ROI on Treasury Inflation Protected Securities
As inflation raises its ugly head, investors have started to think back to the stagflation of the 1970s and worry about negative real interest rates. One option for those who want buy to US Treasures is to purchase TIPS or Treasury Inflation Protected Securities. Is the ROI on Treasury Inflation Protected Securities sufficient to stay ahead of inflation and protect you from getting negative real interest rates? And, what happens with TIPS if the economy goes into a spiral of deflation and negative interest rates?
What Are Treasury Inflation Protected Securities?
Also called TIPS, Treasury Inflation Protected Securities are issued by the US Treasury just like T-Bills, T-Notes, and T-Bonds. They can be purchased at Treasury Direct, through a bank, or through a broker. The idea behind this interest-bearing investment vehicle is to protect the buyer in the case of a huge rise in interest rates happening after the person makes their investment. The interest rate paid on a TIPS is adjusted according to the Consumer Price Index. Interest is paid twice a year and added to the principal. TIPS can be purchased in $100 increments for 5, 10, or 30 years. Like other Treasuries and unlike Series I Savings Bonds they can be bought and sold in the secondary market. TIPS can be redeemed after holding them for a minimum of 45 days.
What Is the Current Interest Rate on TIPS?
As of October 29, 2021 the interest rate for a 10 year TIPS was 2.57%. The long term effective rate will go up as the CPI rises and down as it falls. The current “break even” rate to stay up with inflation is 2%. Thus, you will not be getting a 2% yield in terms of purchasing power but your TIPS investment will currently keep up with the purchasing power it had when you purchased the 10 year TIPS. 2% is the current Fed inflation target.
What Happens to TIPS with Deflation?
The point of buying TIPS is to protect against inflation. What happens if the economy tanks and we see negative interest rates, falling prices, and a Japan-like scenario? Here is what the Treasury says about this:
What happens to TIPS if deflation occurs? The principal is adjusted downward, and your interest payments are less than they would be if inflation occurred or if the Consumer Price Index remained the same. You have this safeguard: at maturity, if the adjusted principal is less than the security’s original principal, you are paid the original principal.
In other words, the interest added to principal on your TIPS will be reduced as the CPI drops. But, should the bottom drop out of interest rates and the economy, the worst you can do is get your initial purchase amount back in dollars. Thus, TIPS are actually a protection against severe deflation as well as one against inflation.
Why Buy Treasury Inflation Protected Securities?
If you want part of your investment portfolio in interest bearing vehicles, US treasuries are your safest bet. The value of TIPS is that you get some protection against runaway inflation like happened in the 1970s. TIPS are not a cure all. An ETF that tracks the S&P 500 is likely to provide a better ROI over time providing that the market does not implode. The latter possibility is why many investors keep a portion of their assets in bonds, CDs, or Treasuries.
ROI on Treasury Inflation Protected Securities – Slideshare Version
What Are the Risks with Stablecoins?
The US Department of the Treasury just issued a report in which they urge lawmakers to set up rules for regulating stablecoins. These cryptocurrencies that are tied to “stable” assets like the US dollar have grown to have a market value of $130 billion, $100 billion more than at the beginning of the year. The companies that offer stable coins, Tether and Circle, fall into a grey area in that they are not tech companies and not banks but are operating like both. What are the risks of stablecoins? The folks at Treasury are concerned about things like fraud, mismanagement and bank runs if these growing assets are not regulated.
What Is a Stablecoin?
The chief argument against cryptocurrencies like bitcoin is that they have no basis for their value outside of what the market will pay. The rationale for stablecoins is that they are pegged to a “reserve asset” such as the US dollar or gold. Tether (USDTUSD) and TrueUSD are both tied to the dollar. They have dollar reserved that are kept by custodians separate from the companies and are audited regularly. There are also stablecoins that are pegged to other cryptocurrencies and ones that derive their value from computer algorithms (Basecoin).
Why Are Stablecoins Attractive?
