Comparing Poverty Rates Across OECD Countries: Chart

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The percentage of population living below the poverty threshold levels across OECD member countries are shown in the chart below:

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poverty-rates-across-oecd-countries

Source: Society at a Glance 2016, OECD

The U.S. ranks second in this list with only Israel having higher percentage.

The current poverty threshold level in the US is $24,300 for a family of four persons. Households earning above this threshold are not considered poor according to the state. Obviously this level is very low. It is not possible for couple with two children earning let’s say $30,000 per year live a comfortable life anywhere in the country. In the bigger cities and major metropolitan areas $30K won’t go far – probably may cover only the annual rental for an apartment…..

UK GDP: Size Relative to Global GDP and Composition by Industry

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The UK economy is the fifth largest in the world with a GDP of about $3.0 Trillion. USA, China, Japan and Germany are ahead of the UK in the order mentioned. Globally the British economy is small. It contributes only 11% of the world output as shown in the chart below:

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uk-size-of-economy-vs-other-countries

In terms of GDP composition, the real-estate sector forms a significant chunk. This is not surprising since the British are obsessed with property and concepts like “buy-to-let” are a national past-time as almost everyone wants to become a landlord.

In addition, the state is a major employer. Public-sector jobs are highly prized among the public and in some places there are hardly any  private sector industries leaving the state as the only employer. Hence Public Services is the second largest industry in the UK as shown in the chart below:

uk-gdp-composition

According to Office for National Statistics, 5.3 million were employed in the private sector as of March, 2016. The total private sector employment is estimated to be 26.2 million. So about one-fifth (17%) of the total employed persons  in the UK are working in the public sector. This figure is very high. The UK should create more opportunities in the private sector in order to unlock the full potential of the economy and try to get ahead of other advanced economies such as Japan and Germany.

Instead of focusing on economic growth, the British spend their time  talking daily about how glorious the country was when it was an empire in the 1800s and early 1900s. More recently the main talk of the country is whether the Brexit will be a “hard Brexit” or “soft Brexit”……

Source: Purgatory not hell, Oct 10, 2016, Barclays

Related ETF:

  • iShares MSCI United Kingdom (EWU)

Disclosure: No positions

Courage is Important to Build Fabulous Wealth in Equity Investing

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One of the factors that successful equity investors tend to possess is courage. Being courageous and jump into the market when there is blood all over the market is not easy. For most investors it is much easier to buy in a rising market than a plunging one. The human fear of unknowns and complete wipe-out  prevents investors from buying stocks when the market collapses. For instance, during the trough of the Global Financial Crisis(GFC) was a great time to invest in stocks. But most people, including yours truly, did not. This is because at that moment it felt like stock indices were heading to zero and that depression is inevitable. So to protect remaining assets investors failed to pump in new money into the market. Some investors freaked out and even sold at bargain prices losing a lot of money in the process.

However bold investors that bought as much stocks as possible with both hands more than doubled their investment in the following years as the US market roared back to pre-crisis levels like a charging lion. Though phrases like “Buy Low Sell High” sounds simple, in reality it is much more difficult to know when stocks are cheap. When stocks keep falling with no end in sight, it can cheaper everyday until theatrically reaching a price of $0.01 or one cent. In such scenarios investors who have conviction on the market or a particular company should buy at lower lows and hold them for years to gain tremendously when the stock soars.

This weekend’s Jason Zweig article in the journal explained the importance of courage in equity investing using the great economist and investor John Maynard Keynes as an example. From the article:

In a new research paper in Business History Review, an academic journal, finance professor David Chambers of Cambridge’s Judge Business School and economist Ali Kabiri of the University of Buckingham analyze how Keynes mustered the courage to invest heavily in U.S. stocks devastated by the crash and the ensuing depression.

Keynes had almost entirely ignored U.S. stocks in the college’s endowment until September 1930. What a time to get interested! The U.S. stock market had fallen 38.4% over the preceding 12 months. But Keynes was so excited by the bargains he saw opening up in the U.S. that he worked with a small New York brokerage, Case Pomeroy & Co., to research the market and his own stock ideas. In 1931, when U.S. stocks fell a bloodcurdling 47.1%, and again in 1934, when they dropped another 5.9%, Keynes traveled to the U.S., spending much of his time meeting people on Wall Street, in government and in business who could help him research his investment ideas.

He bought U.S. stocks throughout the depression. When they fell another 38.6% in 1937, Keynes, undaunted, bought still more. By 1939, he had put half his main portfolio for the college in U.S. companies, favoring high-dividend-paying preferred stocks, investment trusts (diversified stock portfolios similar to today’s mutual funds) and, later on, public utilities. He focused on a small number of stocks trading at low multiples of their value as businesses, often hanging on for eight years or more until their stock prices finally rose to reflect those asset values.

