The January 2019 Fed Minutes

Attention has turned to what extra gems of information might be contained in the release of the FOMC’s January 2019 minutes about the future path of policy. Comments have focused on the Fed’s balance sheet, the consequences of its runoff for financial markets, and what the Fed’s policies might be going forward in terms of balance sheet size and rollover.

Federal Reserve - FOMC

Financial markets have inferred that the runoff of the Fed’s balance sheet has negatively impacted risk-taking incentives, but that inference is largely mistaken and misses the forest for the trees. Indeed, the minutes state that “Participants noted that the ongoing reduction in the Federal Reserve’s asset holdings had proceeded smoothly for more than a year, with no significant effects on financial markets.”

The early portion of the minutes focused on how to better communicate what the FOMC’s intentions are with regard to the size of its balance sheet. The Committee suggested that it will pursue a multipart process to communicate how it will proceed. The first step was a “Statement Regarding Monetary Policy Implementation” in which it revised previous guidance. The statement made two points. First, it indicated that, going forward, the Committee will continue to operate its floor system (without calling it such) of administered rates, which will require an ample supply of excess reserves. The Committee will not be returning to the pre-crisis process of affecting rates by managing the scarce supply of reserves. What this says is that the Fed will now go forward with a larger balance sheet – a path determined by the amount of currency in circulation, reserve deposits held by governmental and foreign entities, and a larger cushion (as yet unspecified) of bank reserves. That is, the Desk will set interest rates directly rather than indirectly controlling rates by manipulating the outstanding supply of reserves. The second part of the statement indicates that that the Committee stands ready to adjust its path to normalization depending upon economic and financial developments (read: incoming data).

Support for the first point in this policy clarification was actually contained in an earlier segment of the minutes summarizing the Open Market staff briefing on long-run policy frameworks for implementing policy. That briefing argued that the recent experience with what is called the floor system worked out well without the need to manage the amount of outstanding reserves and stated that “The current regime was therefore effective both in providing control of the policy rate and in ensuring transmission of the policy stance to other rates and broader financial markets.” The exact size of this buffer of reserves was not specified, and it was only hinted that the size limit would be reached sometime later this year. Interestingly, there was another piece of information about how the size of the reserve buffer would be managed. That process rests on the often not understood fact that the volume of reserves outstanding does not depend upon bank behavior, including banks’ willingness to hold reserves, but instead is totally under the control of the Fed. To that end, the staff suggested that, over time, as currency demand and other holdings of deposits at the Fed increased with growth in the economy, the constant reserve component would continue to shrink as a proportion of the total size of the Fed’s portfolio.

As a last point, it is worth addressing again what the shrinkage of the Fed’s portfolio means to financial markets relative to Treasury debt issuance. The following chart shows the current changes in the size of the balance sheet relative to the Committee’s target of $550 billion, as of the third week in January 2019. Both Treasury and MBS runoff is below target, with the maturing MBS far behind, due in no small part to slower than anticipated pay downs. In total the portfolio has declined by $382 billion, somewhat below the $550 billion target. So, in actuality, the balance sheet shrinkage is below what was planned and announced. Against this evidence is what the Treasury has been doing with regard to debt issuance in response to a growing deficit and outstanding debt of some $22 trillion. Since the Fed started its balance sheet reduction in October 2017, Treasury debt held by the public has increased by a net $1.5 trillion. Moreover, since the Fed’s holdings count as debt held by the public, the Treasury has more than offset the decline in the Fed’s portfolio. In fact, the dominant force affecting financial markets has been the increase in Treasury debt supply (and not the shrinkage in the Fed’s portfolio), combined with recent declines in foreign holdings of US debt.
Reduction in Fed Balance Sheet due to Runoff from Oct 1 2017 - 3rd Week 2019
As for the endgame size of the Fed’s portfolio, we estimate that currency demand would support a balance sheet at about $2.5 trillion by early 2022. To this would be added liabilities reflecting reserves supporting the reserve repo process, US Treasury holdings, and other deposits at the Fed that presently total about $1 trillion, suggesting a balance sheet of about $3.6 trillion, which is not far off from its present size of $4.1 trillion (as of February 6, 2019).

Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Shutdown #7

Jim Bianco, my friend and regular fishing buddy at Camp Kotok, penned a note on “a side effect of the government shutdown.” Readers know we have done a six-part series on the shutdown, and we have been hugely critical of the political process, with both Democrats and Republicans equally as our targets. Setting aside that fight, let’s look at a point or two seeded by Jim Bianco.
Cumberland Advisors Market Commentary
Jim notes that the Federal Register is the “chronicle” where every new regulation is posted. He also notes that one of the analytics many people use is the count of the number of pages in the register. The page count peaked under Obama. Trump promised to reduce it, and Trump has delivered on his promise to date: The number of pages has dropped by about a third. Jimmy projects that it will drop again and that the shutdown means the government that creates regulations will be doing less of that because it was out of business for 35 days.

First, we must applaud Jim for calling this technical area to the attention of folks who are busily fighting partisan battles and not looking at more holistic data points.

Secondly, we give Jim a hat tip for referencing the source of his insights: TenThousandCommandments.com. We invite readers to go to this website and surf it. It may open some eyes to the amount of regulation and deregulation we have had and then cause readers to think about that issue.

From our perch as a highly regulated business, we can see the internal costs we must absorb every day. We review nearly everything we do or say for compliance and supervision within our regulatory framework. This commentary had a set of eyes perform a review of it.

Now take that process to a macro level and apply a reduction of the regulatory burden. Result: costs go down. Those costs are not productivity-enhancing. They are burdens that either reduce profitability (less room for growth or new hiring or capital investment) or are passed through to consumers via a supply chain to become price increases. Either way, an ever-enlarging regulatory burden carries a cost.

Some regulations that apply to health and safety, anti-fraud, and other social challenges are absolutely necessary. Others constitute excess and overreach. Judgments as to which are which are idiosyncratic and can come down to political viewpoint. But, on the whole, a more streamlined system is better for a large economy than a more centrally planned approach is.

Here are a few highlights from the 2018 edition of Ten Thousand Commandments, which can be downloaded from the TenThousandCommandments.com website:

  • “The estimate for regulatory compliance and economic effects of federal intervention is $1.9 trillion annually….”
  •  “The estimated burden of regulation is equivalent to nearly half the level of federal spending….”
  •  “When regulatory costs are combined with estimated federal FY 2018 outlays of $4.173 trillion, the federal government’s share of the entire economy reaches 30 percent (not including state and local spending and regulation).”
  •  “The regulatory hidden tax is equivalent to federal individual and corporate income tax receipts combined, which total an estimated $1.884 trillion in 2017….”
  •  “If it were a country, US regulation would be the world’s eighth-largest economy, ranking behind India and ahead of Italy.”

We thank Jim Bianco for calling this important issue to the attention of his readers (of which we are one).

