Financial Services Executives Interest in Blockchain and Digital Assets



What Do Banks and Financial Executives Think of Blockchain and Digital Assets?

 

The accounting firm Deloitte Touche Tomatsu surveyed a global array of senior executives during the early Spring of 2021.  The intent was to gather information on their thoughts of blockchain and digital assets and make available perceptions and expectations that could shape the future.  A total of 1,280 senior business leaders worldwide were surveyed; all had at least a general understanding of blockchain. The 28-page report focuses on how organizations are harnessing blockchain’s capabilities with a further emphasis on financial applications such as crypto assets, industry value, and banking services. From this data, a trend and clearer picture of the future is painted.

The overall finding was that among the financial services industry (FSI) respondents, about 80% say digital assets will be “very/somewhat important” to their industry over the next 24 months. More than 75% of all respondents feel they’ll be at a disadvantage competitively if they fail to adopt blockchain and digital assets.

 

The 2021 Global Blockchain Survey was Conducted in 10 Locations (1,280 Respondents)

 

Source: Deloitte’s 2021 Global Blockchain Survey

 

How Do Financial Executives View Blockchain and Digital
Assets?

The respondent categories are broken out into three segments. The Overall includes everyone, FSI  Overall, and FSI Pioneers.  Deloitte defined the FSI Pioneers this way,  “…have deep convictions about the potential that blockchain and digital assets offer.” Across all three groupings, there was strong agreement of the importance of blockchain and digital assets.

 

Source: Deloitte’s 2021 Global Blockchain Survey

 

The Future of Digital Assets

It would make sense that the FSI Pioneer category would be near “all in” on their convictions. When it comes to importance to the industry or whether digital assets will be an alternative fiat, the Overall and FSI Overall demonstrated only 76% agreed.

 

 

Source: Deloitte’s 2021 Global Blockchain Survey

 

Barriers

Approximately 60% of the overall respondents and 70% of the FSI Pioneer category pointed to regulatory barriers as the largest obstacle of digital assets. Cybersecurity is also of great concern to the larger Overall group, with 71% responding that it is a big obstacle. Privacy was of least concern to the overall group, with 59% considering it a big concern, whereas almost 70% of the FSI Pioneers had privacy concerns.

 

 

Greatest Impact

The survey reflected optimism about future revenue opportunities from providing solutions for digital assets and blockchain. FSI Pioneers once again are strong believers, with 93% strongly/somewhat agreeing versus 80% of Overall respondents. In order to capture these revenues, financial services firms can’t sit idle; they must adapt and reinvent how they do business. If they don’t, the concern is they won’t capture the potential for revenue, and they will instead see a drain on old business lines.

The evolution of the financial services industry is picking up speed.  Blockchain is seen as a way among many business leaders, particularly those the survey categorized as pioneers, as a way to gain a competitive advantage. The winners will be those most flexible, they don’t have to invent any new path, but quick adaptation could be the difference between thriving and not.

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The Coinbase Nasdaq Listing Offers a Diversified Equity Investment in Crypto-Growth



Cryptocurrency Gaining Acceptance by Banks

 

Source:

Deloitte’s 2021 Global Blockchain Survey

 

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Will Inflation and Low Growth Kick Off a Gold Bull Market?


Image Credit: Frankieleon (Flickr)


The Beginning of the Road for Gold?

 

With the return of inflation and expected deceleration of economic growth, as measured by gross domestic product (GDP), a growing chorus of commentators are highlighting the risk of stagflation which was last prevalent in the 1970s. Stagflation is generally characterized as a period of declining economic growth, high unemployment, and inflationary pressure. While high unemployment is arguably not present in the current environment, most economists expect a deceleration in GDP growth rates, while inflation has been fueled by accommodative monetary policies and increased fiscal spending to combat the negative economic impacts of COVID-19. Longer-term Treasury yields appear to signal easing inflation, while inflation-adjusted yields are consistent with low economic growth expectations. The jury is still out on whether inflation will prove transitory or whether it will prove more sustainable than the U.S. Treasury Secretary and Federal Reserve Chairman predict.

Building a Stagflation Portfolio

Gold shined as a defensive asset during the stagflationary 1970s, a period characterized by inflation, high unemployment, and poor economic growth. While the current macroeconomic environment differs in many respects from the 1970s, there are similarities, including 1) transitory inflation is proving more persistent than many expected, 2) real economic growth is expected to decelerate, and 3) the labor participation continues to be negatively impacted by COVID concerns, federal unemployment benefits, and mortgage and rental forbearance programs that have been cited as reasons some choose not to enter or re-enter the workforce. The emergence of the delta variant of the coronavirus leads some to think that the economy could move into a stagflation-like period that could limit the Federal Reserve’s options for tightening monetary policy to combat the recent increase in inflation.

The information below was sourced from the U.S. Gold Bureau’s website, which summarizes historical asset class performance during stagflationary periods.

Sources: Bloomberg, Haver Analytics, Rosenberg Research, Incrementum AG

What is notable is gold’s average outperformance during these periods relative to the broader market. While metals underperformed, mining stocks linked to gold and silver could be expected to benefit from gold and silver outperformance. While oil outperformed gold and silver, the transition to alternative energy and lesser reliance by the United States on foreign sources of oil may impact oil’s sensitivity to stagflation.

Take-Away

While stagflation does not appear to be the base case for most economists, investors would be wise to consider how they might position their portfolio if its probability increases. In addition to gold, a stagflationary environment could benefit sectors with pricing power, including energy and materials or sectors that can pass on higher costs to consumers.

 

Suggested Reading:



Metals and Mining Second Quarter 2021 Review and Outlook



COLA Increases in 2022 Likely to Top $68 Billion





Digging Deeper Into Gold Investments



Recycling Li-Ion Batteries Through Bioleaching

 

Sources:

Analysis:
Stagflation? Recession? Bond Market Messages Puzzle Investors
, Reuters, Yoruk Bahceli, August 6, 2021.

Stagflation
Portfolio Luring Managers Who Say Time to Act is Now
, Reuters, Katherine Greifeld and Vildana Hajric, August 11,2021.

Stagflation
is ‘A Legitimate Risk’ that Would be Painful for U.S. Markets
, MarketWatch, Christine Idzelis, July 26, 2021.

New
Coronavirus Wave is Giving Credence to the Risks of a U.S. Stagflation-Like
Scenario
, Market Watch, Vivien Lou Chen, August 3, 2021.

Disco
Inferno: The U.S. Could Be Headed Back to ‘70s-Style Stagflation
, Barron’s, Randall W. Forsyth, July 16, 2021.

Gold,
Stagflation and a Word About Basel III
, United States Gold Bureau, Bill Stack, July 14, 2021.

 

Stay up to date. Follow us:

 

COLA Increases for Seniors in 2022 Will Likely Top $68 Billion


Image Credit: Ron Latch (Pexels)


With Inflation Pushing Up the COLA on Social Security, Investing Where Seniors Spend Could Pay Off!

 

Retirees are likely to get a cost of living (COLA) increase greater than the last three years combined come January 2022. This will add up to an enormous amount of money. Many seniors have pent-up needs, after all, they’ve been tightening their belts as interest rates were pushed to near zero.  An inflation report last week (Aug. 11) released by the Bureau of Labor Statistics is the first of three which decides how much additional cash they’ll have to spend. It’s looking good for those over 62.

