Cumberland Advisors Market Commentary – To Pass or Not to Pass (Part 3)

The FOMC decided to throw a pass by cutting rates; but given the market’s response, it looks like they were tackled for a loss. In Woody Hayes’ parlance, the one positive of a forward pass turned into a negative.

Market Commentary - Robert-Eisenbeis - To Pass or Not to Pass (Part 3)

Powell attempted to offer three justifications for the policy move: to insure against downside risks, to counter global weakness and trade uncertainty, and to help push towards the Committee’s 2% inflation goal. These explanations appeared to be greeted with some skepticism by the media. But, more importantly, there were really two significant moments in the press conference, one of which has gotten little attention so far.

In response to a question, Powell first suggested that the way to think about the cut was as a mid-cycle adjustment. Markets initially interpreted this during the press conference as “one and done,” which was not what markets had hoped for, and the Dow dropped 478 points. But it recovered somewhat to close down 325 after Powell appeared to walk back the inference to suggest that future cuts would be dependent upon incoming data.

But the interesting takeaway from the press conference concerns the policy formulation process and related communications and may represent a significant change with important implications. It raises all sorts of questions about non-meeting meetings, speech coordination, etc. In particular Chairman Powell responded in a very telling way to a question of whether the FOMC felt market pressures for a rate cut, which I paraphrase below:

He first said, What we did was well-telegraphed.

He went on to add, What we did was consistent with what we had said we would do; our reasons were well-telegraphed; and we believe we will achieve our goals.

Finally, he indicated, We know that policy works through communications and actions consistent with those communications.

That interchange raises all sorts of questions about how closely markets will need to monitor and process speeches and other communications by FOMC participants. Chairman Powell strongly implied in his monetary-policy testimony before Congress that a rate cut was likely. President John Williams, for example, spoke before the blackout period leading up to the meeting and clearly implied that it would be better to take preventative measures than to wait for a disaster. These are but two examples of the “telegraphing” to which Chairman Powell referred. But were these communications coordinated? How could rate cuts be “well-telegraphed” if there had been no advance discussions and agreements? Are certain Board members and FOMC voting members discussing policy with each other before the meetings? All these questions not only deserve answers but also suggest that, going forward, Fed watching will be heightened and markets will respond to the possibility that they are getting advance information on policy moves. This is not the way the policy should be conducted.

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

Read Part 1 here: To Pass or Not to Pass? (Part 1)
Read Part 2 here: To Pass or Not to Pass? (Part 2)
Read Part 3 here: To Pass or Not to Pass? (Part 3)


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 Commentary – To Pass or Not to Pass? (Part 2)

In our previous discussion of the three options facing the FOMC – raise the funds-rate target, hold the rate steady, or cut the target rate – we argued that there were risks and potentially negative consequences associated with each.

Federal Reserve - FOMC - Uncertainty, Risk, & Three Options

The first option would shock markets and raise questions about the Committee’s rationale, regardless of what the communication might be, generating negative press for the FOMC. The second option would only trigger the speculation “if not now, when?” The third would risk an “I told you so” from the president – he had already begun questioning the FOMC’s competence following the release of the second-quarter GDP number on Friday, July 26. Moreover, that option would trigger additional demands from market participants for more and more cuts, regardless of the consequences.

We argued that the first estimate of second-quarter GDP would be a critical number, as it relates to the justification for the FOMC’s decision; so let us look at what is in the GDP report. The attached chart shows the breakdown of the contributions of the various key components behind the 2.1% growth that was reported.[1] There is something for FOMC participants to latch onto in order to support either their preference for a cut in rate or for no change.

As mentioned, GDP growth came in at 2.1%, which is exactly what the FOMC SEP projections had for all of 2019. That GDP number exceeded the most frequently mentioned expectation of 1.8%. Other positives were new home sales in June that were 42K above those in May, durable goods orders that were up 2% after being down 2.3% in May, and weekly jobless claims that were at 206K, down from 216K the previous week. Corporate earnings were largely positive as well.

But putting all these numbers aside, this quarter’s GDP number contained a couple of interesting twists. Only two categories accounted for the positive growth – consumer spending and government spending. The consumer number is especially interesting since it accounted for 2.9 percentage points of growth, while government spending added 0.9 percentage points. That consumer spending contribution is second only to that in the last quarter of 2017, when overall growth was 3.5%. Two main components account for most of the negative contribution to growth: Inventories subtracted 0.9 percentage points, and exports took off another 0.6 percentage points. Nonresidential fixed investment was virtually nonexistent and subtracted another 0.1 percentage point. Finally, there is a wild card in trying to figure out how much of an impact the problems with the Boeing Max 737 may have on both domestic production and international trade. We know that the Saudis have cancelled a 50-plane order, and there have been related cuts in parts and components as well. Mike Englund of Action Economics estimates that Boeing’s impact took about .2 percentage point off of GDP growth in the second quarter and without the Max problem export growth would have been -3.2 instead of -5.2% and equipment growth would have been 2.7% instead of only .7%.[2]