Source: John Maynard Keynes: Courage Is the Key to Investing by Jason Zweig, WSJ, Oct 14, 2016

Investors who have courage to buy beaten down stocks can multiply their original investment many times. A couple of examples:

  1. Brazil’s oil major Petrobras(PBR) collapsed from over $60 a share to $2.71 a while ago as corruption and fraud came to light at the crown jewel of the country. It seemed like the firm could file bankruptcy wiping out equity holders. But then the exact opposite happened with the stock soaring well above $10. On Friday it closed at $11.14. Investors who had conviction on Petrobras and bought at $3 or less are already sitting on substantial gains.
  2. During the Brexit panic recently, Dutch banking giant ING Groep N.V (ING) fell to as low as $9.26. On Friday the stock closed at $12.36.
  3. French oil equipment and services firm Technip(TKPPY) plunged to $9.69 as the oil market crashed. But then as the firm merged with another company and oil prices recovered, the stock soared and closed at $16.34 on Friday. Anyone that bought at $10 or less have gained at least 50%.

The above are just three sample companies. There are hundreds of others whose stocks have similarly shot up after left from dead by most investors.In all these instances only courageous investors reaped huge gains as they jumped in when everyone was bailing out.

Disclosure: Long PBR, TKPPY and ING

Related piece: Why courage is key for contrarian investing, CityWire UK

Americans Are The Largest Holders of US Government Debt

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Many people believe that China owns most of the US debt. This is not true. US investors are the largest holders of US debt and not China. China is the largest holder of US debt among foreign holders.

The chart below shows the holders of US treasury debt:

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holders-of-us-debt

Source: The US is indebted to China: Fisher’s financial mythbusters, Oct 10, 2016, Money Observer

From the article:

Figure 1 (above, click to enlarge) shows who owns US Treasuries. American investors – individuals, corporations, charities, banks, mutual funds, hedge funds, and myriad other entities – own 38 per cent. They like owning Treasuries. They see them as safe (and they are!).

SAFE HAVEN

They don’t usually get a high return on them – haven’t since the early 1980s. Over long periods, stocks typically get better results, but investors are confident the US government will pay interest and return principal on maturity.

About 27 per cent is owned by hundreds of US federal government agencies, but mostly the Medicare and Social Security trust funds. People don’t worry about debt the US government owes to itself. States, public pension plans, and other local governments hold another 4 per cent.

So, 69 per cent of US federal debt is held by Americans, American governments, and/or American entities, which benefit Americans. Just 31 per cent is held by the non-US world. Of that, 6.2 per cent is held by China.

Interestingly, Japan holds 5.6 per cent – almost the same – but no one complains about that. And you don’t hear a lot of phobic fantasising about Japan dumping its Treasuries. Is there something magical about the Chinese that scares us, that isn’t magical about the Japanese?

Mathematically, it would make no difference to markets if the Japanese sold while the Chinese bought or vice versa. Then, the UK owns about 1 per cent – we’re perfectly sanguine about that.

Britain is our great friend! We don’t care about Mexico (0.4 per cent) or Thailand (0.2 per cent), Luxembourg (1.1 per cent), Germany (0.4 per cent), or India (0.6 per cent). All tiny!

Remember, China, Japan, the UK, Thailand, Luxembourg, and India are happy to buy and hold US debt. They can buy other nations’ debt. And they do! Just much less.

But they like buying US debt and do so to satisfy their own investing and/or policy ends, not from some sense of charity or kindness.

The total outstanding US public debt stands at 14,225,008,508,056.12 or $14.2 Trillion according to US Treasury. Out of this, China holds $1.2 Trillion followed by Japan at $1.11 Trillion. The majority of the $14.2 Trillion or about $10.0 Trillion is held by Americans.

Total Number of Mutual Funds vs. ETFs

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The ETF industry has grown tremendously in the past few years. However relative to mutual funds ETFs are still smaller in terms of total numbers of funds available on the market and the assets held in them. The following chart shows the number of mutual funds vs. ETFs:

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mutual-funds-vs-etfs

Source: Vanguard Blog for Advisors

In the US market, there were 1,929 ETFs as of June 28 this year. Though this figure looks large, the total number of mutual funds available is in the thousands. In fact, 6.865 mutual funds are now available for investors. Thats not all. In the past 12 months thru June 28, 354 mutual funds were launched while only 284 ETFs came to the market.

A few reasons why mutual funds continue to thrive over ETFs are:

  • As the name implies ETFs are designed for easier trading all day when markets are open. So investors consider ETFs to be short-term instruments while mutual funds are something that buy and forget for years.
  • Mutual funds are the main funds offered to Americans in retirement accounts such as 401K by their employers. Hence most workers are indirectly forced to invest in mutual funds than ETFs or other assets. Hence the mutual fund industry has a stranglehold on the billions of retirement assets of most people.
  • Unlike an ETF which usually track an index, many investors go with mutual funds especially actively-managed funds falsely believing that a fund manager will be good enough to outperform the market. The mutual fund industry continues to convince Americans thru misleading marketing that star-fund managers are better at investing than ETFs or even individual investors building a portfolio themselves.

Some of the large ETFs on the US market include:

  • Vanguard Dividend Appreciation ETF (VIG)
  • SPDR S&P Dividend ETF (SDY)
  • SPDR S&P 500 ETF (SPY)
  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard MSCI Emerging Markets ETF (VWO)

Disclosure: No Positions