high inflation before a presidential election next year

–          The peso has weakened by 10% against the dollar since the start of the month – and 40% this year – cementing its position as one of the biggest losers in the broader emerging market rout triggered by the fall in the Turkish lira

–          Argentina’s short-term debt obligations mean that it has roughly $50bn of peso and dollar-denominated debt coming due by the end of next year.  The bulk are peso-denominated Lebacs, or fixed-rate bills issued by the central bank with interest rates as high as 52%

 

Japan ‘womennomics’ hindered by ambiguity over gender equality – Pg. 3

–          Mr Abe’s government has focused heavily on impediments to work, such as lack of childcare, and achieved some success.  Compared with 2012, there are 2m more women in the workforce.  With female employment rates matching many European countries, the surge in working women has been an important factor in the recent run of strong economic growth

–          Scholars say this ambiguity about gender equality has deep roots.  In 1947, when US occupiers drafted its constitution, Japan became one of the first developed countries to outlaw gender discrimination

–          A sexual division of labour helped deliver rapid growth in the 1960s and 1970s: the wages of salaried men rose in line with long working hours but women stayed at home to care for children or do poorly paid part-time jobs

 

Auditing in crisis – Pg. 7

–          The idea that a company’s reported figures should give a “true and fair” representation of its assets, liabilities, financial position and profit or loss has a long pedigree.  It dates back to the first audits in the 19^th century and was written into law in Britain after the second world war.  In the 1970s, it was transposed into European legislation.  If there is a foundational principle underpinning the assurance offered by audits, this is it

–          ….the accounts should not overstate profit or performance so that the directors (and shareholders) can rely on them as a basis for determining that any dividends are not paid out of capital.  It is a view that requires auditorial judgment

–          …means sticking to a mechanical interpretation of the accounting rules, irrespective of whether the financial results that they produce is at all representative of the company’s real position

–          One of the ideas underpinning fair value accounting was to eliminate the capacity of bosses to squirrel away profits through “big bath” provisions.  This was to stop them “smoothing” their results in ways that made it difficult for external investors to discern the underlying performances of the business

–          Not only did the application of the key standard on fair value accounting for financial instruments – IAS 39 – enable banks to conceal vast losses before the financial crisis, paying fat bonuses to managers on the fictitious profits they conjured, it also made it harder to throw off the post-crisis hangover

–          The [Big Four] have an overwhelming grip on the listed company market in Britain and the US, auditing 98% of the FTSE 350 and 99% of the S&P 500 respectively

–          No less importantly they dominate the counsels of the profession

–          One of the key auditing judgments is about whether the profits made by company are legally “realized” (meaning either turned to cash or as near as makes no difference) and consequently available to be distributed to shareholders.  In 2005, the FRC proposed abolishing this statutory link, describing it as “rigid” and an “unnecessary obstacle” to meaningful accounts

–          Its solution was to remove any legal requirements whatsoever, making it potentially easier for companies to pay dividends out of shareholders’ own capital and disadvantaging creditors – something the very first audits were designed to stop

 

Grosvenor eyes 30,000-home portfolio – Pg. 12

–          The property company that owns much of central London’s wealthiest areas has unveiled plans to expand into large-scale residential development

–          Grosvenor said yesterday that under its new plans, it would aim to work as “master developer”, orchestrating the planning, design and build of large housing schemes, typically of between 2,000 and 5,000 homes, along with associated infrastructure

–          Grosvenor would identify the development sites on greenfield or brownfield land, shepherd them through the design and planning process, and then pass individual parts of them on to housebuilders

 

Answer: (1) Save each month until it hurts (Prof Note: What have I been saying???!!!); (2) Determine which type of passive income suits you best (Prof Note: Fixed Income, Equity, Real Estate, etc); (3) Determine your passive income’s purpose (Prof Note: You must know your lifestyle and the cost of that lifestyle); (4) Hold yourself accountable; (5) Don’t make withdrawals

28 August 2018

 

Question: According to CNBC, what are four (4) things extreme savers refuse to spend money on?

 

US and Mexico in breakthrough on restructured trade agreement – Pg. 1

–          The US and Mexico have reached a breakthrough in efforts to revamp the Nafta trade agreement, potentially ending an acrimonious impasse in relations between the countries since Donald Trump took office

–          It was unclear whether Canada…would sign up to the deal

–          The two sides agreed to stricter rules for Mexican car exports to the US, including requirements that 75% of the content be made in North America, and that 40 – 45% of the content be made with workers earning at least $16/hour – a measure aimed at discouraging manufacturers from relocating to Mexico

–          The deal keeps tariff-free trade for farm products, but with new measures on health standards

 

European Economy – Running out of steam – Pg. 7

–          Yet the labour shortages rippling through central Europe are the result of demographic decline and economic success.  Having peaked in the late 1990s, the region’s population is now shrinking, wizened by emigration and tumbling birth rates

–          ..the combined population of Poland, Hungary, the Czech Republic and Slovakia – known as the Visegrad Four, or V4 – will fall from about 64m in 2017 to just 55.6m by 2050, or about 13%

–          …economies are set to expand by around 4% this year

 

Higher yielding trades hit by macro pain – Pg. 18

–          …four key areas: Emerging market local currency denominated debt, Eurozone bank shares, high-yield corporate paper and Italian government bonds….