For those FOMC participants who have given great weight to the global slowdown, the large negative contribution of exports will be a point of focus, along with the anecdotal evidence that business investment is off because of uncertainty about a global slowdown and concerns about trade and trade negotiations. We note that these two factors were points of emphasis in Chairman Powell’s recent testimony on monetary policy. However, it is hard to fathom how a cut in rates would counter either of these concerns. So we are left with a dichotomy and dilemma for the FOMC. The domestic economy is on track and meeting forecasts. Moreover, PCE inflation came in at 2.3%, slightly above the FOMC’s target. On the other hand, the international side is not doing all that well and the trade issues look likely to persist for some while.

It is uncertain how the FOMC will come down on this mix of evidence, especially when it isn’t clear how a rate reduction at this time will address any of the key concerns. Regardless, the FOMC will be faced with a challenging communications effort to sell whatever it decides to do but will likely face political pushback: The president will claim vindication if a rate cut is forthcoming or continue questioning the FOMC’s competency if no rate change is forthcoming, and markets will cry out for even more cuts at subsequent meetings.

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

Read Part 1 here: To Pass or Not to Pass? (Part 1)
Read Part 2 here: To Pass or Not to Pass? (Part 2)
Read Part 3 here: To Pass or Not to Pass? (Part 3)

[1] We need to keep in mind that sometimes the number can be revised significantly when the final trade numbers are received. There were also significant reductions in prior quarters’ numbers as well reducing 2018 growth to under 3%.
[2] See Mike Englund, Action Economics, “Impact of the 737 Max Grounding on GDP.”

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 Commentary – To Pass or Not to Pass? (Part 1)

Ohio State’s Woody Hayes used to say that his problem with the forward pass was that “Three things can happen, and two of them are bad.” Well, after Chairman Powell’s testimony last week, the FOMC may find itself in a similar position, only maybe worse.

Federal Reserve - FOMC - Uncertainty, Risk, & Three Options

The Committee can do three things – lower rates, keep rates steady, or raise rates – and in this case all three options have potentially negative consequences. Let us consider the kinds of fallout that might occur from each, starting with the easiest option, raising rates.

Raise Rates – Clearly, if this option were selected, it would totally surprise everyone – markets, both bond and equity, as well as politicians. Such a move would negate all the messaging that has preceded the FOMC’s upcoming July meeting and make the Committee look erratic and out of touch with what is going on in the economy. Criticism about competency would also be leveled. Such a move has no probability of happening.

Keep Rates As Is – Opting not to change rates would also be a surprise to markets and would have to be sold based upon yet-to-be seen incoming data. While there is a host of forthcoming data, the first estimate of second-quarter GDP is critical. The FOMC and Chairman Powell will be hard pressed to sell a no-rate-decrease policy, especially after having glossed over the most recent jobs report. The second-quarter GDP number will further expose the divisions within the FOMC about when and whether a rate change is warranted. Reserve bank presidents Bostic and Barkin have now gone on record as not being convinced that a rate move is needed, and other reserve bank presidents will be speaking before the July meeting on both sides of the issue. Finally, no change would also fuel additional speculation about the next and subsequent meetings. This is the Chinese water torture policy option.

Lower Rates – The riskiest option of the three for the FOMC may be to move rates down, by say 25 basis points. Chairman Powell has already attempted to justify a rate cut because of uncertainties about global growth and trade issues. The best that the FOMC can hope for is a sub-trend second-quarter growth number, whereupon they could attempt to sell the rate decrease as an insurance move to keep the expansion moving.

There are several problems with this strategy. The first is political. Regardless of the stated rationale, President Trump will point to the fact that the FOMC’s move confirms his assertion that the last rate increase was too much, that he was right and the FOMC was wrong, and that they didn’t know what they were doing. His access to the media and his captive audience far outweigh that of the Fed, so the FOMC’s voice will be drummed out. Most unsettling would be the perception that the FOMC caved to political pressure and has now put its independence at real risk, inviting even more armchair policy making, notwithstanding recent expressions of support by people on both sides of the aisle at the recent congressional hearings. Not only is there a critical threat to the Fed’s independence, but also a rate decrease will only give rise to market participants arguing for at least an additional 75-basis-point reduction through the end of the year. Thus, the drumbeat for more and more accommodation would continue, and the FOMC would face increased market and political pressure to deliver more. In other words, a 25-basis-point move solves nothing, holds little chance of being credibly sold, uses up valuable policy flexibility in the case of a recession threat, and only creates more problems going forward.

