Tag: Prof Note

26 March 2019

 

Question: According to MSN: Money, what is the average credit card debt?

 

White House pick for Fed board attacked by economists – Pg. 4

–          “Steve is an amiable guy but he does not have the intellectual gravitas for this important job”, wrote Mr Mankiw, a Harvard University professor and former chair of George W Bush’s council of economic advisers, on his blog, “Mr Moore should not be confirmed” (Prof Note: Whoa!)

–          The main concern about the choice of Mr Moore is that it marks a blatant attempt by Mr Trump to place a political ally within the Fed after months of attacks on the institution from the outside

–          Mr Moore’s nomination, which must be approved by the Senate, is likely to reignite concerns about Fed independence which have already ratcheted up a notch in the Trump era

 

Negative-yielding sovereign debt vaults back over $10tn as growth fears intensify – Pg. 19

–          The amount of government debt with negative yields has vaulted back over the $10tn market after the US Federal Reserve’s unexpectedly downbeat outlook exacerbated concerns over the health of the global economy and sent investors scurrying for the apparent safety of sovereign bonds

–          Bond yields have sagged lower for much of 2019 as fixed income investors have remained skeptical that growth will pick up again

–          The ECB this month restarted a crisis-era bank lending programme and last week the Fed shelved plans to raise interest rates this year – unexpectedly cautious moves that have raised questions whether officials see a downturn coming

–          The total amount of debt trading with nominal yields below zero is now $10.07tn….up from a low of $5.7tn in early 2018.  The last time the total moved through the $10tn mark was September 2017

 

Answer: $6,814

23 March 2019

 

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

 

Jittery investors shed stocks and seek safety in sovereign bonds – Pg. 1

–          Fears of a deepening economic slowdown rattled global financial markets yesterday as stocks fell, German government bond yields turned negative and a widely followed US Treasury market indicator raised fears of a recession

–          In the US, three-month Treasury yields surpassed those on 10-year debt – a kink that has receded every US recession since the second world war and last occurred before the financial crisis in 2007.  The yield on the benchmark 10-year Treasury note fell by 0.09% to 2.45%, down from 3.36% in October

–          …has the central bank returned the American economy to a safe equilibrium or is it beginning to fundamentally deteriorate?

 

Trump picks Powell critic for Fed board – Pg. 6

–          …nominated Stephen Moore, a visiting fell at the staunchly conservative Heritage Foundation think-tank and former adviser to his 2016 campaign, for a spot on the Federal Reserve Board

–          …Mr Moore has been one of the most prominent supporters of the president’s domestic economic agenda with its focus on tax cuts and deregulation

–          Mr Moore has been a vocal critical of the Fed, particularly as the central bank las year raised interest rates

 

Beware the health costs of legalizing cannabis – Pg. 8

–          Few investment sectors can match the huge returns achieved by the cannabis business in recent months, propelled by the prospect that the drug will be legalized for recreational use around the world while more medical applications are developed

–          …smoking potent cannabis strongly increases the risk of psychosis

–          This “case-control” study adds weight to the growing evidence that cannabis, particularly in high-potency forms such as skunk, can trigger mental illness in vulnerable consumers

–          There are also potential benefits from a well-regulated market, including diverting revenues from criminal traders to legitimate companies and (through taxation) public authorities.  Nor should we ignore the sheer pleasure that many people derive from smoking dope.  But the risks do suggest the need for great caution by governments considering legalization (Prof Note: More and more of my peers are acknowledging they “vape” and/or smoke pot.  What is of most concern to me is the consistent statement by most, “Pot is not addictive.”  In the same conversation I hear, “I just need pot to relax.”  If one needs pot to relax, does that not make it addictive?  Full disclosure, I have never smoked pot (or anything) but am expressing my concern and fear.)

 

Lab-grown stones take lustre off natural diamond producers – Pg. 13

–          …$17bn diamond-mining industry

–          Sales of lab-grown diamonds make up only about 2% of the total diamond jewellery market but production is growing by 15 to 20%/year, …

–          The price of smaller diamonds dropped to their lowest level since at least 2011 in January…

–          …Indian polishers and cutters of diamonds have grown cautious about restocking natural diamonds given the rising supply of lab-grown stones

–          The ability to produce small lab-grown diamonds in a consistent quality and colour has made them more desirable for the fashion jewellery market…

–          …a new breed of lab-grown producers is targeting bigger, more valuable diamonds

–          Over 90% of the world’s natural diamonds pass through India and are polished in the city of Surat

–          Lab-grown stones are produced using high pressure, or by depositing layers of carbon on a diamond seed, a process known as Chemical Vapour Deposition

–          Last July, the US FTC expanded its definition of a diamond to include lab-grown stones

–          Such stones could account for 5% of the global diamond jewellery market by 2023…

 

Answer: $275,000

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