 

COLA Math

According to the Social Security (SSA) website, the basis for increasing Social Security payments is the change in inflation measured by CPI-W for the months of July, August, and September. These months are averaged for the current year and that average is the effective COLA beginning in January of the following year.

 

Source: Bureau of Labor Statistics CPI Report, Released August 11, 2021

On page 4 of the BLS report released last Wednesday, we can see that for the month of July, the first month that is weighted in the formula, the basket of goods measured has increased by 6%. If CPI-W drops to 0% for August and September, recipients will still get a 2% increase. This is already higher than last year (1.3%) and the year before (1.6%). Estimates are that August and September won’t see price increases slow, this has led to a range of forecasts for the Social Security COLA to be close to 6%. In June CPI-W increased by 6.1%. If the trend holds, a near 6% increase would add to more than the last three COLA adjustments combined.

The SSA website shows that for the last three years recipients received 2.8% in 2018, 1.6% in 2019, and 1.3% in 2020. The increases, even with compounding, only multiplies out to 5.80%.  

The average social security recipient receives $1,553.68 per month. A 6% increase for this group would be $93 additional monthly. On the high end, the maximum paid is $3,895 which would increase by $233.70. Neither of these is enough to lease a new Tesla, so what will Seniors be buying? The amount of money isn’t as small as it looks. The number of Americans collecting Social Security payments is 61.5 million. At an average increase of $93 per month, this will place an additional $68.6 billion into the economy next year, all primarily 62-years old and up.

 

Take-Away

The inflation that the economy has been experiencing, regardless of whether it is transitory or persistent, is likely to supply over 68 billion in additional cash to the hands of seniors next year. This is not an insignificant number. If there are specific demands among this group, for example, travel, new car, electronic updates, medical supplies, fitness, those sectors could do well. That is to suggest if there are commonalities among this demographic as to where money will be spent, investing in “gray” sectors may be worth exploring as we approach 2022.

To comment on this and other articles, find us on the popular social media sites below.

Paul Hoffman

Managing Editor, Channelchek

 

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Sources:

https://www.ssa.gov/oact/cola/latestCOLA.html#:~:text=How%20is%20a%20COLA%20calculated%3F&text=A%20COLA%20effective%20for%20December,which%20a%20COLA%20became%20effective.

https://www.ssa.gov/oact/STATS/cpiw.html

https://www.nasi.org/education/who-gets-social-security/#:~:text=About%2061%20million%20people%20collect,is%20receiving%20Social%20Security%20benefits.

https://www.bls.gov/news.release/pdf/cpi.pdf

 

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Debt Limit Debates Impact on Stocks and U.S. Credit Ratings



Debt Ceiling Season’s Impact on Stocks and U.S. Credit Ratings

 

The debt ceiling wrestling match and the U.S. Treasury’s inability to meet the responsibilities of the U.S. Government are likely to cause higher market volatility in the coming months. The suspension of debt limits has just expired, this kicks off the 2021 season, and a note from Janet Yellen is about to make a lot of people concerned.

The debt ceiling (statutory debt limit) is the maximum amount of debt the United States can have outstanding in Treasury debt.  The limit had been suspended in March of 2020 to keep the economy afloat by raising money through debt for businesses and individuals. The suspension was not indefinite and has recently expired.

 

The balance in the Treasury General Account (TGA), which is effectively the checking account for bill paying by the US government, has plunged from $1 trillion at the end of April, to $435 billion this week (August 12). This steep plunge in altitude was required to comply with the end of the statutes’ hiatus. In January, the Secretary of the Treasury Yellen said it would draw down the TGA from its then level of $1.6 trillion to $500 billion by this summer. On August 1, the existing debt ceiling became effective. According to the letter Yellen wrote to the House Speaker and Senate leaders there are immediate expenses that won’t be able to get paid. 

In this letter to Congress concerning the US meeting entitlement obligations, Yellen spelled out to Congress some “extraordinary measures,” the Treasury will take to keep the US from defaulting. The three large government-funded retirement systems topped her list:

-The Civil Service Retirement and Disability Fund

-The Postal Service Retiree Health Benefits Fund.

-The Government Securities Investment Fund (G Fund) of the Thrift Savings Fund that are part of the Federal Employees’ Retirement System.

All entitlements above are required by law to be (eventually) funded and are expected to be made whole as money becomes available by Congress hiking the amount of debt the Treasury can borrow by issuing US Treasury obligations.

If the debt ceiling is not raised by Congress, (or taxes hiked and budgets slashed), this list will grow. At some point, if money isn’t made available there will be concern that the US Treasury won’t be able to meet its debt payments. This will draw a reaction by rating agencies and investors.  For example, in August of 2011, the rating agency S&P cut the U.S. credit rating to AA+ and maintained a negative outlook. With the ratings change S&P analysts cited concerns of growing budget deficits. Rating downgrades typically cause investors (lenders) to seek higher interest rates for their new perceived risk.

Rating Agencies

Fitch, a Nationally Recognized Statistical Rating Organization (NRSRO), placed the US’s credit rating on negative outlook in July of 2020. Last month while reaffirming its AAA rating Fitch expressed heightened concern of financial activity they say will push the country further from a stabilized debt burden. The NRSRO said the US could be downgraded without a plan to balance debt and spending “in the post-pandemic phase.”

In June, Moody’s expressed its views about the US debt burden. “While the coronavirus pandemic has created unprecedented challenges for the US economy and exacerbated the pace of deterioration of the government’s fiscal position, Moody’s expects the US economy to recover over time and the sovereign’s credit profile to remain resilient to the shock,”

S&P, the third NRSRO covering US debt has a stable outlook on its AA+ rating. This maintained level is based on the dollar’s reserve status and institutional strengths, as well as the credibility of the Federal Reserve.

 

Looking Toward History for Guidance on Debt

The current year may not follow the pattern of other years as there have been many new and inventive financial strategies the US has taken to achieve goals over the past 18 months. However, this is what has generally happened each year over the decades (the statutory debt ceiling was enacted in 1917). 

Since 1960, each time the debt ceiling needed to be raised by Congress to pay bills required by Congress, those involved in working out the solution let the activity go down to the wire thereby creating an emergency situation. Defaulting on Treasury debt would topple world bond and equity markets while likely strengthening some commodities like gold and silver. Each time this has happened concessions were made, the debt ceiling was either raised or extended (or suspended), and we moved on until the following year when debt ceiling season.

Take-Away

Debt ceiling season this year has all the ingredients it needs to be even more tumultuous. The government debt is viewed as excessive relative to GDP. Washington’s spending “guarantees” have grown dramatically, there are still some concerned about how ready workers are to return to work, and money is flowing from the Treasury’s checkbook at a pace of $100 billion per week.

During past years the talk of if there “will be a deal,” “will they vote on a deal,” “they have a deal but Congress is on vacation,” sends the stock market into a volatility-tizzy. There’s no reason to expect this year’s to not be disruptive.

