Big Money Managers Must Stop Stampedes

Asset managers escaped ‘too-big-to-fail’ rules, but they still pose stability risks

By Paul J. Davies 

   Bank of England Governor Mark Carney chairs the Financial Stability Board. Photo: European Pressphoto Agency


Fund managers aren’t too big to fail, but that doesn’t mean their actions can’t have a big impact on the financial system.

Global rule setters decided against treating asset managers like super-large banks or insurers last summer. However, the Financial Stability Board did plow on with efforts to understand how they can hurt wider markets if they are forced to sell heavily due to the demands of skittish investors in difficult markets.

This is important because asset managers have become an ever larger part of the global financial system. The top 10 fund managers in the world now manage more than $20 trillion of assets among them, according to the board.

With investors everywhere chasing yield, billions have poured into fixed-income funds that buy relatively illiquid assets while promising nearly instant cash redemptions to investors. Many also juice their returns using borrowed money or derivatives.

The rule-setting body has now identified several risks to the wider financial system that aren’t fully captured by current regulations or common practices and come up with proposals to fix these.


The most important—and obvious—is to try to reduce risks of big mismatches between the ease with which investors believe they can pull their money out of funds and the difficulty the manager may have in selling the underlying assets.
 
U.S. markets got a big reminder of these risks last December when a distressed-debt fund run by Third Avenue was forced to block investor withdrawals, prompting a mini-panic among investors in other high-yield bond funds.

The FSB wants local regulators to make sure that any fund that plans to invest in assets that are less liquid always has more restrictions on when and how investors can redeem their cash. Investors should be well aware of what they are buying into.

The board also wants to see more stress testing of funds overseen by local regulators to help monitor interconnections between funds, fund managers and the wider markets.

Other proposals relate to better information gathering and monitoring, especially regarding how to measure funds’ exposure to borrowed money and derivatives, which can add leverage, too.

Fund managers rightly escaped designation as too big to fail, but they should back the main thrust of these proposals to help ensure safer markets for all.

Brexit Is Just What The Dr. Ordered

by: Peter Schiff
 
 
Summary
- Brexit will give the Fed cover to keep low rates.

- Yellen should thank the voters.

- The Fed can't raise rates.

 
Janet Yellen should send a note of congratulations to Nigel Farage and Boris Johnson, the British politicians most responsible for pushing the Brexit campaign to a successful conclusion.
 
While she's at it, she should also send them some fruit baskets, flowers, Christmas cards, and a heartfelt "thank you." That's because the successful Brexit vote, and the uncertainty and volatility it has introduced into the global markets, will provide the Federal Reserve with all the cover it could possibly want to hold off on rate increases in the United States without having to make the painful admission that domestic economic weakness remains the primary reason that it will continue to leave rates near zero.
 
For months, the corner that the Fed has painted itself into has gotten smaller and smaller. It continues to say that rate hikes will be appropriate if the data suggests the economy is strong.
 
Then its representatives continually cite (arguably bogus) statistics that suggest a strengthening economy, which cause many to speculate that rate hikes are indeed on the horizon. But then at the last minute, the Fed conjures a temporary reason why it can't raise rates "right now," but stresses that they remain committed to doing so in the near future. But each time they conduct this pantomime, they lose credibility. Sadly, Fed officials are discovering that their supply of credibility is not infinite, even among those who would like to cut them a great deal of slack.
 
But the Brexit vote saves them from all this unpleasantness. Now when critics question the Fed's unwillingness to deliver on the suggested rate hikes, given what they believe to be a strong economy, all the Fed needs to do is point to the "uncertainty" that will be in play now that the world's fifth largest economy is disengaging from the European Union. And since this process is bound to be long, messy, and fraught with uncertainties (as there is no precedent for a country leaving the EU), this will be a handy excuse that the Fed will be able to rely on for years.