Currencies are supposed to be stores of value. Cryptocurrencies like bitcoin function like commodities that double in price over a week or two and then collapse by half. Ten percent variations over a day are common. This feature makes trading bitcoin attractive and the fact that the overall trend is going up makes bitcoin attractive to some investors. But, if you are going to spend your cryptocurrency such as was intended when cryptocurrencies were first envisioned, a stablecoin would seem the better bet as the price does not fluctuate so severely.
What Is the Worry With Stablecoins?
Treasury Secretary Yellen said this about stablecoins:
Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options but the absence of appropriate oversight presents risks to users and the broader system.
Banks need to maintain reserves and are subject to oversight by regulators. Banking issues that came to light after the 1929 and 1968 market collapses showed the need for such oversight. The Treasury does not have a problem with the idea of stablecoins as a means of exchange or store of value. What they want is to bring this asset into the regulatory scheme that protects uses from malfeasance or simply from dumb mistakes as noted in an article in The New York Times Dealbook about stablecoins.
The working group determined that authority to regulate stablecoin issuers would have to come from an act of Congress and that the group could not currently mandate standards for digital payments reliant on stablecoins. That lack of authority, the report said, makes these types of crypto-based transactions more vulnerable to “human errors, management failures or disruptions” that could result in consumers losing money, becoming victims of fraud or being unable to get their money.
A couple of months ago we asked if crypto banks were really pawn shops as they required a deposit of dollars to use their cryptocurrencies for loans, credit cards, or for deposits. Stablecoins are just one more iteration of cryptocurrencies, many of which may be very useful and some of which may be dangerous without proper oversight.
What Are the Risks with Stablecoins? – Slideshare Version
Economic Problems in China and Your Investments
Ever since the then-leader of China, Deng Xiaoping introduced economic reforms in the late 1970s China has been an economic miracle. It is a middle income economy today but because it has a population of over 1.4 billion it is a superpower in the economic realm. And, it aspires to be the dominant superpower in military power and global dominance. However, the Chinese Communist Party which runs everything in China needs to keep people in China satisfied with how they are doing things and that may be more and more of an issue in China. Our concerns are about economic problems in China and your investments.
Why Has the Chinese Economic Boom Lasted So Long?
When China opened up to the world and started to reward people for their work and initiative in a quasi-capitalistic manner it opened the door to the country’s economic success. The country had a virtually untapped pool of cheap labor and a huge market that other nations wanted to get into. Foreign investment poured into the country as Western nations set up shop to produce products cheaply in China and import across the globe for less than they could do from their home nations. Favorable trade status achieved in the 1990s gave China full access to nations across the globe. Along the way China got into the habit of borrowing in anticipation of greater growth which worked for years. However, China has saturated global markets and no longer has the its unlimited pool of cheap labor as the one couple one child policy has left a demographic hole in their workforce and people in China today expect to make more than pennies a day.
Experts have been saying for years that China needs to develop its domestic markets more, reduce its debt, and open up its markets to foreign companies. They have kept going despite not doing these things and the answer to why their boom has lasted seems to be the grandfather of all housing bubbles.
Why Does China Have a Housing Bubble?
China does not have Social Security or a similar social safety net. Traditionally, families had lots of children so that the kids could support their parents in old age. That went out the window when China mandated that couples could only have one child. Recently the law changed to allow two kids and now three but it will take years for those children to reach working age much less the age where they can support their parents. Thus, Chinese save and save and save. One of the preferred ways to save in a society that did not allow property ownership within living memory is to buy real estate. People buy apartments in vacant cities as a way to hedge against the future. They pay property developers like Evergrande money in full up front before the first brick has been laid. We wrote about this in our article about Chinese real estate and the next financial crisis. The problem with the Evergrande situation is that they have billions of dollars of debt that they cannot pay and lots of apartment buildings for which they were paid and have never started on!
What Will the Communist Party Do to Stay in Charge?