TenThousandCommandments.com – Mobile users, click the “View web version” link at the bottom of the mobile site to see the full array of content.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Week in Review (Feb 11, 2019 – Feb 15, 2019)

Cumberland Advisors Week in Review

(Feb 11, 2019 – Feb 15, 2019)

February 16, 2019

Week In Review

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team. These are not revised assessments, and circumstances may have changed in the market from the time of original publication. We also include older commentaries that our editors have determined may be of interest to our audience. Your feedback is always welcome.

 

MATT MCALEER’S WEEKLY RECAP

Matt McAleer shares some research in this week’s wrap up. Nice to see Europe get the bid we talked about before. We’ve been pleased in movements in Latin America and Asia. We talk about our US portfolio, changes we’ve made, and some history backed up by charts and data.  Should you ever own anything but the S&P 500? WATCH HERE. And reference the charts here: https://www.cumber.com/matt-mcaleers-weekly-recap-video-february-15-2019/

Matt McAleer and John Mousseau will provide extended quarterly videos for our clients that will incorporate equities and fixed-income in the coming weeks. Stay tuned!

 

MARKET COMMENTARY

 

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UPCOMING EVENTS

Financial Literacy Day – Financial Markets and the Economy
You’ll want to mark your calendar for Thursday, April 11, when the University of South Florida Sarasota-Manatee joins Cumberland Advisors and the Global Interdependence Center in hosting the third annual “Financial Markets and the Economy Financial Literacy Day” event.Financial Markets and the Economy Financial Literacy Day IIIThe Outlook for the US Stock Market & Global Economic Outlook will be a feature and there will be a special report on the “Use of the Bloomberg Terminals – Two Years Later” after Cumberland Advisors and David Kotok gifted them to the University led by Paul Bova, Director of Development and/or Dr. GJ de Vreede, Dean, University of South Florida Sarasota-Manatee College of Business. We look forward to seeing what level of impact this has had on area students seeking to enhance their educations and understanding of finance and finance related tools.Financial Markets and the Economy Panels, Talks, and Discussions Include:

 

  • Keynote Speaker: Gretchen Morgenson, The Wall Street Journal: Senior Special Writer, Investigations Unit
  • A Conversation with Susan Harper, Canada’s Consul General in Miami
  • Session I – The Stock Market Matt McAleer, Executive VP & Director of Equity Strategies, Cumberland Advisors Richard Hoey, Senior Economic Advisor to BNY Mellon Wealth Management Adam Johnson, Founder & Author of Bullseye Brief, an Investment News Letter Moderator: Maryanne Waldman, RBC, Boston, MA
  • Session II – Health Hunger and Philanthropy Judith Monroe, President and CEO, CDC Foundation Erin McLeod, CEO, Friendship Centers, Sarasota, FL Lisa Marsh Ryerson, National President, AARP. Formerly, President and CEO, Wells College, Aurora, NY. Gabriel Hament, Cumberland Advisors Moderator: Lisa Shaw, CFP, CIMA, Managing Partner, Cygnus Asset Management, LLC
  • Session III – How the World Looks to Me Leland Miller, CEO, China Beige Book International Paul O’Brien, Former Deputy Chief Investment Officer, Strategy and Planning Department, Abu Dhabi Investment Authority, ADIA. Moderator: John Authers, Author and Bloomberg Columnist

Learn More about Financial Markets and the Economy Financial Literacy Day III at USFSM.

COMMUNITY ENGAGEMENT

 

David R. Kotok speaks to organizers of “Coming Together Against Cancer 2019”, held Saturday, April 13, 9–11:30am at Eloise Werlin Park, Sarasota, FL. CTAC is a donor-driven community uniting donors with pioneering physicians, researchers and institutions as ‘Partners In Discovery’ with the common goal of eradicating cancer. Donors leverage CTAC’s educational resources to make informed decisions and maximize the impact of their philanthropy with 100% donation pass-through and the potential for matching funds. Cumberland Advisors is a proud supporter. Watch the video to learn more or visit http://www.ctac.life

GET TO KNOW CUMBERLAND ADVISORS

Gabriel Hament, an investment advisor representative with Cumberland Advisors, originally joined the firm in late 2015 to assist with Charitable and Foundation Accounts. Gabriel passed the December 2018 Chartered Financial Analyst ® (CFA) Level I examination, the first of three steps toward CFA designation. At Cumberland, Gabriel now works with foundations, independent nonprofits and private individuals to align client investment portfolios with their unique objectives.

Gabriel was previously a political consultant in the Sarasota region, where he supervised and coordinated campaign messaging, fundraising, and field outreach programs. A native of Sarasota, he earned his B.A. in political science with a minor in history as a John V. Lombardi Scholar at the University of Florida.

Gabriel is also a graduate of the Connect Florida Institute, a sister organization of Leadership Florida. The mission of Connect Florida is to educate, engage, and inspire the state’s top emerging leaders.

Additionally, Mr. Hament is a member of the Programming Committee of the Sarasota Tiger Bay Club, which promotes community understanding of current political and social issues through public discourse and the free exchange of ideas. The Sarasota Tiger Bay Club is a nonpartisan political organization established in 1982.

In March 2017 Gabriel was appointed by the Sarasota County School Board to serve as a member of the Financial Advisory Committee (FAC). The FAC was created to provide citizens’ oversight of the district’s use of operating funds from the 1-mill locally voted referendum that was originally approved in 2002 and most recently reauthorized in 2018. The FAC provides oversight for the use of capital funding generated by the district’s share of a one-percent county sales tax. The FAC also monitors the District’s investment accounts ($50 Million Core Portfolio).

Are you with a foundation, independent nonprofit, or are you a private individual looking to align your investment portfolios with your unique objectives? Feel free to contact Gabriel or another investment advisor representative at Cumberland Advisors for an introduction.

 

FEATURED INTERVIEWS



Matt McAleer, Executive Vice President & Director of Equity Strategies for Cumberland Advisors, appears on the TD Ameritrade Network to discuss financial markets with Oliver Renick.

View the discussion by following the link above or here: https://tdameritradenetwork.com

 

Are municipalities ready for climate change? What are the repercussions for credit ratings and bonds? We examined many different angles of climate change during our January 2019 Climate Change summit led by Bob Bunting at the University of South Florida Sarasota-Manatee (USFSM)  including a presentation on conditions in the arctic. We were fortunate to have the opportunity to speak to the featured presenter, Dr. Robert Corell, about his experience in the arctic for a few minutes on camera. David R. Kotok leads the discussion, “What’s Happening in the Arctic,” in this short interview.

ADDITIONAL RESOURCES

 

Lessons from Thucydides

David R. Kotok has written the monograph pamphlet, “Lessons from Thucydides” detailing information asymmetries and their implications for investors and world affairs. The concept of a Thucydides Trap and its rise and avoidability (or lack thereof) is often debated and David makes a case for dealing with them weaving current and historical events into a comprehensive narrative.

Thucydides-Trap

This free monograph also has lessons for President Donald Trump’s trade policy. Can the United States avoid a Thucydides Trap with China & Xi Jinping? Will you benefit from the Lessons of Thucydides or fall victim to a Thucydides Trap? If information is key, you now have a handbook at your fingertips. Download a copy of this monograph in either PDF (free) or Kindle ($.99) format. https://www.cumber.com/thucydides/


Have you subscribed to our YouTube Channel?Thank you for engaging with us, your comments always welcome.