Brexit could also place severe strains and uncertainties on the global currency markets. The fear of financial losses could encourage investors to seek safe-haven assets like gold and, at least for now, the U.S. dollar. Given that there is already much concern that the dollar is valued too highly against most currencies, and that this has created imbalances in the global economy, any surge in the dollar that results from Brexit may have to be fought by the Federal Reserve through lower interest rates and quantitative easing. This would rule out the potentially dollar-strengthening interest rate hikes that they supposedly planned on delivering. So as far as Janet Yellen is concerned, the British have given her the gift that keeps on giving.
 
On another level, the vote in the UK illustrates the fundamental inefficacy of the monetary and financial policies that have been implemented by the world's dominant central banks and central bureaucracies. For years, global elites have been telling us that deficit spending, government regulation, and central bank stimulus is the best way to cure the global economy in the wake of the 2008 Financial Crisis. To prove these points, elite economists associated with the government, academia, and the financial sector have pointed to all kinds of metrics to show how their policies have been successful. But the man on the street perceives a very different reality. They know that their living standards have fallen, their cost of living has risen, and that their job prospects have deteriorated. They see a loss in confidence and economic stagnation when they are being assured the opposite.
 
This disconnect has fueled anti-establishment sentiment on both sides of the Atlantic. In the United States, it has given rise to the insurgent candidacies of both Donald Trump and Bernie Sanders. The unexpected successes of both reflect a deep distrust of the establishment. Such discontent would not be in play if the positive stories being told by the elites had made any resonance with rank and file voters.

The same holds true with the unexpected strength of the anti-EU voters in Britain. The "Remain" camp had the support of virtually all the elite members of the major UK political parties, the media, and the cultural world. In addition, foreign leaders, including President Obama in a state trip to England, harangued British voters with warnings of economic catastrophe if the British were to make the grave error of defying the advice of their "best" economists.
 
Given all this, poll numbers that suggested the vote could be close had been dismissed. The elites, as evidenced by recent drifts in currency and financial markets, had all but assumed that British voters would fall into line and vote to remain. Instead, the people revolted. After having been misled for so many years by the very elites who urged them to remain, the rank and file finally asserted themselves and voted with their feet.
 
British voters may not know what they will get with an independent Britain, but they knew that something was rotten, not just in Denmark, but all over the European Union. The same holds true in the United States. Until our leaders can paint more realistic pictures of where we are and where we are going, we should expect more "surprises" like the one we got yesterday.

Doug Casey Debunks the Common Excuses for Staying In One Country

by Doug Casey


Tell a person that it's a big beautiful world, full of fresh opportunities and a sense of freedom that is just not available by staying put and you will inevitably be treated to a litany of reasons why expanding your life into more than one country just isn't practical.

Let's consider some of those commonly stated reasons, and why they might be unjustified. While largely directed at Americans, these are also applicable to pretty much anyone from any country.

"America is the best country in the world. I'd be a fool to leave."

That was absolutely true, not so very long ago. America certainly was the best – and it was unique.

But it no longer exists, except as an ideal. The geography it occupied has been co-opted by the United States, which today is just another nation-state. And, most unfortunately, one that's become especially predatory toward its citizens.

"My parents and grandparents were born here; I have roots in this country."

An understandable emotion; everyone has an atavistic affinity for his place of birth, including your most distant relatives born long, long ago, and far, far away. I suppose if Lucy, apparently the first more-or-less human we know of, had been able to speak, she might have pled roots if you'd asked her to leave her valley in East Africa. If you buy this argument, then it's clear your forefathers, who came from Europe, Asia, or Africa, were made of sterner stuff than you are.

"I'm not going to be unpatriotic."

Patriotism is one of those things very few even question and even fewer examine closely. I'm a patriot, you're a nationalist, he's a jingoist. But let's put such a tendentious and emotion-laden subject aside. Today a true patriot – an effective patriot – would be accumulating capital elsewhere, to have assets he can repatriate and use for rebuilding when the time is right. And a real patriot understands that America is not a place; it's an idea. It deserves to be spread.