The Messaging Problem – At this point the FOMC faces a real messaging problem. To illustrate, Chairman Powell repeatedly emphasized the problem of uncertainties about a global slowdown and tariffs in his recent monetary policy testimony. For an economist to use the term uncertainty means that he or she cannot estimate the probability that an event will occur or what its consequences will be. On the other hand, to use the term risk means that one has a view about the likely probabilities associated with the events of concern. There are no economic models that can provide any meaningful guidance as to what the consequences of a policy move to counter uncertainties are or will be. We do have some ideas about how to address risks. To complicate matters even more, either a trade war or a global slowdown is unlikely to have a measurable impact on the core of our economy. Trade is a small portion of GDP, and the so-called trade uncertainties that have been in place as of last year had no noticeable impact on first-quarter GDP growth, which came in at 3.1%. In fact, the most recent data indicate that our trade deficit with China has actually increased rather than decreased, in spite of the tariffs that have been put in place. The impact of a global slowdown are also questionable. Global growth has been slow for at least a year, and it isn’t clear how it has affected us or what impact an “insurance” policy rate cut might have or how big it should be.

In short, unlike in the case of the forward pass, where at least one positive result might be realized, the FOMC has painted itself into a corner where none of the three options available to it in the short run are likely to result in positive outcomes, either economically or politically.

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

Read Part 1 here: To Pass or Not to Pass? (Part 1)
Read Part 2 here: To Pass or Not to Pass? (Part 2)
Read Part 3 here: To Pass or Not to Pass? (Part 3)


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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The June FOMC

In the commentary leading up to the June meeting, I argued that some relaxation of the tariff issues with Mexico, combined with relatively good data for the US economy, would make the FOMC’s decision to hold pat on rates relatively easier.

Federal Reserve - FOMC

While the FOMC did decide at its June meeting to hold rates constant for the moment, the dot charts and dissent by President Bullard suggest that a number of participants were closer to cutting rates than they may have been previously or than observers might have expected leading up to the meeting. The statement itself, as many have noted, deleted the word , and the FOMC also dropped its characterization of ongoing economic activity from “solid” to rising at a “moderate rate.” We need to remember that the minutes of the March meeting indicated that the staff forecast had included a markdown of growth after Q1, so the change in language validates that forecast and aligns with the districts’ characterization of growth in their regions.

The deletion of the word patience really reflects two considerations. First, the Committee expressed concerns that downside risks had increased, and Chairman Powell made it clear in the press conference that those concerns were driven by uncertainty about US tariff policies and global growth. The FOMC statement did note that inflation expectations for the near term had declined, but longer-term expectations remain well anchored. Clearly, the failure to achieve its inflation objectives was not a determining factor in the FOMC’s decision to maintain current rates.

Second, while the word patience was missing, it was also the case that policy would be dependent on incoming data, and that view hadn’t changed one bit. Instead, the deletion of patience indicated the FOMC’s concern about the risks to the expansion and reflected the Committee’s shift from a “steady as you go” policy stance to “on your mark.”

How far are we from “get set, go!” is now the critical question; and at this point, as former Federal Reserve Bank of Philadelphia President Charles Plosser noted on Bloomberg Asia after the meeting, we are rather in the dark as to what the FOMC’s reaction is likely to be to the incoming data. The key incoming data for the FOMC’s July 29–30 meeting will the June jobs report on July 5 and the first look at the advance estimate for Q2 2019 GDP on July 26.

We can also glean some useful information on how the FOMC participants’ views on policy have changed from a comparison of the dot plots from March to June.

Bob Eisenbeis FOMC Chart 20190624

First, looking at the December projections, we see a significant shift and difference of opinion as to whether rates should be raised or lowered. While six people favored at least one or two rate increases in March, all but one had significantly lowered their rate recommendations in the June SEP. Eight people continued to favor holding rates between 2.25–2.5%, while all the remaining participants favored at least one rate cut by the end of 2019. Similarly, for 2020, of the 10 participants who saw rates above 2.5% in March only three now saw rates that high, while nine saw rates below 2.25%, and seven saw rates between 1.75–2.0%. Finally, for 2021, views have further diverged, probably reflecting the uncertainties that participants now feel may exist after the 2020 election. These projections appear quite bearish, given the fact the interest rates have come down in the near term from where they were in March. Mortgage rates are now hovering at about 3.9%, more than a percentage point below where they were at the end of 2018. More generally, the Chicago Fed’s National Financial Conditions Index is almost as low as it was in 2007 before the Fed started to raise rates. Given the state of the labor market and general health of the economy, it remains a puzzle as to why the FOMC has now changed its view regarding the appropriate path for interest rates going forward.