 




Taxing Wealth Instead of Income?

With the desire to finance both an increasing deficit and an increase in government services, politicians are searching far and wide for funds. Increasingly, proposals are surfacing to tax wealth rather than income as the means to fund pet projects. The proposals attract followers since unequal distribution of wealth is viewed as a problem that needs to be addressed. However, we really need to think through the implications of going down this road.

Market Commentary - Cumberland Advisors - Taxing Wealth Instead of Income

First, it is important to understand the distinction between income – a flow of money from work and investments – and wealth – an accumulation of assets, things that we have. We all know that we can borrow to fund our acquisition of things, which then have to be financed out of current income. Most recent proposals therefore have actually focused on taxing net worth- reflecting the difference between what we owe and what we have.

While it is easy to refer to wealth in the abstract, it is important to recognize the wide range of assets that constitute our wealth. These include our homes, cars, financial assets, clothes, vacation homes, yachts, intellectual property rights, patents, etc. Some of these are easily valued while others are more problematic. One of the most recent wealth tax proposals would tax net worth over $10 million at 2% and net worth over $1 billion at 3%.

One of the interesting points about the wealth tax is that it taxes net worth – our things – each year, whereas an income tax is based on our current year’s income. Here is an interesting thought experiment. Suppose you have $1 billion, and it is taxed 3% every year. In 10 years, assuming the principal was not invested, you would have slightly less than $750 million remaining, and in 20 years you would have about $540 million. So, in effect, the government is saying that you have too much stuff and they are going to take it. In the extreme, this is not really different from the government saying that you have too many cars or that your house is too big and therefore you must let someone use one of your cars or one or two of your rooms at your expense.

More seriously, it is interesting to look at how the composition of wealth differs over classes of different net worth. The Federal Reserve’s survey of consumer finances contains information that allows us to get a better picture of how the distribution of stuff differs across different wealth cohorts. For the lower tiers, real estate, autos, retirement funds, and liquid assets comprise the bulk of net worth. At the other extreme, for those with a net worth in excess of $1 billion, the target cohort for the net worth tax, those same assets are a minuscule portion of their net worth (See Chart, “What Assets Make Up Wealth?” at https://www.visualcapitalist.com/chart-assets-make-wealth/).

More than two thirds of the wealth of the $1-billion-dollar-net-worth cohort is composed of what is termed “business interests.” The Survey of Consumer Finances divides “business interests” into those business interests in which the owner has an active management role and those in which the owner does not play an active role and well over 90% of such business interests constitute active management. Thus those who wish to tax wealth rather than yearly income are, in fact, targeting mainly privately held business interests whose value is derived from the active entrepreneurial involvement of the principal and his or her family (1). Such assets are hard to identify, since they can include loan guarantees, intellectual property, etc. Those business interests are not frequently traded and are extremely hard to value. These are the same business interests that generate employment and benefits to many others. To implement a tax that serially requires a potential long-term expropriation of and monetization of productive businesses activities in the name of funding other social objectives requires very careful review and analysis of the costs and benefits.

The same survey also shows that one of the main determinants of wealth is education, and the returns are greatest to a college education (2). To be sure, we have recently heard about the problems of excessive student debt, and a recent Wall Street Journal article convincingly shows that students who attend but don’t finish college can be even worse off than those who don’t have a college degree (3). However, that same article also shows that unemployment rates are lower among college graduates and those with some college than for those with no college, and earnings show a similar pattern.

We need to remember that our Declaration of Independence promotes the “pursuit of happiness,” which has come to mean equal opportunity, not equal incomes or equal wealth. Given the evidence on education and wellbeing, we need to consider whether the key to dealing with the so-called problems of income and wealth inequality may be education and not government redistribution policies. Maybe we should focus on programs to raise those on the bottom while taking advantage of the often philanthropic tendencies of people with large accumulations of wealth. Perhaps we should consider policies, as just one example, that reduce inheritance taxes if a wealthy individual donated some of his or her wealth in advance of passing, provided that the gifts are to support qualified educational initiatives and keeping people in college who otherwise might be forced to drop out. This provides a carrot and opportunity for a wealthy individual to do good and avoids government expropriation with no guarantees that the funds will be used to address a social problem.

Robert Eisenbeis, PH.D.
Vice Chairman & Chief Monetary Economist
Email | Bio


Sources:

  1. “Changes in U.S. Family Finances from 2004 to 2007: “Evidence from the Survey of Consumer Finances,” Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach, and Kevin B. Moore, revised 2009, Federal Reserve Bulletin, Vol. 95, 2009, https://www.federalreserve.gov/pubs/bulletin/2009/articles/scf/default.htm.
  2.   Ibid.
  3.   https://www.wsj.com/graphics/calculating-risk-of-college/

Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Shutdown #6

US agriculture was not well positioned to suffer a federal government shutdown in December and January. In an era of low commodity prices, many farms cannot afford trade-war shenanigans and cannot afford government shutdowns.

Market Commentary - Cumberland Advisors - Shutdown Hamilton Quote

Across the US, median farm income for 2018 was -$1548 (yes, a negative $1548), a fifteen-year low, despite record farm productivity (https://www.ajc.com/news/farmers-knife-edge-bad-weather-tariff-war-shutdown-exact-toll/BcQhMALKUmNBslXllcSjcL/). That data includes, of course, not only large corporate farms but also small farms where producers rely on off-farm jobs to make ends meet.

To top off the twin challenges of low prices and foreign markets evaporated by the trade war, weather-related losses have hit some farms hard, making assistance far more critical. Take the situation for South Georgia pecan growers, for example (https://www.ajc.com/news/farmers-knife-edge-bad-weather-tariff-war-shutdown-exact-toll/BcQhMALKUmNBslXllcSjcL), Justin Jones among them. Hurricane Michael destroyed many of Jones’ trees, trimming potential income for years to come. A significant portion of what was a bounty crop of nuts could not be harvested because of heavy rains. Jones’ crop losses weren’t mitigated by higher prices, either, despite a diminished supply, because the Chinese stopped buying US pecans. Meanwhile, South Georgia farmers found themselves waiting on federal relief and crop insurance payments because of the shutdown. Old debt, instead of being paid off by a generous harvest, had to be wrapped into new loans.

The shutdown was especially ill-timed, because farm bankruptcies are up, as the Wall Street Journal reports in an must-read article titled, “This One Here Is Going to Kick My Butt: Farm Belt Bankruptcies Are Soaring” (https://www.wsj.com/articles/this-one-here-is-gonna-kick-my-buttfarm-belt-bankruptcies-are-soaring-11549468759). Farmers must contend with low commodity prices, trade war impacts on exports, and higher costs for fertilizer and equipment. The WSJ report sizes up the unfolding damage:

“Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.

“States in those circuits accounted for nearly half of all sales of U.S. farm products in 2017, according to U.S. Department of Agriculture data.”

