January 13, 2021
My Dear Reader,
Every year there are stories that can define trends or occurrences that can define that year or even decade. For example, in 1905, the little-studied Moroccan Crisis set the stage for the powers involved in World War One and became an omen for the entirety of the 20th-century violence that ensued. Much like the Moroccan crisis of 1905, there are developing stories this month that I believe could define this year and perhaps even this decade. Take heed of each of these stories, we will be revisiting them each as this year drags on.
The IMF and the “Lost Decade”
Writing for the Brookings policy non-profit, Kevin Watkins, head of Save the Children UK argued that the near-universal lockdowns have hurt developed nations, as well as developing ones;
“Poverty is one driver of the impending great reversal. The world was not on track for the 2030 goal of eradicating extreme poverty before COVID-19, and progress was slowing. We are now heading in the wrong direction. Based on national poverty lines, UNICEF and Save the Children estimate that the global downturn in economic growth could leave another 117 million children in destitution. That figure is almost certainly an underestimate. Derived from economic growth projections, it takes no account of lockdown policies that have pushed millions of the near poor into poverty.”
When COVID-19 first hit the shores of many nations, leaders of every ilk utilized the best knowledge that they had at the time, which came mostly from China and the WHO. At the time, both entities, who now appear to be in cahoots with each other, were warning that millions could die if the virus was allowed to spread. Without known treatments or remedies, world leaders assumed that “locking down” and restricting the movement of their citizens would be the most effective cure for the short term. However, that short term has come and gone and now the national lockdowns have proven themselves to be ineffective at stopping COVID, but very effective at ruining both business and lives. Not just in the US, but around the world. In the same article, Kevin Watkins takes an example from India to prove this point;
“Narendra Modi, India’s Prime Minister, apologized for the botched lockdown, which left millions of migrant workers and poor households without safety nets, food, or income; sadly, apologies don’t lift people out of poverty. [And] Snapshot numbers on poverty don’t tell the full story.”
This is the trend not only worldwide, but also at home, where representatives of the people never feel the effects of their own rules. Or worse still, they ignore them completely. The drastic difference in the livelihoods of the common man and those of elected officials has long been a source of contention, but now that the lockdowns have forced so many people down the social order, while in many cases creating wealth for those in power. This will create further social tension, not unlike the French revolution of 1789 and the Russian Revolution of 1917. Where social tension and resentment was created between those in power and the elites of society and those without power. It created a powder keg in which one wrong political move sparked an all out revolution. With the recent events at the capital building and with the riots this past summer, I believe that there is fertile ground for political violence and social upheaval, which is obviously a negative when it comes to market based finances. Additionally, the lives that have been impacted by these frivolous lockdowns has potentially hurt an entire generation. In the last section of his article, Kevin Watkins points out the numbers and direct impact that the poorest among us feel because of the inability to work;
“Malnutrition, a close cousin of poverty, has devastating consequences in the first 1,000 days of a child’s life—in utero through to their second birthday—increasing the risk of low birth weight and health problems, compromising the immune system, and damaging cognitive development. These early health problems lead to reduced educational performance and lost income in adulthood. The International Labor Organization has rightly warned that rising household poverty could force millions more children out of school and into child labor.”
Child labor is a topic that has been thrown under the rug in recent decades, but its use in underdeveloped counties has been noted by non-profit and international organizations. Obviously, this is part of a larger moral and ethical question. For a political structure to espouse platitudes about the saving nature of lockdowns, while simultaneously forcing children in the poorest nations around the globe to work their fingers to the bone for pennies is perhaps the greatest irony of the times we live in. While politically, we attempt to run politicians on virtue and righteousness, we ignore the effects of the actual policies put in place and instead listen to empty political speeches, and worse still, take them at face value. Speaking of empty virtue, a more serious issue has taken place at some of the largest publicly traded corporations, and it could seriously harm stock-based financial plans.
The new “Corporate Responsibility”
Recently another shift has taken place in a broader corporate sense that has not been covered yet by major finance publications. However, Sovereign Man Investing has taken notice for the past few months. This shift has to do with changing corporate attitudes towards its own shareholders.
“Big businesses have completely sold out to the wokists. Huge brands like Gillette wag their fingers at their own consumers, presuming that all men are sleazy, oppressive scumbags. Tech companies which once stood for the free-flow of information are zealously censoring content. And most large companies are now overtly prioritizing top executives and directors based on identity characteristics like race, sexual orientation, and gender, rather than talent and integrity. (Ironically they all sing the praises of the Chinese Communist Party, which is conspicuously exempt from abiding by these fanatical woke principles.)”