The folks who are in charge in China are the Chinese Communist Party and today that means Xi Jinping. The Party stays in power not because they were ever elected but, currently, because they have delivered economic success to the people. However, that success is waning as we noted in our articles about the political dangers of investing in China and Chairman Mao and investing in China. The recurring way that dictators like Xi stay in power is to shift blame to “foreign enemies” when the problem is that they mismanage the government. It is a real worry that China keeps ramping up pressure on Taiwan and threatening its neighbors in the South China Sea as any of this posturing could get out of hand and lead to a war with the potential for global consequences including your investments.
In regard to Evergrande, the collapse of this company may have significant effects on China’s economy and may hurt those who supply them with raw materials but will likely not have the same effects globally as the collapse of Lehman Brothers at the start of the Financial Crisis. Thus the way that a housing market collapse in China would affect your investments would be via a global slowdown and not a financial collapse. To the degree that you are invested directly in China, your investments could suffer substantially more. The more China threatens Taiwan in order to distract its unhappy population the more you may wish to consider US defense stocks as part of your portfolio.
Economic Problems in China and Your Investments – Slideshare Version
Considerations When Investing
Success in investing leads to increased wealth and security. Success in investing comes from making sound decisions, paying attention, and taking the time to learn about what to invest in and how to invest. We have written about how to invest successfully and so has the SEC. The U.S. Securities and Exchange Commission (SEC) and a posting entitled Ten Things to Consider Before You Make Investing Decisions. The bottom line is that you need to make individual investment decisions grounded in a well-considered investment plan. Here are our thoughts about considerations when investing.
What to Do Before You Invest
The point of investing is to create and increase wealth so that you can live a safe and comfortable life, do the things that you want, and retire in financial security. Along the way you will want to purchase a home, perhaps a business, and send your kids to college. To this you need to consider the time line for each of your investments and start investing as early as possible. But, before putting a cent into investments it is wise to pay off credit card debts, invest in a home, and put money aside for a rainy day.
Investments Versus Credit Card Debt
It is not uncommon to pay 18% to 20% on credit card debt. Meanwhile, the best you will get from a CD at your bank will be around 1%. Although your goal for investments will be to make a 20% ROI, that is difficult and very rare for an investment beginner to achieve. So, before you use dollar cost averaging to put money into the stock market, start making payments to nibble away at your credit card debt until it goes away. Then, start putting money into an emergency fund sufficient to cover three to six months of expenses.
Home Ownership and the Mortgage Interest Deduction
Over the years it will cost you less to live if you are paying a mortgage than if you are paying rent. The Federal deduction for interest on your mortgage is one of the best deals around and you will end up owning your home. For most people, the largest asset they have going into retirement is their home. Your first investment after paying down your credit card debt and putting away money for a rainy day should be to buy your own home. You may only own one home during your life or you may own several but if you keep equity in your home it may be your best asset when you retire.
Personal Financial Roadmap
Successful investing does not start with a tip on social media and striking it rich. It starts by drawing up your own personal financial road map. This includes looking at your debt, examining your spending habits, thinking about your life and financial goals, and making decisions about how to get where you want to go. Set up a personal budget that puts money into paying your bills including your home mortgage, paying down credit card debt, putting cash aside in a bank account for emergencies, and having money each payday, month, or quarter to invest.
Determine Your Risk Tolerance
There are ways to invest without losing money but they are all interest bearing investments like Treasuries and CDs which currently pay negative real interest rates due to increasing inflation. This situation has sent more and more people into the stock market looking for better returns. Unfortunately, not all stock market investments work out so well. When the Covid-19 pandemic hit, hospitality, travel, and other sectors were hit much harder and longer than tech stocks. If you want to limit your risk in the stock market the best route is typically to invest in an ETF that tracks the S&P 500 or Russel 2000. Such investments have outperformed managed accounts over the last decade since the financial crisis.