The 35-day shutdown meant that many farmers faced delays in applying for and receiving Farm Service Agency loans that they use each year to buy seeds, feed, equipment, and fertilizer. Christopher Quinn, reporting for the Atlanta Journal-Constitution, explains, “Farmers plan crops, prepare fields and line up financing January to March. But most USDA functions and local Farm Service Agency offices closed in late December and most of January. That left farmers behind and prevented them from applying for loans, collecting federal disaster aid and crop insurance and trade mitigation payments which were given to offset a portion of tariff losses. In a financially pinched time, that money would be useful.” (https://www.ajc.com/news/farmers-knife-edge-bad-weather-tariff-war-shutdown-exact-toll/BcQhMALKUmNBslXllcSjcL)

The 35-day shutdown of the federal government also delayed crucial ag reports. Just as investors need those reports, farmers need them, too, particularly information on foreign production and demand, as they make critical decisions about when to sell their corn or soybeans, or how much of what to plant for 2019. How critical are delays and a dearth of data from the USDA? A UPI report, “Lacking USDA Crop Reports, Farmers Make Critical Decisions in the Dark,” laid out the situation during the shutdown:

“This is the time of year growers across the country take out loans, purchase machinery, decide what they will plant – and buy seed. The USDA’s data on price outlooks and international supply and demand for agricultural commodities can be crucial in making those decisions.

“‘Here, we’ve been a month with no information,’ said Tim Bardole, a corn and soy grower in Iowa. ‘As far as planting goes, we’ve got our seed bought. We kind of took a shot in the dark. When the reports come out, we’ll find out how far off we were.’” (https://www.upi.com/Lacking-USDA-crop-reports-farmers-make-critical-decisions-in-the-dark/6301548967114/)

As it braces for a possible second shutdown, the USDA has been scrambling to produce those reports that couldn’t happen in January. The long-awaited World Agricultural Supply and Demand Estimate, or WASDE, was finally released on February 8. Fortunately for investors and for farmers, it held no big surprises. US soybean production, corn production, and projected exports were down, while wheat, sorghum, and rice were up.But nothing in the report spurred the price volatility many had feared.

The shutdown interfered, too, with the timely implementation of the 2018 Farm Bill, which the USDA is scrambling to implement. Among its other “farm-friendly” provisions, the 2018 Farm Bill includes much-needed aid to struggling dairy farmers and a provision for insurance against low milk prices under the Margin Protection Program (http://www.thedailynewsonline.com/bdn01/kirsten-gillibrand-calls-for-rapid-implementation-of-farm-bill-post-shutdown-20190206).

The USDA has obviously done its level best to forestall damaging impacts on farmers. During the first shutdown it temporarily reopened almost half of its Farm Service Agency offices on a part-time basis to help with existing loans and to produce 1099s needed for 2018 taxes. The Washington Post reports that some USDA employees who worked through the shutdown did not see their back pay until more than two weeks after the shutdown ended, basically because the computer system used to issue payments choked with the overload. When accounts are finally settled, the federal government will have footed the bill not only for back pay but also for the overtime pay that is unavoidably the price of catching up. (https://www.washingtonpost.com/national/health-science/after-the-shutdown-federal-workers-are-coping-with-a-rocky-restart/2019/02/07/34494bea-2a41-11e9-b011-d8500644dc98_story.html)

One can only speculate on how the situation will worsen if another shutdown unfolds as US farmers prepare for planting season. Will FSA payments, Market Facilitation Program payments, and farm subsidy payments be made in time, or will some farmers be unable to obtain the money they need to bring a crop to harvest or livestock to market? Will crop loss insurance payments reach those wiped out by a hurricane? Will dairy farmers get insurance payments long overdue? A second shutdown has further potential implications not only for farmers and the Agriculture sector as a whole, but perhaps also for consumers who have to put dinner on the table on a budget.

The many roles of the USDA – from the administration of SNAP to food safety inspections to the complex programs that help farmers plant their crops and feed their livestock and bring them to market so that America eats – cannot be adequately fulfilled during a shutdown, even a partial one. Some politicians grasp this. House Agriculture Committee Chairman Collin Peterson has proposed a bill to keep Farm Service Agency offices running during a shutdown. (https://www.rfdtv.com/story/39871614/house-ag-committee-chairman-collin-peterson-proposes-to-keep-farm-service-agency-offices-open-if-another-shutdown-occurs#.XFsK2dF7nFQ)

But all industrial sectors and all consumers sectors and all services of government and all impacts on our lives are better served if there is no second shutdown. The discussion in Congress is to avoid this type of punishment of our citizens by changing the legal structure so that shutdowns don’t repeat themselves. Nine Republican Senators have sponsored legislation called the End Government Shutdowns Act (S. 104), to ensure an automatic continuing resolution at current spending levels to be triggered when any budget appropriations deadline passes without a budget agreement. (https://www.govexec.com/management/2019/01/senate-republicans-hatch-plan-prevent-future-shutdowns/154160/)

As matters stand, President Trump, the House and the Senate, the Democrats and the Republicans, are all guilty of creating the shutdown that imperiled the finances of federal workers and many farmers alike. They are ignoring the citizens who do not want it. Congress, however, can stop shutdowns permanently, and should. Politicians, whether in Congress or in the White House, should not have a tool to waterboard the federal government, its employees, and those who are served by its programs as a means to strong-arming political outcomes.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




The SALT (State and Local Taxes) Conundrum

There have been headlines recently describing the drop in state tax revenues versus forecasts for some of the higher-tax states such as California, New York, and New Jersey. Part of the falloff is due to an exodus of higher-income residents from high-tax states, such as the ones above, for states with low or no income taxes, such as Florida, Texas, and Nevada. Exacerbating this effect is the SALT provision of the 2017 tax bill (in effect for the 2018 calendar tax year). It puts a $10,000 cap on the amount of deductible state and local income taxes and local property taxes. This cap, of course, effectively raises the effective rates of these taxes by an amount equal to the loss of deductiblity. Prior to this year, being able to deduct state and local taxes in full meant that taxpayers subject to the old 39.6% highest marginal tax rate effectively wrote off almost 40% of their taxes. The SALT change means that, on a cash-flow basis, both people’s property taxes and income taxes will effectively rise almost 40% from what they paid last year. Here’s an example. Let’s say a New Jersey couple paid $30,000 in property taxes and $30,000 in state income taxes. Under the old method, their $60,000 would be reduced to $36,180 as they would have written the tax off at 39.7%, the old top federal marginal rate. Under the new method, state and local taxes are not deductible, except for the $10,000 limit. Thus, their new taxes are $50,000 ($60,000-$10,000), or 38% more.
For obvious reasons, this new tax bite has generated much consternation and many crosscurrents.

Muni Bond Standpoint
Some of the best-performing bonds in the past two years have been higher-grade issues from New York, California, New Jersey, and Connecticut. We have written on this effect, and we began to emphasize these bonds even in national accounts in the middle of 2017. As the tax bill was being discussed, it became evident that SALT was going to be part of the package. It meant that income from out-of-state bonds for taxpayers in high-tax states would have to overcome a higher yield threshold since more would be taken away by the nondeductibility of state and local taxes on a Federal return.