Stay in touch with our updates on the economy, exciting industries, and company research by registering at no cost at Channelchek.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:



What Metals Can Tell Us About the Economy



The Correlation Between Stocks and Unemployment





Metals & Mining – Second Quarter 2021 Review and Outlook



Energy Industry – 2021 2Q Review and Outlook

 

Sources:

https://home.treasury.gov/system/files/136/Debt-Limit-Letter-Congress_20210802_Pelosi.pdf

https://home.treasury.gov/news/press-releases/jy0304

https://www.federalreserve.gov/releases/h41/

https://www.bbc.com/news/world-us-canada-14428930

https://www.moodys.com/research/Moodys-affirms-United-States-Aaa-rating-maintains-stable-outlook–PR_423587

 

Stay up to date. Follow us:

 

Debt Limit Debate’s Impact on Stocks and U.S. Credit Ratings



Debt Ceiling Season’s Impact on Stocks and U.S. Credit Ratings

 

The debt ceiling wrestling match and the U.S. Treasury’s inability to meet the responsibilities of the U.S. Government are likely to cause higher market volatility in the coming months. The suspension of debt limits has just expired, this kicks off the 2021 season, and a note from Janet Yellen is about to make a lot of people concerned.

The debt ceiling (statutory debt limit) is the maximum amount of debt the United States can have outstanding in Treasury debt.  The limit had been suspended in March of 2020 to keep the economy afloat by raising money through debt for businesses and individuals. The suspension was not indefinite and has recently expired.

 

The balance in the Treasury General Account (TGA), which is effectively the checking account for bill paying by the US government, has plunged from $1 trillion at the end of April, to $435 billion this week (August 12). This steep plunge in altitude was required to comply with the end of the statutes’ hiatus. In January, the Secretary of the Treasury Yellen said it would draw down the TGA from its then level of $1.6 trillion to $500 billion by this summer. On August 1, the existing debt ceiling became effective. According to the letter Yellen wrote to the House Speaker and Senate leaders there are immediate expenses that won’t be able to get paid. 

In this letter to Congress concerning the US meeting entitlement obligations, Yellen spelled out to Congress some “extraordinary measures,” the Treasury will take to keep the US from defaulting. The three large government-funded retirement systems topped her list:

-The Civil Service Retirement and Disability Fund

-The Postal Service Retiree Health Benefits Fund.

-The Government Securities Investment Fund (G Fund) of the Thrift Savings Fund that are part of the Federal Employees’ Retirement System.

All entitlements above are required by law to be (eventually) funded and are expected to be made whole as money becomes available by Congress hiking the amount of debt the Treasury can borrow by issuing US Treasury obligations.

If the debt ceiling is not raised by Congress, (or taxes hiked and budgets slashed), this list will grow. At some point, if money isn’t made available there will be concern that the US Treasury won’t be able to meet its debt payments. This will draw a reaction by rating agencies and investors.  For example, in August of 2011, the rating agency S&P cut the U.S. credit rating to AA+ and maintained a negative outlook. With the ratings change S&P analysts cited concerns of growing budget deficits. Rating downgrades typically cause investors (lenders) to seek higher interest rates for their new perceived risk.

Rating Agencies

Fitch, a Nationally Recognized Statistical Rating Organization (NRSRO), placed the US’s credit rating on negative outlook in July of 2020. Last month while reaffirming its AAA rating Fitch expressed heightened concern of financial activity they say will push the country further from a stabilized debt burden. The NRSRO said the US could be downgraded without a plan to balance debt and spending “in the post-pandemic phase.”

In June, Moody’s expressed its views about the US debt burden. “While the coronavirus pandemic has created unprecedented challenges for the US economy and exacerbated the pace of deterioration of the government’s fiscal position, Moody’s expects the US economy to recover over time and the sovereign’s credit profile to remain resilient to the shock,”

S&P, the third NRSRO covering US debt has a stable outlook on its AA+ rating. This maintained level is based on the dollar’s reserve status and institutional strengths, as well as the credibility of the Federal Reserve.

 

Looking Toward History for Guidance on Debt

The current year may not follow the pattern of other years as there have been many new and inventive financial strategies the US has taken to achieve goals over the past 18 months. However, this is what has generally happened each year over the decades (the statutory debt ceiling was enacted in 1917). 

Since 1960, each time the debt ceiling needed to be raised by Congress to pay bills required by Congress, those involved in working out the solution let the activity go down to the wire thereby creating an emergency situation. Defaulting on Treasury debt would topple world bond and equity markets while likely strengthening some commodities like gold and silver. Each time this has happened concessions were made, the debt ceiling was either raised or extended (or suspended), and we moved on until the following year when debt ceiling season.

Take-Away

Debt ceiling season this year has all the ingredients it needs to be even more tumultuous. The government debt is viewed as excessive relative to GDP. Washington’s spending “guarantees” have grown dramatically, there are still some concerned about how ready workers are to return to work, and money is flowing from the Treasury’s checkbook at a pace of $100 billion per week.

During past years the talk of if there “will be a deal,” “will they vote on a deal,” “they have a deal but Congress is on vacation,” sends the stock market into a volatility-tizzy. There’s no reason to expect this year’s to not be disruptive.

Stay in touch with our updates on the economy, exciting industries, and company research by registering at no cost at Channelchek.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:



What Metals Can Tell Us About the Economy



The Correlation Between Stocks and Unemployment





Metals & Mining – Second Quarter 2021 Review and Outlook



Energy Industry – 2021 2Q Review and Outlook

 

Sources:

https://home.treasury.gov/system/files/136/Debt-Limit-Letter-Congress_20210802_Pelosi.pdf

https://home.treasury.gov/news/press-releases/jy0304

https://www.federalreserve.gov/releases/h41/

https://www.bbc.com/news/world-us-canada-14428930

https://www.moodys.com/research/Moodys-affirms-United-States-Aaa-rating-maintains-stable-outlook–PR_423587

 

Stay up to date. Follow us:

 

Robo-Attorneys Could Put Some Law Work at Risk


Image Credit: The People Speak! (flickr)


Are Robots Coming After the Law Profession?

 

Imagine what a lawyer does on a given day: researching cases, drafting briefs, advising clients. While technology has been nibbling around the edges of the legal profession for some time, it’s hard to imagine those complex tasks being done by a robot.

And it is those complicated, personalized tasks that have led technologists to include lawyers in a broader category of jobs that are considered pretty safe from a future of advanced robotics and artificial intelligence.

But, as we discovered in a recent research collaboration to analyze legal briefs using a branch of artificial intelligence known as machine learning, lawyers’ jobs are a lot less safe than we thought. It turns out that you don’t need to completely automate a job to fundamentally change it. All you need to do is automate part of it.

 

This article was
republished with permission from 
The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and opinions of Elizabeth C. Tippett, Associate Professor of Law, University of Oregon and Charlotte Alexander, Associate Professor of Law and Analytics, Georgia State University. The research cited in this article was produced in collaboration with MITRE, a federally funded non-profit devoted to research and development in the public interest.

 

While this may be bad news for tomorrow’s lawyers, it could be great for their future clients – particularly those who have trouble affording legal assistance.

 

Technology Can be Unpredictable

Our research project – in which we collaborated with computer scientists and linguists at MITRE, a federally funded nonprofit devoted to research and development – was not meant to be about automation. As law professors, we were trying to identify the text features of successful versus unsuccessful legal briefs.

We gathered a small cache of legal briefs and judges’ opinions and processed the text for analysis.