Mix of Investments
When you start out investing, your mix of investments should be your emergency fund, the “fund” for paying down debts, and your home mortgage. As you have sufficient cash to invest elsewhere, an ETF that tracks the S&P 500 is a good idea and is, in fact, what the famous investor Warren Buffett recommends for those who do not have the skill, time, or interest to choose individual stocks. An important part of your investment mix should be with tax-deferred vehicles like a personal IRA or a 401k offered by your employer. Work-related plans often include a contribution by your employer and should never be overlooked.
Considerations When Investing – Portfolio Balancing
In general, investors should have a portfolio that is heavier in stocks and other riskier investments early in their investment life and steadily add interest-bearing investments like Treasuries, CDs, and corporate bonds as they near retirement. In our article about rebalancing your portfolio we discuss the “rule of 100” in this regard. Although the stock market provides the best returns over the long haul it can go negative for years as well. The point of balancing is to have a mix of stocks that will not all go down at once and interest-bearing investments that will provide cash to live on in retirement no matter what the market is doing.
Considerations When Investing – Dollar Cost Averaging
One of the most important considerations when investing is how much to invest and how often. Since the vast majority of normal investors are not skilled at timing the market or picking the next fantastic stock, the best approach is to use dollar cost averaging to fund your purchases of ETF shares, dividend stocks via a dividend reinvestment plan, and CDs or another interest-bearing investment. By doing this you invest the same amount each time, buying fewer shares when stocks are expensive and more shares when they are cheap.
Considerations When Investing – Slideshare Version
Default Rate of Municipal Bonds
One of the principal concerns when choosing interest bearing investments is the rate default of that kind of debt and specifically for the specific borrower. In this regard the default rate of all US municipal bonds rated and unrated between 1970 and 2011 was one in 150 or 0.64% according to an article in Seeking Alpha. A default could have been for just a year and defaults on Munis did not necessarily mean that bond holders lost all of their invested capital. Back in 2001 Moody’s reported that for all of their rated municipal bonds the default rate was 0.0043%. What sort of default rate of municipal bonds can you expect going forward and why would you want to invest in municipal bonds?
Why Invest in Municipal Bonds?
Forbes published a useful article about municipal bonds. Investors in the highest tax brackets have historically looked at municipal bonds as a way to avoid taxes on interest income. Very often, bonds issued by local and state governments are not subject to federal taxes. And, many municipal bonds are not taxed at the state or local level although this may require that you are a resident of the city or state that issues the bond. Unfortunately, folks subject to the alternative minimum tax may not be able to take advantage of all of the potential tax advantages of municipal bonds.
Current Default Rate of Municipal Bonds
A Moody’s report from July, 2021 states that through the end of 2020 municipal bond defaults remained relatively low despite a small increase over the previous decade. Municipal bond defaults recorded by Moody’s are listed as the 5-year cumulative default rate from 1970 to 2020 and remained at 0.08% at the end of the decade. While this is higher than what was reported at the beginning of the century for Moody’s-rated municipal bonds, it compares favorably to the global corporate default rate over the last five years which was 6.89%! The report noted that there was one Moody-rated US municipal bond default in 2020 which was the archdiocese of New Orleans which was characterized as a preemptive and defensive measure.
Investment Return on Municipal Bonds
As October, 2021, the rate of interest on a 10 year municipal bond averages1.16% which had edged up for the 0.89% average for the previous twelve months. If you qualify for all possible tax breaks your current municipal bond return on investment will be 1.16% per year. This beats current CD yields for comparable maturities by anywhere from 0.1% to 0.3%. CDs have the benefit of being insured by the FDIC but municipal bonds rated be Moody’s have a 0.08% default rate. Because inflation has been creeping up, even the best tax-free rate of return on a municipal bond is giving you a negative real interest rate.
Why Tie Up Your Money for Ten Years with Negative Real Interest Rates?
Those of old enough to remember the 1970s interest rates in adult life may also have invested in municipal bonds at the time. When you could get 12% for a CD and pay taxes it made sense to take 7% for a municipal bond on which you did not pay taxes. Although inflation ate up your gains in the 1970s and early 1980s, inflation subsided and municipal bonds were a profitable investment and more so because of the tax break. Today, you will be stuck with a 1% yield if you invest in a municipal bond today while we may in fact be moving into even higher rates of inflation making for ever-more-negative real interest rates!