This past week we looked at yield curves for the high-tax states of California, New York, and New Jersey and then compared them to general market yield curves, which we show below as both nominal yields and then yields after the effects of state taxes on these out-of-state yields are factored in.

In-State vs Out-of-State Yields on an After-tax Basis

Source: Bloomberg

We can see that there is an after-tax give-up at every point on the yield curve in all three states for investors owning out-of-state bonds, with the greatest penalty occurring in California, which makes sense, since it has the highest marginal state tax rate. Clearly this situation has driven higher demand for in-state exempt bonds in all of these states as well as in other states with high state income taxes, such as Minnesota, Connecticut, and Massachusetts. With steeper yield curves in munis, the biggest give-up from a nominal interest rate standpoint is in the longest maturity end.

The most natural message from a chart like this is that investors in high-tax states should reduce the amount of out-of-state bonds in their portfolios relative to their in-state exempt bond holdings.

But it’s not that simple. There are credit issues to consider as well.

The following slides are from a State of New York presentation.



(Source: https://www.governor.ny.gov/sites/governor.ny.gov/files/atoms/files/SALT_Revenue_PP.pdf )

The gist of this presentation is that it bemoans the SALT elimination of deductibility and its impact on New York’s budget. There are presumably similar slides in other high-tax-state presentations. The nondeductibility of both the state income taxes as well local property taxes will have a greater effect on residents of high-tax states. The counterargument of conservatives is that high-tax states have raised taxes based on the deductibility subsidy provided by the federal government. In any case, the high-tax states are now facing the loss of high-tax-paying residents who leave for lower-tax states such as Florida, Texas, and Nevada (no income taxes and lower property taxes). At Cumberland we feel this issue has been holding the high-end housing market in high tax states ransom for the better part of the last twelve months, as the nondeductibility of property taxes hurts that market just as the SALT provisions hurt the higher-yielding out-of-state bonds.

So at this point we have higher demand for IN-STATE bonds. But if these high-tax states continue to lose population, that is a credit NEGATIVE over time. Though it may sound somewhat counterintuitive, we are starting to look at DIVERSIFYING into some out-of-state bonds in the high-tax states as a hedge against potential credit erosion. We have written about the credit issue before. State and local governments will be forced to CUT taxes from their constituents to make up for some of the higher EFFECTIVE income taxes and property taxes. If declining tax revenue is not made up, there is a chance of lower debt-service coverage on bonds.

The best way to employ this strategy in the management of muni bond portfolios is to refer to the chart above. The nondeductibility effect on out-of-state bonds is the least at the shorter end where lower-yielding bonds are. To the extent that we continue to manage bond portfolios on a barbell basis, the marginal addition of out-of-state bonds should come from the shorter maturities.

And finally, President Trump said this week that he would consider some changes to the SALT provision of the tax bill (and just as quickly, Senator Charles Grassley of Iowa, chair of the Senate Finance Committee, rejected the idea on principle).

Whereas the president will find sympathetic legislators on both sides of the aisle from Northeastern states and California, we suspect that the true reason for his step-back is that with residents moving at the margin from the Northeast, reliably Republican states such as Florida and Texas become less reliable. These states are becoming somewhat bluer at the margin as we write this. It is hard to conceive of Republicans winning the White House without Florida and Texas, and we feel that is the main reason for the president to revisit the issue.

In summary, SALT has increased demand for bonds in high-tax states, put a higher penalty on out-of-state bonds in high-tax states, and hurt revenue collections as some taxpayers move to lower-tax states. The situation will gain some clarity for individuals after April 15th of this year, once taxes are paid. But in always trying to lean on the idea of better credit, we will look to diversify somewhat in the high-tax states.

John R. Mousseau, CFA
President and Chief Executive Officer, Director of Fixed Income
Email | Bio

Gabriel Hament
Investment Advisor Representative: Foundations, Charitable Accounts & Private Individuals
Email | Bio

Patricia Healy, CFA
Senior Vice President of Research and Portfolio Manager
Email | Bio


*Please note: Cumberland Advisors does not give tax advice. Please consult your tax advisor for applicability of any of the concepts listed in this commentary to your particular situation.


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Cumberland Advisors Week in Review (Feb 04, 2019 – Feb 08, 2019)

Week In ReviewThe Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team. These are not revised assessments, and circumstances may have changed in the market from the time of original publication. We also include older commentaries that our editors have determined may be of interest to our audience. Your feedback is always welcome.

MATT MCALEER’S WEEKLY RECAP

Matt McAleer invites John Mousseau to join him in this week’s wrap up. John relates continued demand for bonds. How about volatility in interest rates? And what effect are taxes and returns having in muniland and for investors? Will Trump change taxes again? John weighs in on these things.

Now onto Matt’s recap. Sometimes the markets act very reasonably from a trading standpoint. As mentioned 2 weeks ago, weekly momentum had reached elevated levels that normally create a pause or pullback. Saw some of that over the past 6-7 trading sessions. He talks about where he sees strength. Have a great weekend. WATCH HERE.

Matt McAleer and John Mousseau will provide extended quarterly videos for our clients that will incorporate equities and fixed-income in the coming weeks. Stay tuned!


MARKET COMMENTARY

 

    • Sign up or see more Market Commentary

       


      UPCOMING EVENTS

      Financial Literacy Day – Financial Markets and the Economy
      You’ll want to mark your calendar for Thursday, April 11, when the University of South Florida Sarasota-Manatee joins Cumberland Advisors and the Global Interdependence Center in hosting the third annual “Financial Markets and the Economy Financial Literacy Day” event.

      Financial Markets and the Economy Financial Literacy Day III

      The Outlook for the US Stock Market & Global Economic Outlook will be a feature and there will be a special report on the “Use of the Bloomberg Terminals – Two Years Later” after Cumberland Advisors and David Kotok gifted them to the University led by Paul Bova, Director of Development and/or Dr. GJ de Vreede, Dean, University of South Florida Sarasota-Manatee College of Business. We look forward to seeing what level of impact this has had on area students seeking to enhance their educations and understanding of finance and finance related tools.

      Financial Markets and the Economy Panels, Talks, and Discussions Include:

        • Keynote Speaker: Gretchen Morgenson, The Wall Street Journal: Senior Special Writer, Investigations Unit
        • A Conversation with Susan Harper, Canada’s Consul General in Miami
        • Session I – The Stock Market Matt McAleer, Executive VP & Director of Equity Strategies, Cumberland Advisors Richard Hoey, Senior Economic Advisor to BNY Mellon Wealth Management Adam Johnson, Founder & Author of Bullseye Brief, an Investment News Letter Moderator: Maryanne Waldman, RBC, Boston, MA
        • Session II – Health Hunger and Philanthropy Judith Monroe, President and CEO, CDC Foundation Erin McLeod, CEO, Friendship Centers, Sarasota, FL Lisa Marsh Ryerson, National President, AARP. Formerly, President and CEO, Wells College, Aurora, NY. Gabriel Hament, Cumberland Advisors Moderator: Lisa Shaw, CFP, CIMA, Managing Partner, Cygnus Asset Management, LLC
        • Session III – How the World Looks to Me Leland Miller, CEO, China Beige Book International Paul O’Brien, Former Deputy Chief Investment Officer, Strategy and Planning Department, Abu Dhabi Investment Authority, ADIA. Moderator: John Authers, Author and Bloomberg Columnist

         

      • Learn More about Financial Markets and the Economy Financial Literacy Day III at USFSM.