One of the first things we learned is that it can be hard to predict which tasks are easily automated. For example, citations in a brief – such as “Brown v. Board of Education 347 U.S. 483 (1954)” – are very easy for a human to pick out and separate from the rest of the text. Not so for machine learning software, which got tripped up in the blizzard of punctuation inside and outside the citation.

It was like those “Captcha” boxes you are asked to complete on websites to prove you’re not a robot – a human can easily spot a telephone pole, but a robot will get confused by all the background noise in the image.

A Tech Shortcut

Once we figured out how to identify the citations, we inadvertently stumbled on a methodology to automate one of the most challenging and time-consuming aspects of legal practice: legal research.

The scientists at MITRE used a methodology called “graph analysis” to create visual networks of legal citations. The graph analysis enabled us to predict whether a brief would “win” based on how well other briefs performed when they included a particular citation.

Later, however, we realized the process could be reversed. If you were a lawyer responding to the other side’s brief, normally you would have to search laboriously for the right cases to cite using an expensive database. But our research suggested that we could build a database with software that would just tell lawyers the best cases to cite. All you would need to is feed the other side’s brief into the machine.

Now we didn’t actually construct our research-shortcut machine. We would need a mountain of lawyers’ briefs and judicial opinions to make something useful. And researchers like us do not have free access to data of that sort – even the government-run database known as PACER charges by the page.

But it does show how technology can turn any task that is extremely time-consuming for humans into one where the heavy lifting can be done at the click of a button.

 

Not long ago, stock charts were updated by hand.Technology has led to automation of updating stock movements. This frees the
investor to focus on other details.

 

A History of Partial Automation

Automating the hard parts of a job can make a big difference both for those performing the job and the consumers on the other side of the transaction.

Take for example, a hydraulic crane or a power forklift. While today people think of operating a crane as manual work, these powered machines were considered labor-saving devices when they were first introduced because they supplanted the human power involved in moving heavy objects around.

Forklifts and cranes, of course, didn’t replace people. But like automating the grind of legal research, power machines multiplied the amount of work one person could accomplish within a unit of time.

Partial automation of sewing machines in the early 20th century offers another example. By the 1910s, women working in textile mills were no longer responsible for sewing on a single machine – as you might today on a home sewing machine – but wrangling an industrial-grade machine with 12 needles sewing 4,000 stitches per minute. These machines could automatically perform all the fussy work of hemming, sewing seams and even stitching the “embroidery trimming of white underwear.” Like an airline pilot flying on autopilot, they weren’t sewing so much as monitoring the machine for problems.

Was the transition bad for workers? Maybe somewhat, but it was a boon for consumers. In 1912, women perusing the Sears mail order catalog had a choice between “drawers” with premium hand-embroidered trimming, and a much cheaper machine-embroidered option.

Likewise, automation could help reduce the cost of legal services, making it more accessible for the many individuals who can’t afford a lawyer.

 

 

Indeed, in other sectors of the economy, technological developments in recent decades have enabled companies to shift work from paid workers to customers.

Touchscreen technology, for example, enabled airlines to install check-in kiosks. Similar kiosks are almost everywhere – in parking lots, gas stations, grocery stores and even fast-food restaurants.

At one level these kiosks are displacing paid labor by employees with unpaid labor by consumers. But that argument assumes that everyone could access the product or service back when it was performed by an employee.

In the context of legal services, the many consumers who can’t afford a lawyer are already forgoing their day in court altogether or handling legal claims on their own – often with bad results. If partial automation means an overwhelmed legal aid lawyer now has time to take more clients’ cases or clients can now afford to hire a lawyer, everyone will be better off.

In addition, tech-enabled legal services can help consumers do a better job of representing themselves. For example, the federal district court in Missouri now offers a platform to help individuals filing for bankruptcy prepare their forms – either on their own or with a free 30-minute meeting with a lawyer. Because the platform provides a head start, both the lawyer and consumer can make better use of the 30-minute time slot.

More help for consumers may be on the way – there is a bumper crop of tech startups jostling to automate various types of legal work. So while our research-shortcut machine hasn’t been built, powerful tools like it may not be far off.

And the lawyers themselves? Like factory and textile workers armed with new power tools, they may be expected to do more work in the time they have. But it should be less of a grind. It might even free them up to meet with clients.

 

Suggested Reading:



Preparing Investors for the Artificial Intelligence Revolution



AI and Skyborg Technology Will Create Huge Tech Winners





Trading Technology Continues to Level the Playing Field



Tax Treatment of Crypto Miners Could Cause U.S. Exodus

 

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How Many More Stimulus Checks?


Image Credit mike01905 (Flickr)


Is a Fourth Stimulus Check Coming?

 

When previous stimulus payments hit the mailboxes and bank accounts of recipients three separate times since April of 2020, each time the stock market reacted positively. There are many stimulus initiatives currently being debated or active.  Investors are wise to keep track of these initiatives, the immediate impacts and the long-term effects could again play a large part in market moves or economic growth. 

 

Various Payments in Play

While almost $1 million jobs were filled in July, driving the unemployment rate down to levels comparable to 2015, there remain calls from both lawmakers and civilians for various new cash payments.  Recently a petition has surfaced with nearly 3 million signatures calling for payments of $ 2,000 for adults and an additional $ 1,000 for children. There are a number of senators that support recurring these payments that would be triggered anytime the unemployment rate rises above 6%. Congress, for its part, is busy working on an infrastructure bill with the potential passage before the end of the month. It’s expected that there would be no movement on other agendas until that deal has been hammered out.

But there is still other money for many in the pipeline. The IRS continues to send additional “plus-up” payments for stimulus amounts owed and it is providing millions of families monthly cash through the extended child tax deduction.

“Thank you payments” in the amount of $1,000 are being sent to teachers and other school staff in several states. This would be funded by state and local governments which received from Washington $350 billion in aid as part of the U.S. rescue plan. Much of this aid will go to schools. Some states chose to offer their teachers and other school staff a “thank you” bonus of up to $1,000. The current states are Georgia, Florida, Tennessee, Colorado, Texas, and California. It’s expected that other states will approve similar disbursements. They have until 2024 to use the funds. 

California will soon issue another round of “Golden State Stimulus Checks,” this will give $600-$1,100 to millions of residents meeting certain criteria. Golden State Stimulus II was approved under a $100-billion budget plan signed by California’s Governor. The stated goal is to spur the state’s economy following an extended period of economic shutdowns. California has approved two rounds of state-level stimulus payments to eligible residents. Nearly two-thirds of residents qualify for the payments. The checks will be available in September.

The President is asking states and cities to use “rescue funds” to send $100 payments to the newly inoculated against Covid. This is viewed not as a means to stimulate the economy but instead to stimulate an increase in interest in receiving the measure.

New rules for child tax credit give parents the potential to get monthly advances for extra cash in 2021, or a lump sum of up to $ 3,600 per child in 2022. The advance was a stipulation in The American Rescue Plan Act. The first monthly child tax credit payments were sent out in July.

 

Other Stimulating Proposals

Since the American Rescue Plan began being implemented in March, the White House has proposed two additional packages – the American Jobs Plan and the American Families Plan. There is no stimulus component to either. The current White House focus is on the infrastructure spending package. The President is said to be “open to a number of ideas” regarding stimulus aid.