Default Rate of Municipal Bonds – Slideshare Version
Beware of Bitcoin Futures ETFs
As noted in The New York Times Dealbook, Bitcoin comes to the big board (NYSE) in the form of a Proshares ETF that tracks Bitcoin futures on the Chicago Mercantile Exchange, CME. From the viewpoint of cryptocurrency enthusiasts this move legitimizes Bitcoin and provides an investment opportunity without having to buy individual Bitcoins. If you are thinking that this will be just like investing in Bitcoins but easier, think again. Beware of Bitcoin futures ETFs as they represent a futures trading opportunity but not an easy way to invest long term.
What Does the Proshares Bitcoin ETF Do for You?
The new Bitcoin ETF (ProShares Bitcoin Strategy ETF (BITO)) does not give you an easy way to buy into Bitcoin. Rather this exchange traded fund will track Bitcoin futures on the CME. This is similar to what we described with our article about investing in commodities in which we noted that ETFs that track commodity futures are not a way to track or invest in the commodities themselves. They are a vehicle that traders can use to hedge risk and speculate on the ups and downs of commodity (or in this case Bitcoin) prices. The ProShares website says this:
ProShares Bitcoin Strategy ETF (BITO) is the first U.S. bitcoin-linked ETF offering investors an opportunity to gain exposure to bitcoin returns in a convenient, liquid and transparent way. The Fund seeks to provide capital appreciation primarily through managed exposure to bitcoin futures contracts.
The fund does not invest directly in bitcoin
The price and performance of bitcoin futures should be expected to differ from the current “spot” price of bitcoin
The first day of trading of this ETF does not tell us much except that there have been more than 11 million shares traded in the first couple of hours. To get a glimpse of how this ETF will do over time consider an ETF that tracks commodity futures.
Futures traders can use such an ETF to hedge risk and profit through speculation but , just like with a commodity ETF, this is not a vehicle for long term investment. As an example, a fund that tracks the Bloomberg commodity index will have lost 40% of its value since its inception more than a decade ago.
Hedging Risk With a Futures-based ETF
The best rationales for using a futures-based ETF in the case of Bitcoin are that you do not need to buy or sell bitcoin, worry about losing your code for reclaiming your bitcoin or losing everything when your Bitcoin exchange is hacked. For folks who expect Bitcoin to keep going up over time there is still the problem of sharp spikes and deep valleys on the price chart. Futures are a way to hedge against sharp price changes without continually having to sell your holdings and purchase again. They are also a way to profit from the ups and downs of Bitcoin and not just the long term appreciation. This, however, is trading and not long term investing.
Tax Advantages of Futures and Futures ETFs
Taxes on Bitcoin profits are at your regular tax rate for short term gains and only taxed as long term gains if you hold the Bitcoin for more than a year. An attractive feature of futures is that profits are taxed 60% as long term gain and 40% as short term gains no matter how long you hold the contract! This is an attractive feature of the Bitcoin futures ETF but remember that in order to make money from this approach you will need to pay constant attention to the Bitcoin market. This is not a buy and forget, sleep soundly at night way to invest.
Beware of Bitcoin Futures ETFs – Slideshare Version
What Will Your Investments Be Worth in Five Years?
We invest for the future. How well that works out depends on two things. What will your investments be worth in five years, ten years, or twenty years as valued in dollars? And, what will inflation do to the purchasing power of the US dollar? There is a fair amount of debate today as to whether we are going into a 1970s-style stagflation or if prices are simply up now due to supply chain issues and will go down when the Covid pandemic finally subsides. The other issue is what will happen to your investments when fundamentals start to determine stock prices again.