        FEATURED INTERVIEW

        Camp Kotok – Judith Monroe from CDC Foundation & David Kotok explore Zika & the role of the foundation for the CDC, including how they help fulfill and extend the CDC’s mission and challenges. A self-described well-kept secret, the source of their funding will surprise many. Can they make the world a better place?



        IN THE NEWS

         

      • Sarasota Magazine – Cumberland Advisors Sets Third Annual Financial Literacy Conference for April 11
      • Quoted:Cumberland Advisors 02/06/2019
      • Sarasota Herald Tribune – ROBERT EISENBEIS: Tax the rich? Check the facts first
      • Quoted:Robert Eisenbeis, Ph.D. 02/04/2019
      • Sarasota Herald Tribune – ‘US manufacturing is doing well and will continue to do well,’ Fed economist says
      • Quoted:Cumberland Advisors / Bill Strauss 02/01/2019
      • Bloomberg – Cumberland Chair David Kotok (Podcast)
      • Quoted:David R. Kotok 02/01/2019
      • Bloomberg – The Fed Is Guessing As it Plays With Fire: David Kotok (Radio)
      • Quoted:David R. Kotok 01/29/2019
      • Bloomberg TV – Cumberland’s Kotok Sees a Need to Expand Uncertainty Premium
      • Quoted:David R. Kotok 01/29/2019
      • SNN TV – USFSM hosts climate change presentation
      • Quoted:Cumberland Advisors / GIC/ USFSM Event Participants 01/25/2019
      • USFSM – Climate change summit draws crowd at USF Sarasota-Manatee
      • Quoted:Cumberland Advisors / GIC/ USFSM Event Participants 01/25/2019
      • Bradenton Herald – Red tide is always bad. Global warming is making it worse, researcher says
      • Quoted:Cumberland Advisors / GIC/ USFSM Event Participants 01/25/2019

      • IN CASE YOU MISSED IT

         

          • Tires, Chickens, and Trade – One Week Later

            Bill Witherell, Ph.D. 09/23/2009

            In the week following President Obama’s imposition of tariffs on Chinese tires, some commentators expressed confidence that the resulting trade dispute would be well-contained by the two countries and argued that the President had to throw some “red meat” to his trade union supporters. Other, including this writer, expressed concerns that this move could be damaging to the Obama Administration, costly for the US, and risk triggering more significant protectionist actions. The pro-business British magazine The Economist was particularly forceful in the cover story of its September 17 issue, entitled “Economic Vandalism.” The article begins with the following: “A protectionist move that is bad politics, bad economics, bad diplomacy and hurts America. Did we miss anything?” Some developments last week are encouraging, but others are not. Starting with the negative, as was anticipated, workers in numerous US industries also suffering from competition with the Chinese have begun to clamor for similar relief. Continued…

          • Joseph Stalin plus 75 (years) = Vladimir Putin

            David R. Kotok 08/15/2008

            Seventy-five years ago another Soviet thug by the name of Stalin chased a food supply and starved the Ukraine. He killed between 7 and 10 million people and thought nothing of it. In an ironic quirk of history, Stalin was born in Gori, Georgia. We now say “Ukraine” and not “the” Ukraine because Ukraine is supposedly an independent country. The Orange Revolution was supposed to have peacefully freed it from the Soviet sphere. So much for wishful thinking. Georgia’s experiment with western-style freedom has ended. The modern-day Stalin looked in George Bush’s eyes and seized the moment. Now Putin is ready to take Ukraine. Anyone who thinks the Georgia events were a one-off and isolated incident is overindulging on vodka. Ukrainian president Yushchenko’s attempt to limit Russian troop movements and obtain notice of them will fail. Putin will use this as the next pretext. We can learn from Georgia how brutal the Russian “ursus horribilus” can be when it chooses to send a message. It will get harder for Mr. Putin when he starts to mess with Poland, Estonia, Latvia, and Lithuania. These are now member states of the European Union. So are others like Slovakia, Slovenia, and Czech Republic. The Russians may draw a line between the EU members and the EU nonmembers. They will use economic warfare against the former and military intervention against the latter. All this leads to more trouble. Continued…


          • ADDITIONAL RESOURCES

            Lessons from Thucydides

            Lessons from Thucydides on Parchment with Hoplites thin banner
            David R. Kotok has written the monograph pamphlet, “Lessons from Thucydides” detailing information asymmetries and their implications for investors and world affairs. The concept of a Thucydides Trap and its rise and avoidability (or lack thereof) is often debated and David makes a case for dealing with them weaving current and historical events into a comprehensive narrative.

            This free monograph also has lessons for President Donald Trump’s trade policy. Can the United States avoid a Thucydides Trap with China & Xi Jinping? Will you benefit from the Lessons of Thucydides or fall victim to a Thucydides Trap? If information is key, you now have a handbook at your fingertips. Download a copy of this monograph in either PDF (free) or Kindle ($.99) format. https://www.cumber.com/thucydides/

            Have you subscribed to our YouTube Channel?

            Thank you for engaging with us, your comments always welcome.




Cumberland Advisors Week in Review Test

Week In Review

The Cumberland Advisors Week in Review is a recap of news, commentary, and opinion from our team. These are not revised assessments, and circumstances may have changed in the market from the time of original publication. We also include older commentaries that our editors have determined may be of interest to our audience. Your feedback is always welcome.

MATT MCALEER’S WEEKLY RECAP

Matt McAleer invites John Mousseau to join him in this week’s wrap up. John relates continued demand for bonds. How about volatility in interest rates? And what effect are taxes and returns having in muniland and for investors? Will Trump change taxes again? John weighs in on these things.

Now onto Matt’s recap. Sometimes the markets act very reasonably from a trading standpoint. As mentioned 2 weeks ago, weekly momentum had reached elevated levels that normally create a pause or pullback. Saw some of that over the past 6-7 trading sessions. He talks about where he sees strength. Have a great weekend. WATCH HERE.

Matt McAleer and John Mousseau will provide extended quarterly videos for our clients that will incorporate equities and fixed-income in the coming weeks. Stay tuned!

 

MARKET COMMENTARY

Sign up or see more Market Commentary

UPCOMING EVENTS

Financial Literacy Day – Financial Markets and the Economy
You’ll want to mark your calendar for Thursday, April 11, when the University of South Florida Sarasota-Manatee joins Cumberland Advisors and the Global Interdependence Center in hosting the third annual “Financial Markets and the Economy Financial Literacy Day” event.