Other

Job openings are setting new records allowing opportunity for individual economic well-being and economic growth as a country. A total of 10.1 million positions were open in June. At the same time people are quitting their positions at a rampant pace. During May 3.9 million people quit their jobs. The amount resigning has averaged 3.6 million per month during the last quarter. As open positions rise, the resignations could indicate various personal decisions. For some it indicates confidence in the ability to find a suitable position elsewhere. For others it suggests they’re holding out for higher wages (which have been increasing).  They might also just be burnt out, it has been a difficult year for many, particularly for hospitality and retail workers. A July survey from Joblist, found that one in three service workers wouldn’t return to the industry, and half wouldn’t return to their old roles. Their reason was unsatisfactory pay, conditions, and benefits.

 

Take-Away

The economy is being managed quite different than at any other time in U.S. history. The creation of money and redirection from some segments to others provides many obvious opportunities. While it is easy to see how a subsidy to an industry could help the industry, and create opportunity, money placed in the hands of individuals also could have pronounced effects on segments of the market where the cash is likely to be spent.

Suggested Reading:



Are Earnings Important for Young Media Companies?



The Next Round of Stimulus and Industries Impacted





Is the U.S. Dollar Slipping as the Dominant Currency?



How Much is a Trillion?

Sources:

https://www.the-sun.com/money/3319154/stimulus-check-update-fury-thank-you-payments-teachers-july-2021/

https://ktla.com/news/california/golden-state-stimulus-checks-when-will-payments-go-out-who-qualifies-and-how-to-check-the-amount/

https://www.bbc.com/news/world-us-canada-58020090

https://www.businessinsider.com/jolts-july-job-openings-labor-market-worker-shortage-hiring-data-2021-8

https://www.joblist.com/jobs-reports/q2-2021-united-states-job-market-report

 

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Is the U.S. Dollar Still the Dominant Currency?


Vladislav Reshetnyak (Pexels)


Is the U.S. Dollar Slipping as the Dominant Currency?

 

The U.S. dollar has been the world’s dominant currency since the end of World War II.

According to the Congressional Research
Service
, roughly half of international trade, international loans, and global debt securities are denominated in $USD. The same goes for many of the world’s most traded commodities including gold, silver, and crude oil. In the chart below the Visual Capitalist has created a visual depiction that shows the standing of the U.S. dollar.

 

Graphics and information
in this article provided by The Visual Capitalist and New York Life Investments

 

Top
Traded Currency Pairs

The foreign exchange market is the largest financial market in the world, with an average daily trading volume of almost $7 trillion. The majority of this volume is driven by banks, corporations, and other financial institutions.

More than 70% of this volume is generated from the top seven currency pairs, all of which include the U.S. dollar.

Currency Pair Share of Global Transactions
EUR/USD 27%
USD/JPY 13%
GBP/USD 11%
AUD/USD 6%
USD/CAD 5%
USD/CHF 5%
NZD/USD 4%
EUR/JPY 4%
GBP/JPY 4%
Other 21%

The EUR/USD pair is the world’s most traded currency pair and is commonly referred to as “fiber”. It indicates how many U.S. dollars are needed to purchase one euro.

Foreign
Exchange Reserves by Currency

Central banks typically hold foreign exchange reserves for purposes such as:

  • Influencing exchange rates
  • Maintaining liquidity in the event of a crisis
  • Backing debt obligations

Given its status as the world’s dominant currency, the USD naturally represents a majority of these reserves.

Currency Share of Total Reserves
US dollar 60%
Euro 21%
Japanese Yen 6%
Pound sterling 5%
Chinese renminbi 3%
Australian dollar 2%
Canadian dollar 2%
Other 3%

 

Japan and China are the world’s largest foreign holders of USD, with stockpiles of over one trillion each. These are often accumulated by purchasing U.S. Treasury bonds, a strategy for devaluing one’s domestic currency.

Because a large portion of China’s GDP is generated from exports, the country benefits when its currency, the renminbi (RMB), is weaker relative to the dollar. A relatively weak RMB means Chinese exports become cheaper than American-made goods.

Will
The U.S. Dollar Continue to Reign?

Today’s shifting geopolitical and economic landscape presents challenges to the U.S. dollar’s global status.

China has overtaken the U.S. as the world’s major trading partner, and is looking to leverage its power to expand the presence of the RMB. Two factors that limit the RMB’s potential as an international currency are tight government controls and a lack of transparency.

Another threat to the USD’s dominance is the use of financial sanctions, which limit foreign access to the U.S. financial system. While these sanctions may be effective from a foreign policy perspective, they can also undermine the global role of the USD.

The following chart illustrates how Russia has circumvented the U.S. dollar in the face of American sanctions.

 

 

More specifically, Russia and China have been working towards a closer financial alliance. As of Q1 2020, just 45% of trade between the two nations was denominated in USD, down from 90% in late 2015.

Impact
on Inflation

America’s M2 money supply has grown significantly since the 2008 global financial crisis, and even more so during the COVID-19 pandemic. M2 includes cash, checking deposits, and liquid vehicles such as money market securities.

Looking forward, U.S. inflation is expected to accelerate. In August 2020, the Federal Reserve announced it would switch to an inflation-averaging policy. This means that annual inflation will be allowed to exceed 2% in a given year, so long as the 2% target is achieved over a longer timeframe.

In some respects, higher inflation can be a positive. The U.S. debt to GDP ratio is currently over 100%, and by 2050, it’s expected to reach 195%. With so much debt being issued, sustained inflation can gradually undermine the real value of these liabilities. The tradeoff, of course, is a further weakening of the U.S. dollar.

 

Suggested Reading:



Some Color on Prices and the Markets Fixation on Inflation



A Look at Real Estate Risks to the Stock Market





How Much is a Trillion?



Money Supply is Like Caffeine for Stocks

 

Information and graphics are largely based on an article by
The Visual Capitalist for New York Life Investments. Ancillary Sources are
provided below:

https://advisor.visualcapitalist.com/how-dominant-is-the-us-dollar/

https://asia.nikkei.com/Politics/International-relations/China-and-Russia-ditch-dollar-in-move-toward-financial-alliance

https://fred.stlouisfed.org/series/M2SL

https://www.newyorklifeinvestments.com/?utm_source=VCweb&utm_medium=MM-ad&utm_campaign=Viscap-NYLhttps://www.statista.com/statistics/246420/major-foreign-holders-of-us-treasury-debt/

https://www.statista.com/statistics/246420/major-foreign-holders-of-us-treasury-debt/

https://crsreports.congress.gov/product/pdf/IF/IF11

 

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Automakers Goals Provide Rich Investment Opportunity



Clearer Future for Low-Carbon Investments

 

U.S. Automakers just committed to producing fuel cell electric, plug-in hybrid, and battery-powered EVs at a level where they would be 40% to 50% of sales eight years from now.  In a joint statement, Stellantis (manufacturer of Chrysler/Jeep), General Motors, and Ford pledged voluntary compliance with targets set to be defined Thursday (August 5) by the Biden administration, which has committed taxpayer and other government support.

Roughly Half of all
New Cars Sold Next Decade

The car manufacturers said their actions “represent a dramatic shift from the U.S. market today.” While the automakers’ commitment is for alternate fuel vehicles to comprise 40% to 50% of sales, the U.S. President is expected to sign an executive order this week setting a voluntary target of 50%.