–          …dominant market trend is the surging US dollar and an increasing sense that, in growth and interest rates policy terms, the US is moving ahead of other countries

–          ..US equities have recovered from February’s volatility shock with the S&P 500 back in record territory

–          The divergence in economic outlook between US and other countries has injected greater discernment into the market – European and Asian junk bond indices have suffered while the US is up 1.7% on the year

 

Answer: (1) Excess living space; (2) Lunch and dinner everyday; (3) Things that aren’t important to them; (4) Excessive car payments

27 August 2018

 

Question: According to MSN:Money, what 8-step plan do financial planners recommend for paying off credit card debt?

 

Price of Trump’s tariff war likely to be paid by consumers, warn Fed chiefs – Pg. 1

–          Moves by US companies to shift the cost of President Donald Trump’s tariffs to their customers risk complicating monetary policy decisions as the Federal Reserve seeks to keep inflation steady,…

 

Tinkering at the edges will not deliver a stronger euro – Pg. 9

–          …idea of establishing a competitor to the Society for Worldwide Interbank Financial Telecommunication – the global payments and financial information system better known as Swift

–          Since it began operating in 1977, Swift has provided a vastly more efficient cross-border payment infrastructure than the previous system based on communication by telegraph messages.  A modern competitor to Swift may or may not be useful, …

–          The Russian central bank has already set up an alternative, for domestic use mainly

–          The reason why European companies are vulnerable to US sanctions has nothing to do with Swift

–          Swift is based in Belgium and subject to Belgian law.  The US exercises no formal control over its governance

–          …the true source of US power lies in the global role of the US dollar and the predominance of the American financial system

–          The Trump administration is also in the position to cut foreigners out of US financial markets, or stop them from travelling to the US if they continue to do business with Iran.  These are known as secondary sanctions…

–          The euro is the world’s second largest currency, but is trailing the dollar on all important metrics by wide margins: for central reserves, cross-border payments and investments; for foreign exchange; and in debt and loan markets

–          It does not seem possible for the euro to strengthen its global role without a single safe asset – a Eurobond.  Modern financial markets require the presence of risk-free securities to function effectively

 

Burden of knowledge/US student debt surges – Pg. 13

–          The US student loan burden has swelled past $1.5tn, despite lending volumes falling for more than half a decade, as graduates fall behind on payment plans and debt relief programmes fail to offer sufficiety succor

–          The overall size of US student loan debt has grown by $500bn since the 2010-11 academic year, ….but the credit rating agency notes that loan origination has declined every year since then

–          The student loan delinquency rate – how many loan balances are overdue by 30 days or more that were not delinquent the previous quarter – fell to a 12-year low of 8.8% in the second quarter of 2018,…

–          The unemployment rate for graduates with a bachelors degree or higher stands at just 2.2%, compared with 5.1% for those with less than a high-school degree.  Nonetheless, student debt remains the worst-performing area of consumer credit

–          (Prof Note: How can young people possibly understand the ramifications and consequences of this crushing debt when I (sorry if this is perceived as arrogant…not meant to be) when my own thoughts (I am well into my 40s) are still maturing on amortization and debt?!  One things I say in class, “Debt <> Debt”.  That is true but also very complicated to understand and I am still maturing in my understanding an defining.)

 

Answer: (1) Change your spending patters (Prof Note: Track Starbucks to the penny); (2) Figure out what you owe (Prof Note: Identify, Quantify, Fix); (3) Roll your balances into a new form, such as a lower APR card; (4) Tap into your assets (Prof Note: Be careful with tax consequences when selling the bonds Aunt Ida left you in her estate.  Be prudent); (5) Choose your debt paydown strategy (Prof Note: Speak with several advisors/experts.  You must learn!); (6) Focus on one card at a time (Prof Note: Small battles, lead to bigger, lead to winning the war); (7) Break down big paying-off-debt goals into smaller ones (Prof Note: I call this making it palatable.  Get a calendar, build an income statement with budget, and plan.  I still do this with projects today.  It is never as scary when written down with a plan.); (8) Promise yourself to never carry a credit card balance again (Prof Note: I learned from attorneys to never make “absolute” statements.  Promise yourself that without a medical emergency, etc, you will never…)