Financial Markets and the Economy Financial Literacy Day III

The Outlook for the US Stock Market & Global Economic Outlook will be a feature and there will be a special report on the “Use of the Bloomberg Terminals – Two Years Later” after Cumberland Advisors and David Kotok gifted them to the University led by Paul Bova, Director of Development and/or Dr. GJ de Vreede, Dean, University of South Florida Sarasota-Manatee College of Business. We look forward to seeing what level of impact this has had on area students seeking to enhance their educations and understanding of finance and finance related tools.

Financial Markets and the Economy Panels, Talks, and Discussions Include:

  • Keynote Speaker: Gretchen Morgenson, The Wall Street Journal: Senior Special Writer, Investigations Unit
  • A Conversation with Susan Harper, Canada’s Consul General in Miami
  • Session I – The Stock Market Matt McAleer, Executive VP & Director of Equity Strategies, Cumberland Advisors Richard Hoey, Senior Economic Advisor to BNY Mellon Wealth Management Adam Johnson, Founder & Author of Bullseye Brief, an Investment News Letter Moderator: Maryanne Waldman, RBC, Boston, MA
  • Session II – Health Hunger and Philanthropy Judith Monroe, President and CEO, CDC Foundation Erin McLeod, CEO, Friendship Centers, Sarasota, FL Lisa Marsh Ryerson, National President, AARP. Formerly, President and CEO, Wells College, Aurora, NY. Gabriel Hament, Cumberland Advisors Moderator: Lisa Shaw, CFP, CIMA, Managing Partner, Cygnus Asset Management, LLC
  • Session III – How the World Looks to Me Leland Miller, CEO, China Beige Book International Paul O’Brien, Former Deputy Chief Investment Officer, Strategy and Planning Department, Abu Dhabi Investment Authority, ADIA. Moderator: John Authers, Author and Bloomberg Columnist

Learn More about Financial Markets and the Economy Financial Literacy Day III at USFSM.

FEATURED INTERVIEW

 

Camp Kotok – Judith Monroe from CDC Foundation & David Kotok explore Zika & the role of the foundation for the CDC, including how they help fulfill and extend the CDC’s mission and challenges. A self-described well-kept secret, the source of their funding will surprise many. Can they make the world a better place?

IN THE NEWS

 

 

 

 

 

 

 

 

 

 

IN CASE YOU MISSED IT

    • Tires, Chickens, and Trade – One Week Later

      Bill Witherell, Ph.D. 09/23/2009

      In the week following President Obama’s imposition of tariffs on Chinese tires, some commentators expressed confidence that the resulting trade dispute would be well-contained by the two countries and argued that the President had to throw some “red meat” to his trade union supporters. Other, including this writer, expressed concerns that this move could be damaging to the Obama Administration, costly for the US, and risk triggering more significant protectionist actions. The pro-business British magazine The Economist was particularly forceful in the cover story of its September 17 issue, entitled “Economic Vandalism.” The article begins with the following: “A protectionist move that is bad politics, bad economics, bad diplomacy and hurts America. Did we miss anything?” Some developments last week are encouraging, but others are not. Starting with the negative, as was anticipated, workers in numerous US industries also suffering from competition with the Chinese have begun to clamor for similar relief. Continued…

 

    • Joseph Stalin plus 75 (years) = Vladimir Putin

      David R. Kotok 08/15/2008

      Seventy-five years ago another Soviet thug by the name of Stalin chased a food supply and starved the Ukraine. He killed between 7 and 10 million people and thought nothing of it. In an ironic quirk of history, Stalin was born in Gori, Georgia. We now say “Ukraine” and not “the” Ukraine because Ukraine is supposedly an independent country. The Orange Revolution was supposed to have peacefully freed it from the Soviet sphere. So much for wishful thinking. Georgia’s experiment with western-style freedom has ended. The modern-day Stalin looked in George Bush’s eyes and seized the moment. Now Putin is ready to take Ukraine. Anyone who thinks the Georgia events were a one-off and isolated incident is overindulging on vodka. Ukrainian president Yushchenko’s attempt to limit Russian troop movements and obtain notice of them will fail. Putin will use this as the next pretext. We can learn from Georgia how brutal the Russian “ursus horribilus” can be when it chooses to send a message. It will get harder for Mr. Putin when he starts to mess with Poland, Estonia, Latvia, and Lithuania. These are now member states of the European Union. So are others like Slovakia, Slovenia, and Czech Republic. The Russians may draw a line between the EU members and the EU nonmembers. They will use economic warfare against the former and military intervention against the latter.

      All this leads to more trouble. Continued…

 

ADDITIONAL RESOURCES

Lessons from Thucydides

David R. Kotok has written the monograph pamphlet, “Lessons from Thucydides” detailing information asymmetries and their implications for investors and world affairs. The concept of a Thucydides Trap and its rise and avoidability (or lack thereof) is often debated and David makes a case for dealing with them weaving current and historical events into a comprehensive narrative.

Thucydides-Trap

This free monograph also has lessons for President Donald Trump’s trade policy. Can the United States avoid a Thucydides Trap with China & Xi Jinping? Will you benefit from the Lessons of Thucydides or fall victim to a Thucydides Trap? If information is key, you now have a handbook at your fingertips. Download a copy of this monograph in either PDF (free) or Kindle ($.99) format. https://www.cumber.com/thucydides/


Have you subscribed to our YouTube Channel?

 

Thank you for engaging with us, your comments always welcome.




Gold

What do 72 countries – including developed nations such as Canada, Australia, Japan, and Sweden; emerging giants such as Argentina, Brazil, Mexico, Nigeria, India, Iran, and Russia; and small countries such as Burundi, Haiti, Myanmar, Syria, and Tonga – all have in common?

Market Commentary - Cumberland Advisors - Gold

Not much, you might say; they differ vastly in such metrics as population, GDP per capita, inflation rate, income inequality, and political stability. Yet these 72 nations do share one surprising feature: The price of gold is at an all-time high in the currencies of all these countries. Furthermore, the price is not far from its historical zenith in terms of the British pound, the Chinese yuan, the Swiss franc, the euro, and even the US dollar.

This phenomenon was pointed out to us by Ross Norman, CEO of Sharps Pixley, a London bullion broker, who wrote an article titled “Gold hits an all-time high in 72 currencies” (Jan. 15, 2019; available at https://www.sharpspixley.com/articles/gold-hits-an-all-time-high-in-72-currencies_288506.html).

So what’s going on here? We can certainly point to the drastic appreciation of gold over the last 20 years. Since 1999, gold has risen by the following percentages relative to these nations’ currencies (some figures are approximate):

Australian dollar 298%
Brazilian real 699%
British pound 470%
Canadian dollar 290%
Egyptian pound 2231%
Indian rupee 644%
Iranian real 6103%
Japanese yen 329%
Mexican peso 861%
Nigerian naira 1720%
Russian ruble 612%
S African rand 914%
Swedish krona 419%
Turkish lira 1648%
US dollar 345%

(Data source: https://goldprice.org/gold-price-history.html)

In the span of these two decades we have seen the dot-com bubble and crash (followed by recession), the US housing crash and Great Financial Crisis (and recession), and then the longest bull market in US history. Gold has tended to tread water in most major currencies in the latter period, from March 2009 to present, but it’s clear that a post-millennial flight from risk and into gold has been a powerful and globally consistent pattern. There has simply been more financial, economic, and geopolitical turbulence over the last two decades than there was in the period 1945–2000.

