How to Avoid Recession, Immigrate to Australia

“Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tossed to me, I lift my lamp beside the golden door!” Statue of Liberty poem This “land down under” has escaped an economic recession for 26 years in a row. An open immigration policy in a nationalist world that demands just the opposite is one of the key drivers to their success. An abundance of natural resource wealth has also helped. Readers would need to go back to the late 1980s, early 1990s, to find two quarters of negative growth (the definition of an economic recession) in Australia. Back then, Australia was noted for its boom and bust economy. Throughout their 160-plus year history, mining booms in gold, gas, sheep and other commodities left investors rich and confident for a couple of years, only to be followed by devastating shocks to the economy as commodity demand declined, throwing workers on the streets and companies into bankruptcy. This writer has a special fondness for Australia. Early in my career, I spent years investing in Western Australia’s iron ore and Queensland’s coal. Following in my footsteps, my daughter also spent a couple of years in Australia as an exchange student. Back then, the government tightly controlled the exchange rate. Today, the central bank is free to set interest rates without political interference and the exchange rate is no longer fixed. Investments in industries outside of the mining areas were also encouraged. Aided by the government, businesses were encouraged to seek out new, non-mining investments, thereby reducing Australia’s...

Italy’s crisis threatens financial markets

A political crisis in the fourth largest economy in Europe has spilled over into the financial markets. Global stock exchanges greeted Italy’s present political dysfunction by registering major declines–and the crisis may just be getting started. Back in 2010 through 2012, readers may recall a similar eurozone calamity. Greece was at the center of that maelstrom and, at its worse, threatened the viability of the European Union and its currency, the Euro. This time around, many of the same issues are now bedeviling Italy. The country has the third largest debt load in the world after the U.S. and Japan. It still suffers from double-digit unemployment while their economy continues to stagnate. At times like this, voters usually look for something to blame. Most Italians have focused on their membership in the EU as the cause for all of their woes. After an inconclusive election several months ago, Italy has been in a no man’s land of political inertia. Two opposing parties: a far-right party (The League) and a populist party (the Five Star Movement) share power. They recently proposed a new government to break the deadlock. The problem was that their candidates presented a threat to those who still wanted to maintain membership in the EU. Their proposed finance minister, for example, was a confirmed foe of both continued membership in the EU and the Euro. He scared the bejesus out of officials throughout the EU. As a result, Italian President Sergio Mattarella vetoed the appointment and instead appointed a technocrat, whom he hoped would reassure the financial markets and the rest of Europe. Both opposition parties are...

It is no longer enough to simply manage money

Back in the day, money managers were revered. News stories spotlighting the year’s “hottest hands,” or that hedge fund’s rising star were all the rage. Retail investors chased performance and paid for it. But times are changing, and simply beating the market for a year or two fails to impress most investors. And with good reason. Most of us are in the investment game for the long haul. We are saving for retirement: a process involving decades of saving and planning. Chasing the firm or advisor that “beat the market” this year has turned out to be a disastrous approach to that concept. Most of us have now realized that you can’t beat the market. Sure, for a certain period of time-days, months, even a few years-you can, if you are lucky. Over time, however, your performance will revert to the mean, which in this case is the average returns of the market overall. So, paying a money manager a high fee year after year to provide outsized performance is a fool’s game. On occasion, I meet some prospective clients, who still believe that’s possible. They have run from advisor to advisor with great hopes followed by disappointment, and then bitterness and blame. As a fiduciary, I am required to tell them the truth. For those who don’t believe it, I quickly show them the door. Given the facts of financial life, why, therefore, should you pay a money manager yearly fees simply to give you what the market gives you? Why not save your money and buy an index fund and be done with it? I think that...

What’s up with oil?

Two years ago, the experts were telling us that the price of oil would continue to fall. Twelve-dollar oil was a real possibility. The end of OPEC was nigh as well as their ability to influence geo-politics. It appears those predictions were premature. The price of oil has more than doubled over that time, from roughly $30/barrel in the spring of 2016 to over $71/ barrel today for West Texas Intermediate crude. Those same experts now expect the price could gain further, but there is no agreement on how much higher it can go. The “swing” factor in that equation is firmly in the hands of American shale producers. They are the culprit of the past three-year decline in oil prices and will likely be the key determinant of future prices in the short-term. In November, U.S. crude production exceeded 10 million barrels/day. We haven’t seen that since I came home from Vietnam back in 1970. There is a real possibility that America could become the world’s largest oil producer by the end of this year. That would put us ahead of both Saudi Arabia and Russia. What a change that has been since the days of the OPEC-instigated oil embargos, long lines at U.S. gas stations, and rationing! The impetus for this astounding change in our fortunes has been the developing technology, which was largely government-funded, that has allowed U.S. entrepreneurs to explore and develop enormous oil and natural gas-rich shale deposits throughout the country. But that’s only the beginning of this saga. These producers, unlike traditional oil companies, can turn their energy spigot off and on at...

The Facebook fallacy

After a grueling two-day inquisition before both houses of congress, Mark Zuckerberg, the founder of Facebook, has left the building. The question is how much did anyone really learn about the privacy issues of this social media behemoth? As most readers are aware, the present controversy erupted when it was revealed that a Trump-campaign related firm, Cambridge Analytica, harvested personal data from millions of Facebook users. It spawned a huge controversary over privacy, cybersecurity and Big Data companies in general. I watched as much of the hearings as I could stomach. What was clear to me was most of our so-called legislators had no idea how Facebook works. While some were obviously coached by their aids, even the answers to their questions drew blank or embarrassed stares. How they expect to regulate something they don’t understand is beyond me, but then again, I guess it happens all the time. It could be anyone of us up there grappling to understand an entity that has become so entangled in our everyday lives. The truth is only a handful of Americans truly “get” what Facebook is even though they have been upfront with us since the get go. So, let’s start by asking a simply question—how does Facebook make money? And yes, Joe, Facebook is a for-profit company. In one word, the answer is advertising. How much is that worth? At last count, the company is capitalized at roughly $543 billion. Clearly Facebook is not some kumbaya, social network where everything is free no matter how touchy-feely it may look. Helping two billion people worldwide “connect” is an admirable accomplishment from...

Beware the tax hit from mutual funds

Plenty of investors will be faced with an unpleasant surprise. Any day now, one or more of the mutual funds that you own will be sending out their capital gain distributions for the year.  The tax hit could be quite large this year. Many investors are not aware that mutual fund companies are required to distribute at least 95% of their capital gains to investors each year. Given the double-digit gains in the stock market last year, those gains could be an unwelcome liability when tax time rolls around. At this late date, there is little one can do about it, other than pay the piper, but this year you can take steps to minimize 2018’s potential tax liability. Since the tax reform act did not change capital gains taxes, you can expect that short-term capital gains (less than 12 months) will be taxed at the same rate as your income tax bracket. Long-term capital gains, however, will continue to be taxed at 15%. The job of most mutual fund managers is to buy low and sell high. That’s what creates track records, which, in turn, attracts investors to their funds. But mutual funds are just like individuals when it comes to capital gains. Anytime a mutual fund sells a security, no matter what the asset, that gain is taxable. And since mutual funds are considered pass-through entities, they are required to pass along to you any of these taxable gains. In the grand scheme of things, capital gains distributions could be considered a luxury problem since we want the mutual fund we are invested in to turn a...