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


1) It is now clear in Fed-speak that solid means that growth is faster than “moderate,” which usually means growth at about 2.2–2.4%.


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.AAA




The Currency Wars Are Starting to Flare Up Again

Excerpt from Bloomberg

The Currency Wars Are Starting to Flare Up Again
06/18/2019 By Robert Burgess

Cumberland-Advisors-David-Kotok-In-The-News

NEGATIVE YIELDS KEEP EXPANDING
Draghi’s dovish comments did wonders for the sovereign bond market, sparking a rally that pushed yields lower almost everywhere around the world. French 10-year note yields fell to zero for the first time after Swedish and Austrian benchmarks turned negative, according to Bloomberg News’s Sid Verma. There’s a good chance that the next time it updates, the Bloomberg Barclays Global Aggregate Negative Yielding Debt Index will show that for the first time since mid-2016, more than $12 trillion of bonds have yields below zero. At the last update Monday, the amount totaled $11.8 trillion. “Fifty years I’ve been in this business, and never in 50 years did I think $12 trillion would be negative interest rates,” David Kotok, chairman of Cumberland Advisors, said on Bloomberg TV. On the surface, it makes no sense for investors to pay governments to lend them their money. But it’s not that simple. For some investors, those negative yields turn positive when hedged into dollars, generating yields that are similar to or even higher than U.S. Treasuries, according to Bloomberg Intelligence.

Read the full article at the Bloomberg’s Website


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.




Analyst: I’m 50 years in this business. What do I buy, and do I base it on a tweet?

Analyst: I’m 50 years in this business. What do I buy, and do I base it on a tweet?

June 18, 2019

Yahoo Finance - David R. Kotok

Yahoo Finance’s Adam Shapiro and Julie Hyman sit down with David Kotok, Cumberland Advisors Chairman & Chief Investment Officer.

“I won’t take my money and lend it to the United States of America at 2% for 10 years and I won’t pay Austria money to hold money for me and charge me to do so for 100 years. How can I possible do that for a client? So if I won’t do that with my money I’m not going to do it for a client,” says David R. Kotok.

Watch at Yahoo Finance or in the embedded player below.




The Fed Decides (Radio Podcast): Bob Eisenbeis on Bloomberg Markets

Federal Reserve officials left their main interest rate unchanged and continued to pledge patience as they grappled with conflicting currents in the U.S. economy. Discussing the decision and Fed Chair Powell’s press conference are Bloomberg Markets Editor Joe Weisenthal, Bloomberg News Stocks Editor Dave Wilson, Former President of the Minneapolis Fed Gary Stern, Ira Jersey, Bloomberg Intelligence Chief U.S. Interest Rate Strategist, Bloomberg News Bond Reporter Alex Harris and Bob Eisenbeis, Vice Chairman and Chief Monetary Economist at Cumberland Advisers. And we Drive to the Close with Ryan Detrick, Senior Market Strategist for LPL Financial. Hosts: Carol Massar and Jason Kelly. Producer: Paul Brennan

Running time 41:10

.

Cumberland Advisors on Bloomberg Radio
Radio

LISTEN HERE (or click the graphic above): Bloomberg Markets with Robert Eisenbeis Ph.D.

If you like this podcast, you may enjoy the June 22, 2018 Bloomberg Daybreak interview with  David Kotok, Chairman and Chief Investment Officer at Cumberland Advisors. He discusses the Dow’s eight day drop and possible trade war with China. He also discussed bonds and treasuries with Bloomberg.

NOTE: 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.


This podcast from 2015 features David Kotok talking about his background and Camp Kotok with Barry Ritholtz. They also talk about the history of Cumberland Advisors since its founding, and delve into fundamental principles of investing and valuation.


Links here
https://itunes.apple.com/us/podcast/masters-in-business/id730188152?mt=2

And here
http://www.bloomberg.com/podcasts/masters-in-business/




A Unique Lens on Risk Management

May 1, 2019 – Jeremy Schwartz and Liqian Ren from WisdomTree Funds hosted an investment strategy discussion that covered factor investing, U.S. sector trades and the global outlook with Matt McAleer, Director of Equity Strategies at Cumberland Advisors.

Matt McAleer, Director of Equity Strategies at Cumberland Advisors

Read about or listen to their discussion here: https://www.wisdomtree.com




Market check: talking interest rates and inflation

Market check: talking interest rates and inflation

Yahoo Finance - Market Check - talking interest rates and inflation [Video]

Yahoo Finance Video

Jensen Quality Growth Fund Portfolio Manager Allen Bond talks inflation and interest rates with Yahoo Finance’s Adam Shapiro and Julie Hyman and Cumberland Advisors Chairman & Chief Investment Officer David Kotok.

Watch at Yahoo Finance or in the embedded player below.




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.

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.