Effect of Inflation of Purchasing Power
As we noted in our article about saving with negative interest rates, traditionally safe, interest rate-bearing investments today are actually losing money. The New York Times Dealbook for 10/14/21 discusses how everything is getting more expensive and how that is causing problems for the Fed and White House. Because you want to be able to use your invested and saved money to live on and do things with over the years, you have a problem with “safe” investments like CDs and Treasuries and need to stick with the stock market to stay ahead of the effect of inflation on investment value. Unfortunately, there are value concerns today about the ability of the market or at least all parts of it to keep rolling forward at the same pace as over the last decade.
When Fundamentals Start to Determine Stock Prices Again
As the prices go up the Fed is going to have to raise interest rates and dial back on their quantitative easing measures. We are already seeing reticence in Congress in regard to what everyone pretty much agrees is necessary funding of infrastructure repairs and improvements due the stagflation concerns. The “talking heads” on business news sites like Bloomberg are starting to talk about what companies like Tesla or Amazon will be worth in five or ten years. The issue is that many companies have stock prices that assume continued fast growth when the companies have grown to a mature status in their business niche. An opinion that is gaining ground is that prices of many of the tech leaders of the last few years are going to adjust to a lower rate of growth or even back off a bit as investors come back to the use of intrinsic stock value as a way to judge when investing in stocks over the long term.
Investing With a Five to Twenty Year Investment Horizon
When asked what his preferred length of time to hold was, Warren Buffett replied, forever. His point was that when you pick the right company with the right business plan, strength in their market niche, customer loyalty, and global product recognition, you will want to keep that stock as it grows in value, pays dividends, and stays well ahead of the effects of inflation. The strongest argument for investing in the stock market is that the US stock market outperforms other investments over the years, providing that you stay invested and that you pick investments like ETFs that track the S&P 500 and thus reflect the overall market. The key to this approach is having an investment horizon of at least five to ten years. The obvious reason for this approach is that some years are good, some are bad, others are awful, and some are spectacular in the market. And, because predicting which years will be the best and the worst is not always that accurate, simply staying in the market for years is the most effective for successful investing over the years. By doing so your investments in five, ten, or twenty years are more likely to stay ahead of inflation and help you achieve a comfortable retirement.
What Will Your Investments Be Worth in Five Years? – Slideshare Version
How Can You Invest in Greenland?
Greenland is the largest island in the world with three-fourths of its surface covered by the only permanent sheet of ice outside of Antarctica. Until recently the most sparsely inhabited jurisdiction in the world was primarily known for trivia like the fact that if all of its ice melted world sea levels would rise by six meters (20 feet). Now, as the ice sheet is melting, Greenland has become a trove for minerals including strategic minerals such as rare earth elements. That being the case, how can you invest in Greenland and its mineral riches?
The World Wants Greenland’s Minerals
The receding of the Greenland ice sheet and the presence of valuable minerals for easy mining has not gone unnoticed. The New York Times wrote about Greenland and its minerals and the race to cash in on Greenland’s mineral riches.
Global superpowers are jostling for influence. Billionaire investors are making big bets. Mining companies have staked claims throughout the island in a quest that also includes nickel, cobalt, titanium and, yes, gold.
What The Times also notes is that Greenlanders are concerned about how mining operations could reshape or even destroy their world.
But those expecting to exploit the island’s riches will have to contend with Mariane Paviasen and the predominantly Indigenous residents of the village of Narsaq.
Who Lives in Greenland and Who Governs It?
The roughly 56,000 inhabitants of Greenland are 89% Inuit whose ancestors migrated across the Arctic from what is present day Alaska, 6% Danish, 1% other Nordic, and 1% miscellaneous. These folks live on an island into which would fit the countries of Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, the Netherlands and the United Kingdom. The island was “discovered” by the Vikings in the 10th century when a ship bound for Iceland was blown off course. The island is part of the Kingdom of Denmark but is autonomous and self-governing. When he was president, Donald Trump suggested that the USA should simply buy Greenland from Denmark to secure its mineral riches. Because the island is self-governing and because it has a small population, all of the issues revolving around mineral rights and mining tend to be very local issues as detailed in the article in The Times. The folks on Greenland are fully aware how fragile their ecosystem is and are not especially interested in moving somewhere else so that folks elsewhere in the world can drive electric cars.