While this is worrying considering that major financial corporations have also banned people from contributing to certain campaigns based solely on political purposes. This is mostly due to the threat of political pressure from the left that is absent on the right, and the moral implications are outside of the scope of this article. However, these attitudes can have an impact on the market and individual stocks. After banning Trump, Twitter stocks dropped by over 6% despite the fact that a potential competitor, Parler was taken down. In a separate article, Sovereign Man also makes notes of some of the new NASDAQ guidelines that could shift corporate priorities
“NASDAQ is one of the largest stock exchanges in the world and home to most of the biggest names in tech. Companies worth a total of $17 TRILLION– nearly the entire size of the US economy– are listed on the NASDAQ exchange, including Google, Apple, Microsoft, Facebook, and Amazon. You’d think the executives behind NASDAQ would be remarkably sharp people who understand what it takes to build and run a wonderful business. But here we are again with another sign that the world has lost its mind. NASDAQ has now joined with other woke warriors in trying to mandate that all of its listed companies meet minimum diversity requirements. Specifically, the wonderful wizards of WOKEDAQ insist that every company should have at least one woman on its board, plus one person who is either an ethnic minority or LGBTQRSTUVWXYZ. (I can only imagine how ridiculous annual reports will become once companies have to start disclosing details of the private lives of their new lesbian directors.)”
Again, aside from the political arguments, this sets a dangerous precedent that outward qualities or loyalties to a party are more important than running a profitable business. This may mean that a drop in stock price or value of a company will no longer lead to a shakeup in the executive structure and could further harm the ability to generate a suitable rate of return. Incompetence can now be acceptable if outward qualities qualify.
Extended rate cuts, the debt and college debt
Much has been made of the growth of tech stocks over the past three decades. Anecdotally, I have heard advertising from companies that proclaim “This is like buying stock in Apple or Amazon 20 years ago!” Or people outside of the financial industry wonder why they didn’t take a shot at these tech companies in the mid to late 90s. While these picks obviously would have paid off, remember that people DID pull the trigger on companies such as Worldcom, NorthPoint Communications, Global Crossing, Pets.com, Webvan, and Boo.com. This was known as the tech bubble and served as a stark reminder that stock market speculation has significant repercussions. While this may be a long-winded point, consider this piece from Empire Financial about treasury bonds during that time period.
“And during the same time, interest rates plummeted. At the time of Amazon’s IPO, 10-year U.S. Treasury yields were an incredible 6.5%. At that kind of yield, any investment bank or investor could double their money in 11 years… completely risk-free and without any leverage at all. But that kind of yield didn’t last forever. The yield on a 10-year Treasury bond has been on an overall downward trend over the last 20-plus years, dropping to an almost unbelievable 1.08% today.”
When treasury bonds had much higher yields, many investors would wait for the bonds to mature and then reinvest the profits into more bonds, creating an ecosystem in which the Government did not have to pay anyone back, and for larger funds and investment banks, they could still show steady returns. The practice used to be so effective that governments such as China and Japan couldn’t get enough of our debt. In fact, China once owned over 1.3 Trillion dollars of US debt. In total, foreign governments currently 7.07 Trillion of the US national debt. But as we wrote about the debt and the falling bond rates last year, we pointed out some important trends that could carry into 2021 and beyond. For example, the current 7.07 Trillion owned by foreign powers is a 5 percent reduction from February of 2020. This suggests that world governments are less sure about the return on US debt and potentially the USA’s ability to settle its debt. Domestically, the social security trust funds have been 100% invested in US treasury bonds and the Treasury secretary still estimated that the funds would be depleted by 2034. However, Sovereign Man investing points out that the estimation has now been updated to 2029 based on the Treasury secretary’s office.
“Traditionally, Social Security always buys new bonds whenever its existing bonds mature. So they keep refinancing the debt for the US government. But now Social Security has a huge problem: the trust funds are rapidly running out of money. Prior to Covid, the Treasury Secretary estimated that Social Security’s trust funds would be fully depleted by 2034. But Covid has ravaged Social Security’s finances. Unemployment surged, countless businesses closed, and payroll taxes were suspended. In other words, there was no money being paid into the trust funds. At the same time, Social Security payments increased; even more, people have retired and started collecting benefits. So while Social Security inflows went to zero, the outflows jumped.”
Aside from the obvious, which is that social security may be in trouble soon, the falling returns on bonds may force traditionally conservative investment accounts or funds into riskier investments. While tech stocks continue to climb and drive market growth, it should be noted that it can still be hard to find a winner, take Quibi for instance. When you take all of these points, a dangerous picture is painted about both the economy and leads me to question personal economic models. I believe that this will define the 2020s, and hopefully, a great awakening can occur when it comes to personal finance and its basis in the market. But more importantly, if I could help you potentially avoid this disaster entirely, would you want to know how?
To Your Creation and Potential,