"I can't leave my aging mother behind."

Not to sound callous, but your aging parent will soon leave you behind. Why not offer her the chance to come along, though? She might enjoy a good live-in maid in your own house (which I challenge you to get in the U.S.) more than a sterile, dismal, and overpriced old people's home, where she's likely to wind up.

"I might not be able to earn a living."

Spoken like a person with little imagination and even less self-confidence. And likely little experience or knowledge of economics. Everyone, everywhere, has to produce at least as much as he consumes – that won't change whether you stay in your living room or go to Timbuktu. In point of fact, though, it tends to be easier to earn big money in a foreign country, because you will have knowledge, experience, skills, and connections the locals don't.

"I don't have enough capital to make a move."

Well, that was one thing that kept serfs down on the farm. Capital gives you freedom. On the other hand, a certain amount of poverty can underwrite your freedom, since possessions act as chains for many.

"I'm afraid I won't fit in."

The real danger that's headed your way is not fitting in at home. This objection is often proffered by people who've never traveled abroad. Here's a suggestion. If you don't have a valid passport, apply for one tomorrow morning. Then, at the next opportunity, book a trip to somewhere that seems interesting. Make an effort to meet people. Find out if you're really as abject a wallflower as you fear.

"I don't speak the language."

It's said that Sir Richard Burton, the 19th century explorer, spoke 10 languages fluently and 15 more "reasonably well." I've always liked that distinction although, personally, I'm not a good linguist. And it gets harder to learn a language as you get older – although it's also true that learning a new language actually keeps your brain limber. In point of fact, though, English is the world's language. Almost anyone who is anyone, and the typical school kid, has some grasp of it.

"I'm too old to make such a big change."

Yes, I guess it makes more sense to just take a seat and await the arrival of the Grim Reaper.

Or perhaps, is your life already so exciting and wonderful that you can't handle a little change?

Better, I think, that you might adopt the attitude of the 85-year-old woman who has just transplanted herself to Argentina from the frozen north. Even after many years of adventure, she simply feels ready for a change and was getting tired of the same old people with the same old stories and habits.

"I've got to wait until the kids are out of school. It would disrupt their lives."

This is actually one of the lamest excuses in the book. I'm sympathetic to the view that kids ought to live with wolves for a couple of years to get a proper grounding in life – although I'm not advocating anything that radical. It's one of the greatest gifts you can give your kids: to live in another culture, learn a new language, and associate with a better class of people (as an expat, you'll almost automatically move to the upper rungs – arguably a big plus). After a little whining, the kids will love it. When they're grown, if they discover you passed up the opportunity, they won't forgive you.

"I don't want to give up my U.S. citizenship."

There's no need to. Anyway, if you have a lot of deferred income and untaxed gains, it can be punitive to do so; the U.S. government wants to keep you as a milk cow. But then, you may cotton to the idea of living free of any taxing government while having the travel documents offered by several. And you may want to save your children from becoming cannon fodder or indentured servants should the U.S. re-institute the draft or start a program of "national service" – which is not unlikely.

But these arguments are unimportant. The real problem is one of psychology. In that regard, I like to point to my old friend Paul Terhorst, who 30 years ago was the youngest partner at a national accounting firm. He and his wife, Vicki, decided that "keeping up with the Joneses" for the rest of their lives just wasn't for them. They sold everything – cars, house, clothes, artwork, the works – and decided to live around the world. Paul then had the time to read books, play chess, and generally enjoy himself. He wrote about it in Cashing In on the American Dream: How to Retire at 35. As a bonus, the advantages of not being a tax resident anywhere and having time to scope out proper investments has put Paul way ahead in the money game. He typically spends about half his year in Argentina; we usually have lunch every week when in residence.

I could go on. But perhaps it's pointless to offer rational counters to irrational fears and preconceptions. As Gibbon noted with his signature brand of irony, "The power of instruction is seldom of much efficacy, except in those happy dispositions where it is almost superfluous."