How Can You Invest in Greenland?
Companies hoping to open mining operations in Greenland include a small Australian company, Greenland Minerals Ltd with a Chinese partner according to The Mongabay News. As the article notes, the company was “red-carded” to use a soccer term in its quest to mine an area rich in uranium and rare earth elements and discard huge amounts of radioactive thorium. Jeff Bezos and Bill Gates have teamed up to try to mine Greenland’s riches. According to Mining Technology, 41 companies have mining rights in Greenland with Denmark and the UK being the most prominent followed by Canada and Australia and not China or the USA. Major players include Anglo American and Glencore. Others include Arctic Energy Pty Ltd, Greenland Gas & Oil Ltd, East Greenland Oil A/S, and Bluejay Mining PLC, not all of which are listed companies.
The Five Eyes and Greenland’s Minerals
As we have noted in our articles about strategic minerals including rare earth elements, lithium, and the rest, access to and control of supply chains for these strategic assets could determine global economic and military dominance in years to come. It is of note that the leading companies in the rush to recover strategic minerals from Greenland include three of the “five eyes” nations, Australia, Canada, and the UK. These three along with New Zealand and the USA are strategic partners along with nations in the EU, Japan, and now India in working to avoid Chinese hegemony in the years to come. Keep this in mind when thinking about how to invest in Greenland.
How Can You Invest in Greenland? – Slideshare Version
How Can You Invest in Greenland? – DOC
How Can You Invest in Greenland? – PDF
Fifteen Percent Multinational Tax and Your Investments
As multinational corporations have expanded more and more of their sales and operations outside of their home countries, they have sought to minimize their total tax burden. From the viewpoint of these corporations such actions make perfect sense since the job of the corporation is to maximize value for their shareholders. But, from the viewpoints of many nations, these corporations are engaging in multinational corporate tax evasion by paying low, or no, taxes in jurisdictions where they do not manufacture or sell their products. A recent agreement by over one hundred and thirty nations to rectify this situation brought this issue to mind. How do the new fifteen percent multinational tax and your investments relate to each other?
Is There a Fifteen Percent Global Minimum Tax?
After years of negotiating, more than one hundred thirty jurisdictions and nations have agreed to a fifteen percent global minimum tax for multinational corporations. These nations include more than ninety percent of the world’s gross domestic products. The agreement has two parts. The first is that taxes on these companies must happen where their profits occur. Thus, big companies with addresses in small countries where they say their businesses are will not be able to be taxed there and avoid taxation where they make millions or even billions in profits. The second part is that no signer of the agreement will have a corporate tax rate for less than fifteen percent. The last countries to sign on to the fifteen percent minimum tax rate include Ireland which has traditionally attracted manufacturing to its shores by offering low tax rates.
Is It Really Multinational Corporate Tax Evasion to Seek Lower Tax Rates?
The argument for the fifteen percent tax on multinationals with taxation occurring where profits occur is that these profitable and powerful companies are evading taxes. But, as the famous judge, Learned Hand, once wrote in an opinion on a tax case, there is nothing illegal about so ordering your life so as to legally avoid paying more taxes than you have to. What is really happening is the nations of the world are getting together and setting up the law so that corporations who benefit from doing business on their shores will pay what is locally considered their fair share of taxes. We expect this set of laws to be generally enforceable but multinational corporations will still look for every way that they can to minimize their tax burden and maximize their profits on behalf of their shareholders.
Effect on Corporate Earnings of a Fifteen Percent Minimum Tax
Apple has already noted that they expect to pay more in taxes and see lower profits due to the fifteen percent minimum tax and the fact that taxation will occur where they make their profits. Microsoft will also see changes due to their huge global presence. However, these companies keep seeing their share prices go up because they keep expanding their product lines and customer bases. This will not stop because of a new tax law. As such, we expect to see a one-time reduction in earnings that will play out over the next few years as the new agreement takes shape in the form of new tax laws in countries across the globe. For long term investors with an eye on intrinsic value, this may be the best time to buy at temporary bargain prices.
