President Trump’s Unlikely Victory

electionWith the election of President Donald Trump, you are advised to prepare for a wild ride in the investment markets; indeed, the markets are already turning sharply negative due to the uncertainties ahead.  Will the new President really build an expensive wall across our Southern border?  Will he introduce legislation that will nullify the Affordable Care Act and throw millions of Americans with pre-existing health conditions into health insurance limbo?  Do taxpaying non-citizens who have children born in America have reason to fear deportation?  Are our allies abroad really going to have to renegotiate their trade and security arrangements with the world’s superpower?

It is helpful to remember that these market gyrations are almost always bad times to trade, and particularly to sell.  We have months before the new president takes office.  Traders and analysts have plenty of time to settle down between now and the first 100 days of the Trump presidency, and evaluate whether America’s corporations are, indeed, worth much less than they were before election night.  The safest bet you can make is that they’ll be unusually jumpy for the next four years.  But in the end, the intrinsic value of stocks don’t change with the occupant of the White House.

One of the more interesting things to watch out for is a tax reform proposal sometime in early 2017.  Along the campaign trail, candidate Trump proposed simplifying our taxes down to three ordinary income tax brackets: 12% (up to $75,000 for joint filers), 25% ($75,000 to $225,000) and 33% (above $225,000).  The wish list includes a doubling of the standard deduction, with itemized deductions capped at $100,000 for single filers; $200,000 for joint filers.  Capital gains taxes would be capped at 20%, federal estate and gift taxes would be eliminated and the step-up in basis would be eliminated for estates over $10 million.

However, one should remember that these proposals were made before anyone imagined that Americans would elect an undivided government, with the Presidency, the House and Senate all under the control of one party.  The next four years—indeed, the first 100 days of the new Presidency—represent an opportunity for the Republican party to do something much more ambitious than simply tinker with our nation’s tax rules.  Influential Republican leaders—including House Speaker Paul Ryan—have reportedly been planning for some years to rewrite our nation’s tax code.

What, exactly, would tax reform look like?  At this point, we simply don’t know.  The goal would be tax simplification, but the bet here is that whatever form this takes will add thousands of pages to the current law.

Of course, everything is speculation at this point, which is the most important thing to keep in mind as the markets roil and the shock and awe of the unexpected election outcome begins to sink in and cooler heads prevail.  The very worst thing you could do, over the next few days and weeks, is make a temporary loss permanent by selling into the general panic.


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Buying a Credit Score on the Cheap

credit-scoreYour kids graduate from college and face an immediate dilemma: they have no credit history, which makes it harder for them to rent an apartment or get a credit card.  Is there a way the parents can help them without risking their own credit score?

An article on the website Nerdweallet suggests a solution that will cost just $200.  You encourage your child to open a secured credit card, whose credit limit is equal to a deposit that can be as low as $200.  You make the deposit on his/her behalf, and presto!  The cardholder is now able to make small purchases, pay back into the account, and establish a credit score in about six months.  And the transactions weigh more heavily in credit scoring when the adult child is a primary user, rather than an authorized user on the parent’s credit card.  An added advantage: the child receives his/her own separate bill, and becomes accustomed to paying on time.

Credit experts advise that the child hold spending to 30% or less of the credit limit—which basically means putting no more than $60 on the credit card, and then paying that amount back.  Parents can spring for a higher deposit if they think the adult child will be responsible for making higher payments.

Make sure the new credit card holder understands the interest rates, minimum payment and due date on the statements, and and help adult children calculate how long it would take to pay off the balance making only minimum payments.  Eventually, once the adult child has learned good credit card habits by using a card with training wheels, he or she can transition to an unsecured credit card.  At that point, the secured card can be closed and your deposit returned.


How to Buy Your Kid a Good Credit Score for $200

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Global Debt Overhang

ca-2016-10-15-global-debtYou haven’t heard much about the U.S. government’s debt, in part because, as a percentage of the economy, the growth of our national debt has slowed dramatically.  (See chart)  But measured on a global scale, the world’s $152 trillion of debt—from consumers, corporations and governments worldwide—is more than double the balance at the start of the century, which worries the International Monetary Fund.  That total represents 225% of gross domestic product around the world.