How a “voluntary” “order” is administered may be made more clear when presented.  The order is believed to be non-binding for the manufacturers.

Cost of Non-Binding
Support

The infrastructure that will be needed in fewer than ten years is immense. EV charging stations, hydrogen distribution or point of sale manufacturing, and cleaner electricity to provide for both. The Detroit big three car builders said the aggressive EV sales goals could only be met with billions of dollars in government incentives, including consumer subsidies.

Separately, Hyundai supports the 2030 40%-50% EV sales goal. Toyota, which had always officially preferred a hybrid model, said in a statement, “you can count on Toyota to do our part.”

 

Investor Opportunity

In a June 17 press release, consulting firm AlixPartners forecasted investments in electric vehicles by 2025 could total $330 billion. As of now, electric vehicles represent about 2% of total global vehicle sales. Biden has, to date, called for $174 billion in government spending to boost EVs, including $100 billion in consumer incentives. A new bipartisan Senate infrastructure bill includes $7.5 billion for EV charging stations but no money for new consumer incentives.

 

Your Investment Portfolio

With hundreds of billions being reallocated and transferred to fulfill these aggressive goals, the opportunities for investors seem high.

At the most basic level, this immense undertaking will include a need for more raw materials. Among mining stocks, investors in copper producers could be big beneficiaries as the metal is needed to distribute electricity from generation to charging stations, and also within vehicles.  Silver which is used to build solar panels could also see more industrial demand. Lithium, cobalt, and other rare earth metals currently used to manufacture batteries will also be in higher demand. Although wind and solar power generation is expanding, it is not expected to create enough reliable energy. Therefore, companies that produce uranium could also benefit from increasing demand as more nuclear plants go online.

 

 

Direct manufacturers of necessary components would also benefit. Renewable Energy Magazine predicts $60 billion worth of batteries will be needed to meet the coming growth. This places lithium-ion high on the list of component manufacturers. According to USA Today, there are 42,000 charging stations in the U.S., but only 5,000 are considered “fast charging.” In comparison, there are 150,000 gas stations (according to API.org). There are large and small companies building charging stations; it may not come as a surprise that more than a few of them are recognizable companies that are better known for selling gasoline. Hydrogen fuel cells are currently a better solution than lithium-ion for distance or heavy cargo travel. Refueling, however, is even more challenging than recharging a battery. Manufacturers of fuel cells include start-ups and large industrial conglomerates. As with charging stations, the manufacturers that are going to see an erosion in one product while growth in another may not pay off to investors as significantly as smaller more focused companies. The technology to produce pure hydrogen and do it affordably and with low or no emissions is still in its infancy. Recent reports suggest existing gas mains can be used as part of a distribution system, owners of these lines would lose one product and gain another. Onsite hydrogen production may turn out to be the winning technology, to solve this piece of the puzzle.

Car manufacturers themselves will get an influx of taxpayer-funded subsidies. Additionally, if consumer adoption of new vehicles is high, sales may be rampant over the next decade. Conversely, if the infrastructure is behind the car makers’ timeline, buyers may wait, and automakers could find buyers unwilling to buy either the old technology or the new.

Take-Away

With change, there is opportunity. When government spending is involved, the opportunities could be even greater. The promise by car manufacturers to have 40%-50% of their sales electric by 2030 is a huge change in a very big industry an industry that touches many others. Even if partially fulfilled, many companies and fledgling industries will do well. Smaller, more focused companies have the greatest potential to “be the next AAPL.”

It’s easy to find and explore smaller companies in all the various industries affected by going to the company search bar here on Channelchek.

 

 

Suggested Reading:



Recipe for Higher Uranium Prices



Un-hyped Hydrogen Investments





The FOMC and Senate Help Copper Advance



Lithium-ion Battery Recycling Heats Up

 

Sources:

https://www.alixpartners.com/media-center/press-releases/2021-alixpartners-global-automotive-outlook/

https://www.renewableenergymagazine.com/electric_hybrid_vehicles/which-industries-could-benefit-most-from-electric-20210113

https://www.usatoday.com/story/money/cars/2021/07/13/electrify-america-chargers-ev-charging-electric-vehicles-cars/7950468002/

https://www.api.org/oil-and-natural-gas/consumer-information/consumer-resources/service-station-faqs#:~:text=How%20many%20service%20stations%20are,are%20convenience%20stores%20selling%20fuel.

 

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Inflation is Way Above Target – Fed Doesnt Adjust Aim


Image Credit: Jevgenijs Slihto


“Core PCE” Inflation Spike – Highest 3-Month Rate since 1982

 

Fed Chairman Powell doubled down on inflation being temporary and transitory during the post FOMC meeting press conference. Despite his official position, the Fed head admitted that the recent rate of inflation was “not moderately above” the Fed’s 2% target but “way above target.” The inflation measure that the Fed says it uses for its target is the annual “core PCE,” this spiked even higher on Friday (after the Powell’s Wednesday Press conference).

In 2012, the PCE Price Index became the inflation index used by the U.S. Federal Reserve for making monetary policy decisions. Personal consumption expenditures are among the three main parts of the Personal Income and Outlays report, the most recent was released on Friday (July 30). According to the BEA, this Personal Consumption Expenditures price index, without food and energy, jumped by 0.45% in June, from May, after having jumped by 0.5% in May, 0.7% in April, and 0.4% in March. What’s noteworthy is the Fed’s 2% target compared to the gauge they use which is up 3.5% from June last year, it is the highest year-over-year rise since May 1991.

The graph below from the St. Louis Federal Reserve website is a percent change in PCE inflation measures on a semiannual basis over 20 years. The visual makes it clear that this inflation measure is currently behaving well outside of normal parameters.

 

 

The annualized rate of core PCE over April, May, and June was 6.7%, this is the highest run-rate since July 1982. Inflation has suddenly throttled up this spring and into summer. Although we’ve experienced higher inflation data historically, those price increases were always met with the Fed and the interest rate markets reacting strongly. What we have now is government officials broadcasting that inflation is not going to be long lasting, to many this temporary talk sounds reminiscent of Washington’s “only a 14-day lockdown,” and then we’ll have business as usual. It’s understandable that professionals and economic hobbyists are at home looking at the data and feeling uncertain that it is temporary. The bond market to date, often viewed as the more informed money (over stock and real estate speculation), has accepted the idea that these increases are only temporary.

 

 

So far in 2021, Fed officials have not had a perfect record.  The PCE price index, which includes food and energy, also released Friday, jumped 4.0%. Every three months (roughly, as the FED only meets eight times per year), the meeting is followed by the release of “Projection Materials,” which memorializes where FOMC members think the economy and inflation are headed. The median projection for core PCE inflation is now way behind expectations. For example, in December, core PCE projection for 2021: 1.8% the actual was only actual =1.5%. In March, the core PCE projection for 2021 was 2.0% the forecast of the surge to 2.0% was perfect. By June the core PCE projection was 2.1% the actual was 3.5% when the monthly surges are added in. A miss by an additional 1.4% over the 2.1% expectation is significant and could demonstrate a lack of grasp on what’s possible.