Sovereign debt must be a factor in gold’s ascendance, too. Around the world, nations have responded to the challenges of our era by taking on ever greater debt. From 2000 to 2017, these nations experienced the following percentage growth in debt to GDP:

Argentina 24%
Brazil 33%
China 109%
France 67%
Germany 10%
India -7%
Italy 26%
Iran 233%
Japan 93%
Mexico 135%
S  Africa 23%
Spain 72%
Russia -74%
Turkey -43%
US 86%

(Source for US and other data: https://tradingeconomics.com/united-states/government-debt-to-gdp)

Interestingly, the biggest increases in central bank gold holdings from 2000 to 2018 are found among both nations with the greatest debt growth and those with the least.

Country Gold holdings in tonnes
(Debt/GDP change) Q1 2000 Q3 2018 Percent change
China (109%) 395 1843 367
India (-7%) 358 586 63
Mexico (135%) 7 120 1614
Russia (-74%) 423 2036 381
Turkey (-43%) 116 259 123
US (86%) 8139 8133 -0.1

(Source: https://www.gold.org/goldhub/data/monthly-central-bank-statistics)

Apparently, gold purchases are driven more by central bank policy than by economic factors per se. Gold can, however, be a geopolitical force. Bloomberg reported on Jan. 25, 2019, that the Bank of England – at the urging of US officials – had blocked an effort by the embattled Maduro regime in Venezuela to repatriate $1.2 billion in gold. (See https://www.bloomberg.com/news/articles/2019-01-25/u-k-said-to-deny-maduro-s-bid-to-pull-1-2-billion-of-gold.)

In conclusion we can certainly say that gold has retained its global significance as a store of value, and indeed there has been a widespread, strong, and sustained “flight to gold” in this century.

Cumberland’s US ETF managed accounts hold a position in GDX, a gold miner ETF.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Exchange traded funds may not correlate to designated indices and have additional fees and expenses, including the duplication of management fees.


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Shutdown #5

My colleague Norm Dempsey reminded me to thank all the readers of our shutdown series for their emails and messages. He also noted we should do the same for those who supported the climate change series. We concur with Norm.

Cumberland Advisors Market Commentary by David Kotok

In his reminder Norm mentioned that when former Illinois governor Rod Blagojevich was sentenced by Judge James B. Zagel to 14 years in prison for extortion and soliciting bribes, the judge pointedly addressed Blagojevich as “governor.”

Zagel explained why: “It serves as a reminder to those of us who vote and those of us who don’t. It reminds the voters of the maxim, ‘The American people always get precisely the government that they deserve.’ Your case is another lesson for us.”

Many readers responded with messages about the phone calls they made to their elected representatives in the House and the Senate during the shutdown period. The country thanks each and every citizen who took a few minutes to raise a voice loudly. We also thank the many folks who worked without pay during the longest shutdown in history. You will be made whole in your paycheck if you are a directly paid federal employee. If your paycheck is earned in an indirect way, your recompense may be problematic.

For the nation the shutdown has a permanent cost. We cannot restore the lost GDP. Example: The worker who went without pay and didn’t take his shirts to a cleaner during those 35 days will now take the shirts to be cleaned and pay the cleaner. But he won’t have taken them twice. The GDP loss in the first quarter of this year will only partially be made up. And that assumes there is not going to be another shutdown.

We also cannot undo the sentiment shift that has further injured Americans’ view of their political leaders. Neither can we expect to restore America’s tarnished image in the geopolitical realm. As the preeminent world power, we acted poorly, and nearly all on the global scene know it. As for our domestic politics, the damage control will be intensive.

John Harwood used his CNBC blog to recite some post-shutdown polling numbers for President Trump. (See “Americans fault Trump for chaotic government shutdown, as more believe US is ‘on the wrong track’: NBC-WSJ poll,” https://www.cnbc.com/2019/01/27/trump-faulted-for-government-shutdown-nbc-wsj-poll.html.) Here are some excerpts that demonstrate the damage.

“The poll’s results showed that by 63 percent to 28 percent , a margin greater than two to one, Americans believe the country is ‘off on the wrong track’ rather than ‘headed in the right direction….

“And by 50 percent to 37 percent, Americans blame Trump, rather than Democrats in Congress, for the debacle. That result reflects their disagreement with his stance on the issue that caused it….

“Pluralities disapprove the president’s handling of border security and immigration issues, and say would-be immigrants across the southern border with Mexico would strengthen rather than weaken America. A 52 percent majority opposes construction of a wall or fence along the U.S.-Mexico border, while 45 percent favor it….

“Underneath that unimpressive showing lies sharply negative assessments of the president. Just one-third of Americans express confidence that Trump has the right goals and policies; an even lower proportion, 28 percent, express confidence that he has the right personal characteristics to be president….

“By 47 percent to 36 percent, Americans rate Trump negatively rather than positively for ‘being a good negotiator,’ the characteristic he has long claimed as his signature quality. He fares even worse on ‘being steady and reliable’ (53 percent negative, 32 percent positive), ‘being knowledgeable and experienced enough’ (54 percent negative, 32 percent positive), ‘being honest and trustworthy’ (58 percent negative, 28 percent positive) and ‘having high personal and ethical standards’ (58 percent negative, 24 percent positive).”

In our view the breaking point was reached when the transportation system failed and particularly when LaGuardia Airport briefly closed to inbound aircraft because of security worries. (See “Flights are not halted at LaGuardia, but the shutdown is now causing flight delays,” https://qz.com/1533829/shutdown-related-faa-staffing-issues-cause-delays-at-laguardia/.)

We close with a reminder that the phone is powerful for messaging a Senator or House Member. All Senators and all House Members own the results of the shutdown, along with the President. This is a multidimensional, bipartisan political failure. The names of the failed leaders include but are not limited to Trump, Pence, McConnell, Pelosi, Hoyer, Schumer, and Durbin.

“Those who are too smart to engage in politics are punished by being governed by those who are dumber,” is an oft-quoted paraphrase of a line penned by Plato in Book I of The Republic. We tip our hat to John Loewenberg for sharing that insight. The thought, which Plato attributes to his teacher, Socrates, can be alternately translated, “One of the penalties for refusing to participate in politics, is that you end up being governed by your inferiors.” (See https://medium.com/@alex_65670/platos-warning-if-you-don-t-vote-you-will-be-governed-by-idiots-64891cd59b4 for a deeper discussion of the quote and its context.) The lesson applies today: We must diligently speak up.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


U.S. House of Representatives
https://www.house.gov/representatives

U.S. Senate
https://www.senate.gov/senators/


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