Government debt only accounts for about one-third of the total, and not all countries are contributing their share the total debt burden.  The most recent IMF report singles out China as a country at risk of a disorderly wind-down of high debt levels among its corporations, and shows that emerging market economies, with greater access to credit, are among the fastest-growing global debtors.

Why worry?  The report suggests that high private debt levels can increase the likelihood of a new financial crisis, which can lead to negative economic growth and another debt spiral.  Meanwhile, highly-indebted borrowers are likely to reduce their investment and consumption, dragging down economic growth.

The report doesn’t offer any policy prescriptions, except that the world needs to start digging out slowly and carefully, so as not to trigger a global recession, and in years when the economy is growing, there needs to be a policy that pays down debt—both by governments and the companies and individuals that have a little more money in their pockets.


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Internet Participation Rates

ca-2016-10-15-internet-participation-rates1Pretty much everybody has access to the Internet.  Don’t they?  The actual global median of all countries is 67% of citizens, but access is not evenly distributed.  In the U.S., 89% of adults use the Internet at least occasionally, according to the Pew Research Center.  Only South Korea (94%), Australia (93%) and Canada (90%) report higher figures, and the UK (88%), Spain (87%), Israel (86%) and Germany (85%) are comparable.

But as you can see from the accompanying chart, Internet access is much lower in places like Ethiopia (just 8% of adults accessing the Internet), Uganda (11%), Pakistan (15%), and even India (22%), Mexico (54%) and China (65%) are surprisingly low.  Russia, at 72%, actually ranks as one of the world’s leaders, although Internet access is not yet ubiquitous as it is in the more developed nations.

The research found, as you might expect, a very strong correlation between country wealth (as measured by per-capita GDP) and internet access.  (See chart)  But a separate part of the study shows that some of the world’s poorer countries are rapidly increasing their internet usage.  In Turkey, Jordan, Malaysia, Chile and Brazil, the percentage of adults using the internet increased by double digits from 2013 to 2015.

And not surprisingly, the study found that everywhere they looked, younger people age 18-34 were more likely than people over age 35 to say they use the internet or own a smartphone.  Some things are consistent across cultures.


1. Internet access growing worldwide but remains higher in advanced economies


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Gold Up, Gold Down

ca-2016-10-15-gold-up-gold-downThe enduring popularity of gold as an investment has to do with its tangible nature.  Unlike a stock or a bond, you can feel and touch golden coins and larger ingots.  The problem with such tangible assets, of course, is that there is nothing alive about them; that is, there is no claim on the fruits produced by the labor of thousands of workers, in the form of dividends or growth of the enterprise.  As Warren Buffett famously pointed out, if you owned all the world’s gold, you could mainly polish it and admire it in your front yard.

Even so, with all the uncertainty in the Middle East, Brexit and the tumultuous U.S. election, investors piled into gold this year, and have been rewarded with roughly 18% returns so far.  Alas, they are now learning that gold is one of the most volatile of all assets.  Prices have fallen dramatically in the last month, including a 4.5% drop in one week alone.  (see chart)

Experts are saying that if the Federal Reserve Board raises interest rates, that could trigger a further plunge, since investors could park their money in relatively safe investments which (unlike the recent past) paid returns.  Gold was competitive with bonds when bonds (like gold) were paying nothing.  We may be about to see what happens when there’s a difference in yield.



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Pound Poor, Pound Foolish

poundYou may have read that the British pound has had a very rough couple of weeks on world markets, losing more than 4% of its value against the dollar in one week, and continuing the slide through the next, finally reaching a 31-year low against the dollar.  Part of the problem was a mysterious “flash crash” that sent the pound down more than six percent last Friday morning before it briefly stabilized—and then promptly started the next week by testing those crash lows all over again.  Market analysts blamed the initial decline on trading algorithms—that is, computers programmed to buy or sell in milliseconds based on news or shifts in the marketplace.  Apparently, the twitchy programs triggered other algorithms to create a cascade of sell orders that had to be interrupted by human intervention.  But now the human traders appear to be in agreement with the original panicked consensus.