Fifteen Percent Multinational Tax and Your Investments – Slideshare Version
Fifteen Percent Multinational Tax and Your Investments – DOC
Fifteen Percent Multinational Tax and Your Investments – PDF
Stagflation Investment Strategies
Investors old enough to remember the inflation of the 1970s will remember the term stagflation. Stagflation is the term invented to describe when the economy is growing slowly, unemployment is high, and inflation is rampant. A formal definition is when the gross domestic product declines while there is inflation. The market is already starting to see “stagflation trades! In this article we look at what stagflation investment strategies might be useful if this next decade is back to the 70s.
Origins of 1970s Stagflation
As the 1970s were ushered in, the USA had been at war in Southeast Asia six years since the Tonkin Gulf Resolution and for more like twenty years supporting France’s efforts to retain its colony, French Indochina. The costs of that war were coming to bear on the economy and on society. And, during the Johnson Administration from the death of President Kennedy in the fall of 1963 until he left office in early 1969, the former Texas Senator, Vice President and then President ushered in a host of social programs such as Medicare. The economy had been heating up and inflation was rearing its head to the degree that President Nixon instituted wage and price controls which were a disaster. Then the Saudis embargoed oil after the US supported Israel in the 1973 war after which they confiscated US oil assets in their country and raised the price of oil.
Government Stimulus Policy
What was “gospel” at that time for many in government was the idea that the government could stimulate the economy and create jobs by pumping money into the system. This came from the British economist, John Maynard Keynes. Every time the economy lagged a bit, Congress dropped taxes or spent money on something. This approach tended to win votes for the party in power but the national debt started going up to the point that Senator Dirksen of Illinois commented, “a billion here, a billion there, and pretty soon you are talking about real money”! His irony seems to have been lost on Congress then and now as today he would say a trillion here and a trillion there. The bottom line was that along with other factors, this was a huge reason for the stagflation of the 1970s.
Will We See Stagflation Today?
This is not 1970 although we just got out of Afghanistan and we were ready to leave Vietnam back then. We are no longer dependent on Saudi oil after fracking has taken hold and the US is pivoting to solar energy and other sustainable sources. Today the interstate highway system is in dire need of repair as are ports, airports, bridges, internet infrastructure, and dams across the country. Biden’s infrastructure pack in its original form was to cost $3.5 Trillion which many have said would be a budget buster and lead to more inflation. However, economists are generally not worried about long term spending that tends to increase productivity and economic efficiency. A concern of many is the list of “social program” expenses that include child care. But, even that expense holds the promise of getting more working age women into the workforce instead at home watching the kids which would tend to remedy some of the current labor shortages. As such, we think it is a tossup as to whether we see a repeat of the 70s.
Stagflation Investment Strategies
We recently wrote about whether or not investing in commodities was a good idea for balancing your portfolio. Although commodities are more a matter of trading futures (unless you hoard gold), this could be a good idea if you want to guard against inflation. During the terrible stagflation of the 1970s gold rose ten-fold in price while commodities like corn and wheat went up by three and four-fold respectively. Likewise real estate went up in price, especially in areas that were already highly priced. Farm land multiplied in value as their crops increased in value as well. If you don’t buy to buy and hold gold, consider a gold ETF.
Although the Dow went up by less than 5% during the 1970s some stocks did well. You are not going to buy and hold commodities like cattle and corn but companies with commodities in the ground like mining stocks for gold or in this era, strategic minerals are likely to be good bets if inflation gets out of hand.
Although the Dow went up by less than 5% during the 1970s some stocks did well. You are not going to buy and hold commodities like cattle and corn but companies with commodities in the ground like mining stocks for gold or in this era, strategic minerals are likely to be good bets if inflation gets out of hand.
Stagflation Investment Strategies – Slideshare Version