Investors in gilts, U.K. government bonds, saw strong gains over the past month as the Bank of England implemented measures to counter potential Brexit-related woes: cutting interest rates, renewing asset purchases, and easing leverage rules for U.K. banks.
While holders of long-dated government bonds in the U.S., the U.K., and Japan may be celebrating now, it is becoming increasingly obvious that central banks are reaching the limits of what monetary policy can achieve to spur growth. As Mohamed El Erian noted recently in the Financial Times:
These investment gains come at a cost to the system as a whole; and it is a cost that could turn out to be considerable if the government does not follow through with policies that promote high inclusive growth. These include structural reforms [and] a more balanced fiscal stance…
Reinforcing a point we have made in this letter, he observes that in the absence of pro-growth structural reforms and fiscal policy, a prolonged ultra-low interest rate regime can have many negative and counter-intuitive effects -- and that we may already be seeing some of those effects.
For one, participants in the financial system whose health is essential for growth -- including banks and insurance companies -- are hurt by prolonged ultra-low rates. Rather than encouraging spending, ultra-low rates can on the contrary encourage more saving, as economic actors try to ensure that they can meet their future needs for income. Ultra-low rates could eventually push market participants to engage in speculative unregulated financial products, leading to heightened risk and volatility.
Investment implications: Continued economic progress will depend more and more on structural reform (the curtailing of bureaucracy) and constructive fiscal policy from governments (such as lower taxes), as the power of central banks to spark growth continues to erode, and as prolonged ultra-low rates begin to have more and more unexpected and negative consequences. Watch prospects for such reforms as bellwethers of economic growth in coming months and years.
In the U.S., Long Overdue and Finally Appearing: Loans for Vocational Training and Other Alternatives to Four-Year College
Relentless statistics show that the past decade’s huge growth in U.S. college enrollment is leading to a buildup of onerous debt, but no corresponding buildup of graduates with relevant and lucrative skills. Nearly half of recent graduates are “underemployed” -- that is, employed in positions that do not require their degree. At a typical four-year public college, less than half of students beginning their studies will finish in six years. This means that a lot of money is being spent to no effect -- debt that will hamper students’ financial futures and that may eventually fall on the public to repay.
We saw a hopeful development recently in an Education Department initiative called EQUIP, which is spending $17 million to help 1,500 low-income students get educated -- but not at traditional institutions. Instead they’re attending programs run by for-profit companies such as the Flatiron School and Epicodus -- both boot camps which offer intensive education in computer coding. Other participating programs include one run by General Electric (NYSE:GE) to train students in the operation of manufacturing software. Some programs offer the prospect of a degree through an umbrella institution, but will still be comprised almost entirely of high-tech vocational training.
This is obviously a direction far more likely to lead to positive economic outcomes for students and for the country than a brute expansion of enrollment in four-year college programs, and we hope to see the initiative expand and prosper. As we have observed frequently, U.S. economic prospects depend on productivity growth, and a workforce with needed skills is a critical component.
Investment implications: The long-term health of the U.S. economy, and the productivity of its workforce, depends on training workers effectively with skills that are actually in demand in the workplace. The Department of Education has a new initiative to leverage Federal assistance for coding academies and other high-tech vocational training programs. Such initiatives will be far more beneficial than the across-the-board expansion of access to four-year programs that some politicians have suggested.
Greek Government Begins Registering All Privately Held Assets
In February, more than 8.5 million Greek taxpayers will be required to itemize all their wealth and register it with the government -- detailing not just their income and cash holdings, but all their “movable and immovable assets.” Real estate, vehicles, paintings, antiques, jewelry… all included. They’ll have to register changes as they occur and not just annually. (Outraged Greeks in public internet forums are wondering aloud if they have to re-register their cash after buying a pack of cigarettes.)
The program is absurd on the face of it, since, first, the Ministry of Finance has not specified who will appraise the assets or how. Second, as many wags have observed, tax avoidance is a national pastime for Greeks, so they are unlikely to report data on their wealth accurately to the institution that is preparing to tax it.
That, of course, is the endgame here, protestations of the Greek government notwithstanding. A 30% wealth tax on Greeks would “solve” their problems of over-indebtedness, keep them in the Eurozone, and assuage Europe’s financial powers… while a prolonged deflation, as even the International Monetary Fund has painfully demonstrated, presents instead the prospect of interminable economic suffering for the Greek people with no resolution to be seen. So a “one time” reset wealth tax begins to come into view.
Once again, we are left wondering whether Greece is the test-case for a program that could eventually find its way even to the shores of the United States. We don’t think it’s imminent, but we also don’t think it’s impossible.
Investment implications: The Greek government is preparing to collect data on the privately held assets of 8.5 million Greeks -- everything from real estate to cash in their wallets to antiques and jewelry -- and they will have to keep their records current within a month of any changes. Clearly, the Greek government is preparing to levy a wealth tax in an effort to square the circle of its impossible financial situation. Investors should note well that while such events only occur in extreme circumstances, they are not unthinkable -- and at some point, could be implemented even in the United States. For this reason, we always recommend that investors hold a portion of their assets in physical gold -- which would rise if a policy of confiscatory taxation were implemented in any country.
Two-Step Authentication Offers Security Advantages
The only real security that a man can have in this world is a reserve of knowledge, experience, and ability. (Henry Ford)
On July 15, 2016 we wrote a piece on identity protection and cybersecurity. One of our last suggestions was to request an electronic cyber-token from your bank, broker, or financial institution, if they are available.
The hacks and breaches that make it into the news are institutional-scale, so individuals might not think that they could be similarly targeted. But of course, they often are, so it’s always good practice to lean on the side of caution when creating security preferences for your personal financial accounts.
Here are some potential signs of trouble that could alert you to fraudulent activity:
- You see trades or account other activity you don’t recognize.
- When you visit your financial service provider’s website, you see a message that it is “Down for maintenance.” This could be a sign that a hacker is attempting to intercept your communications.
- Your financial data have been compromised in the past; this puts you at risk for future trouble, and should prompt you to a higher state of alert.
- You suddenly begin getting an unusual number of investment-related junk-mail solicitations.
- Any of these events might suggest the benefit of another layer of security, such as a “security token.” A security token is a small electronic device that generates an asynchronous passcode -- a one-time, randomly-generated series of numbers to be entered after your usual log-in and password. Your institution recognizes passcodes generated by its tokens -- but even hackers with supercomputers couldn’t create a fake passcode, or reverse engineer the algorithm.