The obvious cause for this decline in one of the world’s most historically stable currencies is uncertainty.  U.K. Prime Minister Theresa May has signaled that her country will pursue a so-called “hard Brexit,” meaning a full uncoupling of British and mainland European trade agreements sooner and more definitively than the markets apparently expected.  Brexit Secretary David Davis probably didn’t help matters when he said that Britain would renounce any contribution to the European Union budget, agree to jurisdiction of trade disputes in the European Court of Justice, or (a big issue for British voters) the free movement of labor across national borders.

Of course, French President Francois Hollande, responding to his counterpart’s rhetoric, promised that the European response would be equally harsh, and German Chancellor Angela Merkel added that negotiations would not be easy on her side of the table.

Right now, the British currency seems to be a way for all of us to visibly watch how market participants view the future of Britain’s economy, based on what they’re hearing about the way negotiators plan to handle the disengagement.

This is a classic case of foolishly trading on headlines rather than fundamentals, since the actual negotiations will last two years, and won’t even start until late Spring of next year.  Whatever the outcome of those negotiations, you can bet there will be a lot more news about movements in the British pound between now and two and a half years hence—up and down.

Meanwhile, with the pound this cheap, British-based exporters are expected to prosper, since whatever they sell abroad will now enjoy a price advantage.  And this might be a great time for American tourists, if they can endure the Autumn weather, to visit London, Stonehenge and Scotland—at bargain prices.


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Deutsche Bank’s Woes

deutsche-bankYou may have been reading something about problems with one of the world’s largest lending institutions—Deutsche Bank—without understanding what the issue was.  The bank has been reportedly due to pay a whopping $14 billion fine over its role in the 2008 market crash—specifically for selling junk mortgage pools to investors while knowing full well that they were junk.  However, other reports say they bank may be able to settle with the U.S. Department of Justice for a mere $5.4 billion.

Deutsche Bank happens to be Germany’s largest lending institution, although the firm appears to have transferred most of its corporate energies from lending to the diciest corners of the U.S. investment market when it acquired Banker’s Trust Company.  At the time, Banker’s Trust was a convicted felon ineligible to transact business with municipalities and corporate customers after pleading guilty to institutional fraud related to its handling of complex derivatives and dormant customer accounts.  The merged bank then spent much of the first part of the 2000s creating and peddling exotic investment products and trading aggressively in the same securities for its own account.  In Europe, meanwhile, the bank loaded up on so many risky sovereign loans from Spain and Italy that it now faces a potential combined credit risk of 30 billion euros from that source alone.  The bank’s total capitalization has been reported at $17.9 billion.

This risky behavior was certainly not uncommon—U.S. lenders engaged in the same activities, and Lehman Brothers and Bear Stearns did not survive them—and the ending was not unpredictable: after 2008, the bank’s balance sheet was loaded with complex derivative investments that were hard to value or unload, and there were enormous liabilities looming over its future.  Most importantly, from the standpoint of investors, the share price has fallen from 50 euros in 2010 to just over 10 euros (roughly $11) currently.

Deutsche Bank was not the biggest offender for the 2008 crisis based on the size of its fine—that “award” goes to Bank of America and its Merrill Lynch subsidiary, which was slapped with a $16.6 billion penalty for its nefarious role in the subprime crisis.  Nor do analysts believe the bank’s existence is in jeopardy.  At least one German magazine has reported that the German government has opened discussions to bail the bank out with (German) government money, and failing that, the bank may decide to sell shares to the public to recapitalize.

For those of us who thought that the purpose of lending institutions was to lend money into the economy—not play fancy tricks with tricky investments and gamble their own money in the more exotic corners of the markets—the Deutsche Bank debacle suggests a lesson: that greed always seems to find a way to punish those who rely on it as a business or investment philosophy.




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