Let me be clear: in my view, the time to internationally diversify your life is getting short. And the reasons for looking abroad are changing.

In the past, the best argument for expatriation was an automatic increase in one's standard of living.

In the '50s and '60s, a book called Europe on $5 a Day accurately reflected all-in costs for a tourist. In those days a middle-class American could live like a king in Europe. But those days are long gone. Now it's the rare American who can afford to visit Europe except on a cheesy package tour. That situation may actually improve soon, if only because the standard of living in Europe is likely to fall even faster than in the U.S. But the improvement will be temporary.

One thing you can plan your life around is that, for the average American, foreign travel is going to become much more expensive in the next few years as the dollar loses value at an accelerating rate.

Affordability is going to be a real problem for Americans, who've long been used to being the world's "rich guys." But an even bigger problem will be presented by foreign exchange controls of some nature, which the government will impose in its efforts to "do something." FX controls – perhaps in the form of taxes on money that goes abroad, perhaps restrictions on amounts and reasons, perhaps the requirement of official approval, perhaps all of these things – are a natural progression during the next stage of the crisis. After all, only rich people can afford to send money abroad, and only the unpatriotic would think of doing so.

How and Where

I would like to reemphasize that it’s pure foolishness to have your loyalties dictated by the lines on a map or the dictates of some ruler. The nation-state itself is on its way out. The world will increasingly be aligned with what we call phyles, groups of people who consider themselves countrymen based on their interests and values, not on which government's ID they share. I believe the sooner you start thinking that way, the freer, the richer, and the more secure you will become.

The most important first step is to get out of the danger zone. Let’s list the steps in order of importance.

1. Establish a financial account in a second country and transfer assets to it immediately.

2. Purchase a crib in a suitable third country, somewhere you might enjoy whether in good times or bad.

3. Get moving toward an alternative citizenship in a fourth country; you don't want to be stuck geographically, and you don't want to live like a refugee.

4. Keep your eyes open for business and investment opportunities in those four countries, plus the other 195; you'll greatly increase your perspective and your chances of success.

Where to go?

The personal conclusion I came to was Argentina (followed by Uruguay), where I spend a good part of my year and even more now that my house at La Estancia de Cafayate is completed.

In general, I would suggest you look most seriously at countries whose governments aren't overly cozy with the U.S. and whose people maintain an inbred suspicion of the police, the military, and the fiscal authorities. These criteria tilt the scales against past favorites like Australia, New Zealand, Canada, and the UK.

And one more piece of sage advice: stop thinking like your neighbors, which is to say stop thinking and acting like a serf. Most people – although they can be perfectly affable and even seem sensible – have the attitudes of medieval peasants that objected to going further than a day's round-trip from their hut, for fear the stories of dragons that live over the hill might be true. We covered the modern versions of that objection a bit earlier.

I'm not saying that you'll make your fortune and find happiness by venturing out. But you'll greatly increase your odds of doing so, greatly increase your security, and, I suspect, have a much more interesting time.

Let me end by reminding you what Rick Blaine, Bogart's character in Casablanca, had to say in only a slightly different context. Appropriately, Rick was an early but also an archetypical international man. Let's just imagine he's talking about what will happen if you don't effectively internationalize yourself now. He said: "You may not regret it now, but you'll regret it soon. And for the rest of your life."

Why Handwriting Is Still Essential in the Keyboard Age

By Perri Klass, M.D. 
.

Credit Anna Parini

Dr. Perri Klass on family health.
 
Do children in a keyboard world need to learn old-fashioned handwriting?
There is a tendency to dismiss handwriting as a nonessential skill, even though researchers have warned that learning to write may be the key to, well, learning to write.
 
And beyond the emotional connection adults may feel to the way we learned to write, there is a growing body of research on what the normally developing brain learns by forming letters on the page, in printed or manuscript format as well as in cursive.
 
In an article this year in The Journal of Learning Disabilities, researchers looked at how oral and written language related to attention and what are called “executive function” skills (like planning) in children in grades four through nine, both with and without learning disabilities.
 