Fed Chair Powell was asked to explain and define at Wednesday’s press conference both why monetary policy should remain easy with inflation surging,  and to clear up what exactly “temporary” and “transitory” mean to him. He admitted that there was nothing temporary or transitory in the current inflation. The loss in dollar purchasing power is permanent; prices are not expected to go back to where they were.

What is expected to be transitory is the current pace of price increases. The starting point down the road could be 6% higher, but prices aren’t expected to continue increasing at the highest speed we’ve seen in 40 years. In that sense, each rate increase stands alone, so the pace is “transitory” or “temporary.” The use of semantics by Fed officials is an art form all to itself. 

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:



Trimmed PCE Inflation vs. the PCE Deflator



Is Inflation Going to Hurt Stocks?





A Look at Real Estate Risk to the Stock Market



Is the Bubble Michael Burry Warned About Still Looming?

 

Sources:

https://www.bea.gov/news/2021/personal-income-and-outlays-june-2021-and-annual-update

https://www.investopedia.com/terms/p/pce.asp

https://www.bea.gov/news/2021/personal-income-and-outlays-june-2021-and-annual-update

https://fred.stlouisfed.org/graph/?id=PCEPILFE,#0

 

Stay up to date. Follow us:

 

Inflation is Way Above Target – Fed Doesn’t Adjust Aim


Image Credit: Jevgenijs Slihto


“Core PCE” Inflation Spike – Highest 3-Month Rate since 1982

 

Fed Chairman Powell doubled down on inflation being temporary and transitory during the post FOMC meeting press conference. Despite his official position, the Fed head admitted that the recent rate of inflation was “not moderately above” the Fed’s 2% target but “way above target.” The inflation measure that the Fed says it uses for its target is the annual “core PCE,” this spiked even higher on Friday (after the Powell’s Wednesday Press conference).

In 2012, the PCE Price Index became the inflation index used by the U.S. Federal Reserve for making monetary policy decisions. Personal consumption expenditures are among the three main parts of the Personal Income and Outlays report, the most recent was released on Friday (July 30). According to the BEA, this Personal Consumption Expenditures price index, without food and energy, jumped by 0.45% in June, from May, after having jumped by 0.5% in May, 0.7% in April, and 0.4% in March. What’s noteworthy is the Fed’s 2% target compared to the gauge they use which is up 3.5% from June last year, it is the highest year-over-year rise since May 1991.

The graph below from the St. Louis Federal Reserve website is a percent change in PCE inflation measures on a semiannual basis over 20 years. The visual makes it clear that this inflation measure is currently behaving well outside of normal parameters.

 

 

The annualized rate of core PCE over April, May, and June was 6.7%, this is the highest run-rate since July 1982. Inflation has suddenly throttled up this spring and into summer. Although we’ve experienced higher inflation data historically, those price increases were always met with the Fed and the interest rate markets reacting strongly. What we have now is government officials broadcasting that inflation is not going to be long lasting, to many this temporary talk sounds reminiscent of Washington’s “only a 14-day lockdown,” and then we’ll have business as usual. It’s understandable that professionals and economic hobbyists are at home looking at the data and feeling uncertain that it is temporary. The bond market to date, often viewed as the more informed money (over stock and real estate speculation), has accepted the idea that these increases are only temporary.

 

 

So far in 2021, Fed officials have not had a perfect record.  The PCE price index, which includes food and energy, also released Friday, jumped 4.0%. Every three months (roughly, as the FED only meets eight times per year), the meeting is followed by the release of “Projection Materials,” which memorializes where FOMC members think the economy and inflation are headed. The median projection for core PCE inflation is now way behind expectations. For example, in December, core PCE projection for 2021: 1.8% the actual was only actual =1.5%. In March, the core PCE projection for 2021 was 2.0% the forecast of the surge to 2.0% was perfect. By June the core PCE projection was 2.1% the actual was 3.5% when the monthly surges are added in. A miss by an additional 1.4% over the 2.1% expectation is significant and could demonstrate a lack of grasp on what’s possible.

Fed Chair Powell was asked to explain and define at Wednesday’s press conference both why monetary policy should remain easy with inflation surging,  and to clear up what exactly “temporary” and “transitory” mean to him. He admitted that there was nothing temporary or transitory in the current inflation. The loss in dollar purchasing power is permanent; prices are not expected to go back to where they were.

What is expected to be transitory is the current pace of price increases. The starting point down the road could be 6% higher, but prices aren’t expected to continue increasing at the highest speed we’ve seen in 40 years. In that sense, each rate increase stands alone, so the pace is “transitory” or “temporary.” The use of semantics by Fed officials is an art form all to itself. 

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:



Trimmed PCE Inflation vs. the PCE Deflator



Is Inflation Going to Hurt Stocks?





A Look at Real Estate Risk to the Stock Market



Is the Bubble Michael Burry Warned About Still Looming?

 

Sources:

https://www.bea.gov/news/2021/personal-income-and-outlays-june-2021-and-annual-update

https://www.investopedia.com/terms/p/pce.asp

https://www.bea.gov/news/2021/personal-income-and-outlays-june-2021-and-annual-update

https://fred.stlouisfed.org/graph/?id=PCEPILFE,#0

 

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Pass Rates on Financial Analyst Exam Drops 43 Percent in Three Months



What’s Going on With Chartered Financial Analysts (CFAs)?

 

The CFA Institute released its pass rate for the Chartered Financial Analyst (CFA) Level 1 exams taken in May 2021. One doesn’t need a CFA level of understanding data to realize the 25% pass rate is an outlier.

Here are some additional data points for reference, the pass rate for the Level 1 exam (there are three levels) had never previously fallen below 34%. The exams have a 58 year history, and the last time it was as low as 34% was in 2005. During February of this year, the pass rate was 44% and in December 2020 it was 49%.

Is there a Covid Connection?

The CFA Institute says the exam difficulty was consistent with past years. So, has there been a surge in interest in the test from newfound budding financial analysts? Did the pandemic cause a high level of distraction from exam prep? Did the move to computer-based testing play a role?  The CFA Institute seems to suggest the low pass rate was in large part due to poorly prepared candidates.  Each of the CFA exam levels require at least 300 hours of study time. Candidates taking exams this year have had their studies disrupted by repeated exam postponements and cancellations due to COVID 19 preventative measures.

According to the CFA, “Some Level I candidates had been deferred twice prior to the May administration due to restrictions caused by the global pandemic. While some impacted candidates were able to pass, we believe the stop-start nature of the deferred candidates’ studies is reflected in the overall passing rate,”

Some CFA candidates had a different outlook. Many who failed said they’d put in more than the prescribed 300 hours. Other suggestions as to the reason for the abnormally low pass rate include:  CFA Institute is trying to raise the prestige of the CFA charter following complaints it had been watered down   CFA Institute has recalibrated passing scores are changing the format and moving to online exams now that exams are offered four times a year, CFA Institute knows that people will pay $1k to enter again and can therefore make more money from poor scores. These are just a few pulled from various sources.

While the final point would seem particularly cynical, it’s unlikely to have worked out anyway if true. Many of the 75% of candidates who today found out that they’ve failed Level I seem disinclined to give it another go. “Who in their right mind is going to pay $1000 for an exam knowing only 25% of people will pass. It’s a shocking decision,” said one.

