Alchanati Campbell & Associates
The Market. Australia’s economy has slowed sharply as households struggling with record debt and weak wage growth cut back on spending. The US initiated tariffs on $110 billion in Chinese imports on Sunday. A decision is a matter of judgment. Professionals often make decisions that deviate significantly from those of their peers, from their own prior decisions, and from rules that they themselves claim to follow. Negative yielding debt is now at an estimated $17 trillion. Extreme heat is the deadliest consequence of our excess consumption of fossil fuels. The World Health Organization predicts heat stress linked to the climate crisis will cause 38,000 extra deaths a year worldwide between 2030 and 2050. The cost of manufacturing solar systems have been decreasing for the past 7 years and the cost of manufacturing wind turbines and natural gas generators increased slightly. The Arctic is warming twice as fast as the rest of the world. Hong Kong’s troubles have significantly reduced by the city’s chief executive withdrawing the extradition bill. Bond market data is pricing in a 47% chance of a recession in the next 12-months and Ray Dalio stated a 25% in 2020.
Lifetime finance advice. The central problem of life-cycle finance is the spreading of income from the economically productive part of an individual's life over the person's whole life. No investment is riskless if the "run" is long enough and no one knows how long they will live. A person’s life has three financial stages: 1) growing up and getting educated, 2) working, 3) retirement. We all start off with tons of potential and we begin accumulating our human capital (the present value of future labor income). The amount of education one receives is highly correlated with the present value of earning power. Our total wealth is made up of two parts: our human capital and our financial capital. The risks to our retirement are as follows. The risk of living too long is called longevity risk. To insure against longevity risk, one can purchase annuity products that pay yearly income as long as one lives. People today are living longer and could face much higher health-care costs. One way to reduce wage earnings risk, the risk of losing one’s income, is to save more. The Social Security system and many Defined-Benefit plans are at risk so investors must increasingly rely on their own savings for retirement spending. Investors need to make asset allocation decisions and life insurance decisions jointly. The optimal asset allocation depends on the risk-return characteristics of their labor income and the flexibility of their labor income. Younger investors may invest more of their financial assets in risky assets than older investors because the young have more flexibility in their working lives. Conservative investors should invest relatively more in risk-free assets and buy more life insurance. In the event of death, life insurance can be a perfect hedge for human capital. The number one reason for individual investors to save and invest is to fund spending in retirement. A typical investor has two goals in retirement- ensure a comfortable lifestyle and leave some money behind. Individuals risk a stable and healthy retirement due to financial market risk, longevity risk, and the risk of not saving enough. The first step of a well-balanced retirement plan is to locate a suitable global mix of risky and risk-free assets.
Dorian. With Hurricane Dorian making landfall on the Eastern coast of the United States this week, the impact of Hurricane Dorian is incalculable at this moment. 2017 was the costliest year for the U.S. economy in terms of natural disasters, with 16 extreme events costing over $300 billion. The St. Louis Fed put out an informative article detailing the costs. There are direct costs, expensive losses -- things like houses, cars, jewelry, and barbeques. These are easy to calculate the cost of. There are also direct costs like the loss of historical monuments, which are impossible to quantify. Indirect costs are more of the lingering effects of a disaster. Local businesses are destroyed, and depending on the specifics, may never return to that area. That puts people out of jobs and wrecks the unemployment and income of the area. Luckily, most people are insured against disasters like hurricanes, tornadoes, and wildfires, so much of the cost falls on insurance companies. However, in 2018, only half of the $160 million losses in 2018 was insured, so these disasters are even more devastating for the uninsured. The less affluent people are the ones not insured and are the ones that need the insurance the most. They signify no hope of being able to rebuild their home by their own, and quite possibly represent the most tragic of disaster repercussions. Something interesting to keep in mind is that, according to most scientists studying climate/weather, global warming is increasing the frequency of disasters. In turn, global warming is advanced by businesses that are disregarding the environmental impact of their operations in exchange for lower costs and a higher profit margin. Then, when disaster strikes, these companies undoubtedly feel the impact, whether that be through damaged buildings, taxes for national emergency relief, and loss of revenue. While the two sums (cost of lowering environmental impact and disaster relief costs) are not equal, it's interesting to note that they may be paying either way.
USD strength. Amidst global slowdown fears, a potential impending recession, and political instability, the dollar is still holding near its 2-year local high. The DXY, which is considered the US dollar strength index matches the USD against a basket of foreign currencies, to obtain a trade-weighted average value. Dollar strength means a few things: decreased exports, increased imports, increased US capital flows, and decreased tourism. We have decreased exports, as US products are more expensive in foreign currencies, while foreign products are cheaper in regards to the USD. Usually, a strong USD is directly related to the current belief in the future of the economy being strong. To me, there is something awry, as there is quite a bit of fear currently in the US economy. Maybe people can’t find another instrument to move into to cover an impending recession and are willing to bet the USD will drop the least, in regard to other currencies.
Social Security. A study conducted by the Transamerica Center for Retirement Studies stated that 80% of millennials are worried about social security and don’t think they will be able to count on the system that they will have paid into for their entire working life. Yet, studies on the longevity of the system vary. The Center for Economic and Policy Research found that when millennials retire they will actually be able to receive 10% more benefits than current recipients. This report is in stark contrast to what the Social Security Administration reported just this year when it found that the Social Security Trust Fund (that has $2.8 trillion in reserves) will run out of reserves by 2035. This discrepancy is due to the fact that the first report accounts for the fund’s reserves growing faster than inflation. So why is everyone so worried about Social Security? Well, the Center for Retirement Research found that the amount of income that social security will replace is going to drop by 4% which means that beneficiaries will either have to cut back on expenses or find another way to replace that income. In addition, the AARP expects Social Security to only cover roughly half of the basic living expenses. So be sure to start saving your money now! You may not have another choice.
Management practices. In the past, we have learned that managers cannot be trusted to do their jobs of maximizing shareholder value, but the manager’s values must still align with the shareholders. And, that there should be strict monitoring and supervision to restrict opportunistic behavior. But these practices are outdated and ineffective. Bad management theories are destroying good management practices. Business schools and academics are creating management theory into a science of sorts. They are teaching students how to be a good manager based off of a scientific model. Ethics and morals have been diminished due to the strict objectives and goals placed on managers and executives. Goals such as: making shareholders happy and wealthy, profitability, and constant growth and improvement. Sometimes these goals cause managers to be unethical to achieve the goals. If we wish to reinstitute ethical or moral concerns in the practice of management, we have to first reinstitute them in our mainstream theory; the theory taught in schools.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.