Virginia Berninger, a professor of educational psychology at the University of Washington and the lead author on the study, told me that evidence from this and other studies suggests that “handwriting — forming letters — engages the mind, and that can help children pay attention to written language.”
 
Last year in an article in The Journal of Early Childhood Literacy, Laura Dinehart, an associate professor of early childhood education at Florida International University, discussed several possible associations between good handwriting and academic achievement: Children with good handwriting may get better grades because their work is more pleasant for teachers to read; children who struggle with writing may find that too much of their attention is consumed by producing the letters, and the content suffers.
 
But can we actually stimulate children’s brains by helping them form letters with their hands?
 
In a population of low-income children, Dr. Dinehart said, the ones who had good early fine-motor writing skills in prekindergarten did better later on in school. She called for more research on handwriting in the preschool years, and on ways to help young children develop the skills they need for “a complex task” that requires the coordination of cognitive, motor and neuromuscular processes.
 
"This myth that handwriting is just a motor skill is just plain wrong,” Dr. Berninger said. “We use motor parts of our brain, motor planning, motor control, but what’s very critical is a region of our brain where the visual and language come together, the fusiform gyrus, where visual stimuli actually become letters and written words.” You have to see letters in “the mind’s eye” in order to produce them on the page, she said. Brain imaging shows that the activation of this region is different in children who are having trouble with handwriting.
 
Functional brain scans of adults show a characteristic brain network that is activated when they read, and it includes areas that relate to motor processes. This suggested to scientists that the cognitive process of reading may be connected to the motor process of forming letters.
 
Karin James, a professor of psychological and brain sciences at Indiana University, did brain scans on children who did not yet know how to print. “Their brains don’t distinguish letters; they respond to letters the same as to a triangle,” she said.
 
After the children were taught to print, patterns of brain activation in response to letters showed increased activation of that reading network, including the fusiform gyrus, along with the inferior frontal gyrus and posterior parietal regions of the brain, which adults use for processing written language — even though the children were still at a very early level as writers.
 
“The letters they produce themselves are very messy and variable, and that’s actually good for how children learn things,” Dr. James said. “That seems to be one big benefit of handwriting.”
 
Handwriting experts have struggled with the question of whether cursive writing confers special skills and benefits, beyond the benefits that print writing might provide. Dr. Berninger cited a 2015 study that suggested that starting around fourth grade, cursive skills conferred advantages in both spelling and composing, perhaps because the connecting strokes helped children connect letters into words.
 
For typically developing young children, typing the letters doesn’t seem to generate the same brain activation. As we grow up, of course, most of us transition to keyboard writing, though like many who teach college students, I have struggled with the question of laptops in class, more because I worry about students’ attention wandering than to promote handwriting. Still, studies on note taking have suggested that “college students who are writing on a keyboard are less likely to remember and do well on the content than if writing it by hand,” Dr. Dinehart said.
 
Dr. Berninger said the research suggests that children need introductory training in printing, then two years of learning and practicing cursive, starting in grade three, and then some systematic attention to touch-typing.
 
Using a keyboard, and especially learning the positions of the letters without looking at the keys, she said, might well take advantage of the fibers that cross-communicate in the brain, since unlike with handwriting, children will use both hands to type.
 
“What we’re advocating is teaching children to be hybrid writers,” said Dr. Berninger, “manuscript first for reading — it transfers to better word recognition — then cursive for spelling and for composing. Then, starting in late elementary school, touch-typing.”
 
As a pediatrician, I think this may be another case where we should be careful that the lure of the digital world doesn’t take away significant experiences that can have real impacts on children’s rapidly developing brains. Mastering handwriting, messy letters and all, is a way of making written language your own, in some profound ways.
 
“My overarching research focuses on how learning and interacting with the world with our hands has a really significant effect on our cognition,” Dr. James said, “on how writing by hand changes brain function and can change brain development.”