The CFA Institute’s Analysis

Matthew Hickerson of the CFA Institute said the recent exams had the same level of difficulty as previous exams. “All examinations are constructed using industry best-practice psychometric data and detailed examination blueprints,” said the spokesperson. “The degree of difficulty of the May Level I exam was consistent with previous Level I exam administrations, and this is the case whether we look back to paper-based testing or computer-based testing, which we introduced in February this year.”

 

Ten Year Pass Rate for CFA Part

Background

Nearly 26,000 candidates sat for the Level I exam, which was administered at test centers around the world, according to the CFA Institute. The CFA designation is highly prized as it denotes an understanding and accomplishment that a holder can be considered among the elite. 

The CFA Program is a three-part exam taken at different times, often a year apart. It tests the fundamentals of investment tools, valuing assets, portfolio management, and wealth planning. The CFA Program is typically completed by those with backgrounds in finance, accounting, economics, or business. CFA charterholders earn the right to use the CFA designation after program completion, application, and acceptance by the CFA Institute. CFA charterholders are considered well qualified in the fields of investment management, risk management, asset management, and equity analysis.

 

Suggested Reading:



Is Interest Paid on Crypto an SEC Violation?



How Does the Gates Buffet Natrium Reactor Work?





Companies Developing Therapeutics to Fight Covid 19 Will Get a $3.2 Billion Injection



Mining Cryptos from Home Without Expensive Equipment

 

Sources:

www.bloomberg.co/news/articles/2021-07-27/cfa-pass-rate-plummets-to-record-low-of-25-for-level-1-exam

https://www.efinancialcareers.co.uk/news/2020/10/cfa-charter-is-being-degraded

https://www.cfainstitute.org/-/media/documents/support/programs/cfa/cfa-exam-results-since-1963.ashx

 

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Is the Index Bubble Michael Burry Warned About Still Looming?


Image Credit: Vladamir Agofonkin (flickr)


Can Stock Market Index Enthusiasm Cause Costly Bubbles?

 

It has been 23 months since Michael Burry again caught the attention of the investment world by saying index funds are in a bubble. The discussion resurfaced again this morning in Barron’s article titled, The
Stock Market is Ridiculously Expensive, the Average Stock Isn’t.
   As we approach the two-year anniversary of his Bloomberg email interview, it’s important to remember what we learned from Michael Lewis’ book The Big Short about Burry and what investors in his Scion Asset Management service sign off on before they invest with him.

The first can be summed up in this way. When Burry was figuring out how to play the other side of a real estate bubble that few saw as clearly as himself, he went all in and then waited. His positions were built over a long period of time without drawing excessive attention to what he was doing. He informed his readers through his newsletter what he thought; however, unlike many other investment newsletters, it was not written in an alarmist fashion. The trades took a long time to play out.

The second useful tidbit we learned from The Big Short story is investors grew tired of waiting and were quite concerned he may be wrong. Some even got out of their agreements. Burry, along with a few others who shorted mezzanine level CMO tranches and CDOs, had confidence that the upward trend in housing wasn’t sustainable and would one day crumble.

Burry and others shorting securities tied to housing scrambled to grow their positions because they were concerned others would see what was plain as day to them.  They wanted to first fully load the boat with shorts on assets that appeared doomed.

 

What he Told Bloomberg

On September 4, 2019, Bloomberg News posted an article from a lengthy interview with Burry, whom many consider a savant investor. His view was startling at the time; he believed that the flood of money into index funds shows parallels with the pre-2008 bubble in collateralized debt obligations. Not one to just trade on hunches, Burry backed up what he said, saying index fund inflows are now distorting prices for stocks and bonds in much the same way that CDO purchases did for subprime mortgages. He warned the flows would reverse at some point and mentioned “it will be ugly” when they do.

Burry explained, “Like most bubbles, the longer it goes on, the worse the crash will be,” At the time he liked small-cap value stocks, one of the reasons is they tend to be under-represented in passive funds. His concerns included a lack of price discovery mechanisms functioning naturally, “Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies — these do not require the security-level analysis that is required for true price discovery.

“This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”

 

“…In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those — 456 stocks — traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this…” M.B.

 

Burry’s take on liquidity risk is also hard to poke holes in; he felt many stocks have been on a free ride saying, without building a large following on their own. He said “The dirty secret of passive index funds — whether open-end, closed-end or ETF — is the distribution of daily dollar value traded among the securities within the indexes they mimic. In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those — 456 stocks — traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different — the index contains the world’s largest stocks, but still, 266 stocks — over half — traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”

 

“…That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally…” M.B.

 

Although he didn’t give a time frame in late 2019, he said it wouldn’t end well. He discussed how advisors are helping to build the problem by placing clients in indexed funds rather than more active management and lowering their fees to attract more assets; this helps the problem snowball. “Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don’t know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be.” Said, Dr. Burry

Although it seemed surprising and even unbelievable at the time when the unraveling in the mortgage market began 13 years ago, it quickly became obvious that the market was allowed to become over-inflated (pronounced bubble) because the normal pricing mechanisms were stifled. Other investors eventually saw what Burry had seen much sooner; by then it was too late.

In an article this morning (July 28) in Barron’s, it seems they are beginning to make the same arguments that Michael Burry made almost two years ago. The Barron’s piece is titled, The Stock Market is Ridiculously Expensive, the Average Stock Isn’t.

The Barron’s Article Take on Today’s Market

The overriding claim in the reporting by Jacob Sonenshine is the stock market as a whole might look expensive, but there is value to be found in most companies in the S&P 500 (S&P). 

The reason given is the index weighs stocks with larger market caps greater than lower-valued companies. The S&P is currently trading at 21.4 times the aggregate forecast earnings per share of the companies that make it up. That, according to Barron’s is 43% above the long-term average of 15 times. If the influence of market cap was removed and all stocks were weighted equally, the average valuation would be 19 times forecasted earnings, according to Morgan Stanley, this is down from the high this year of 21 times. The decline resulted from sectors like energy selling off.

Investors are concerned that companies like Facebook, Apple, Amazon, Netflix, Google, and Microsoft are why the standard market cap weighting of the S&P appears expensive. According to Barron’s article, the six companies, with a combined market value of $9.4 trillion, account for a quarter of the index’s aggregate value.

They have outperformed the index recently, with an average gain of 4.9% in the past month. The S&P 500 is up 2.6% over that time. The thinking presented in the article is that investors who are positive about the economy are likely to be able to find value by picking stocks that demonstrate value rather than subjecting themselves to the lack of diversification weighted heavily toward those that are overvalued by traditional measures.

Take-Away

Don’t grow impatient with convictions, but timing is difficult. There is no certainty as to whether index fund investing has run its course and created unsustainable bubbles. However, the arguments made almost two years ago by someone who amassed great wealth back in 2008, shorting CDOs, is now being adopted by more mainstream thinking.

When evaluating small-cap stocks, remember your Channelchek registration allows you access to research and data on 6000 prospects that may fit your portfolio.

Paul Hoffman

Managing Editor, Channelchek

Suggested Reading:



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Michael Burry Says COVID-19 Cure Worse Than the Disease





Why Microcaps are the New Small-Cap Stocks



Index Funds May Still Fall Apart Over Time

 

Sources:

https://www.barrons.com/articles/s-p-500-expensive-valuation-average-stock-51627417874?mod=hp_LEADSUPP_2

https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos

 

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