The attractions–and the limits–of fiscal policy

Fiscal policy can do more heavy lifting when monetary policy alone is no longer enough. Even without any coordination, governments have room to borrow and invest more – especially in a low interest rate environment – to effectively stir activity. We have argued that there has not been enough government spending globally on infrastructure, education, renewable energy or other technologies to lift total factor productivity growth back to its pre-crisis trends and boost potential growth.

The low interest rate environment increases fiscal space not only by making it cheaper to borrow, but also makes it possible for some governments to grow out of the increased debt. The ratio of interest expense to revenue for developed market (DM) governments is lower on average now than it was before the global financial crisis, even though debt levels are considerably higher. So as long as risk free rates stay below the return on capital and trend growth, it is possible to increase deficits and still see debt-to-GDP ratios fall (Blanchard 2019, Furman and Summers 2019). The chart above shows how this is true for many DM countries.

There are good reasons to expect an environment favourable to fiscal policy to persist: the deep-rooted forces underlying the global saving glut will not change quickly on their own or will need material changes to be affected. That appears to be the market’s belief.

Yet there is no guarantee this favourable wedge between interest rates and trend growth would persist in the face of a major fiscal expansion. The strength and persistence of global precautionary saving pushed real interest rates below growth, driven by the decline in both neutral rates and the term premium, according to our estimates. But a significant increase in borrowing by governments globally could absorb part or all of this saving glut, pushing real interest rates towards or even above growth.

Record debt

Furthermore, with debt to GDP ratios reaching record highs, it would not take much of a shock to growth or interest rates for the debt ratio to balloon and spark concerns about debt sustainability. Hence high existing debt levels mean fiscal policy is vulnerable to even transitory interest rate spikes. Such a surge in rates could damage the fiscal policy space. This could arise from a so-called sudden stop: a temporary drying up of liquidity due to concerns about debt sustainability or losing reserve currency status.

icon-pointer.svg You can read also read our full paper on the subject: Dealing with the next downturn.

Typically countries that issue debt in their own currency can sustain higher debt levels and have more flexibility than countries that cannot. Yet countries borrowing in their own currency cannot completely avoid a surge in rates. If debt is on an unsustainable trajectory, the central bank can intervene by either increasing the monetary base by printing money or restarting QE. In the first case, runaway inflation would likely result at some point. In the second, it is important to realise that QE does not improve the government’s solvency: as the central bank issues reserves to buy bonds, the consolidated balance sheet of the government sector – including the central bank – is unchanged.

Record debt levels might also stoke expectations that taxes will be raised, or benefits reduced, in the future. Such expectations could reduce current private sector spending and reduce the effectiveness of any public spending increase, a phenomenon known as Ricardian equivalence.

In the final blog in this series, I will outline our proposed solution to the problems facing central banks. You can read also read our full paper on the subject: Dealing with the next downturn.

Elga Bartsch, PhD, Head of Economic and Markets Research for the BlackRock Investment Institute, is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2019 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2019 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Source: https://www.blackrockblog.com/2019/09/17/the-attractions-and-the-limits-of-fiscal-policy/

Animal Spirits video coming to The Compound!

We’ve built the foundation for The Compound YouTube channel over the last year or so and now we’re on the verge of shattering through the 10,000 subscriber mark. We love having this outlet as a place to discuss the investment research we’re doing and to chat with friends of ours and experts we know and respect about the topics of the day. We’ve heard from fans of our content and from clients that …

The post Animal Spirits video coming to The Compound! appeared first on The Reformed Broker.

Source: https://thereformedbroker.com/2019/09/16/animal-spirits-video-coming-to-the-compound/

What Advisors Bring to the Table

I’m just going through the latest piece from Vanguard about an internal study they’ve carried out among their self-directed investment clients who’ve migrated over to financial advisors. It turns out that these investors were significantly more likely to shed the “home country bias” within their equity allocation, to have a higher allocation toward equity risk overall, and to be holding less…

The post What Advisors Bring to the Table appeared first on The Reformed Broker.

Source: https://thereformedbroker.com/2019/09/16/what-advisors-bring-to-the-table/

Building the cities of the future

Picture this: you wake up in the morning to a grueling iPhone alarm, roll out of bed, and put together breakfast. As you walk to the gym, you dodge scaffolding and turn up your music to wash out the sounds of construction. After the workout, you head to the nearest WeWork to start your job. In just a couple of hours, you’ve interacted with just a few of the many ways real estate is changing urban life.

In our recent podcast, “Building the cities of the future,” moderator Oscar Pulido spoke to Ben Young, BlackRock’s head of U.S. real estate investment strategy, about the three biggest disruptors to real estate and how they shape the way we live and work. Below are some highlights from the conversation.

Pulido: My suspicion is that the real estate industry, like virtually every industry in the world these days, is being disrupted. Is that the case?

Young: The needs of people and businesses are constantly changing, and the real estate environment’s needs tend to adapt. Most changes are gradual, like adding dog walks to apartment buildings or moving heaters away from the base building office walls to increase window height. But there are also major long-term disruptions. I think the first that comes to mind, to myself and probably everyone else, is e-commerce, which is the main disruptor. But there are also two more: the sharing economy and 5G.

icon-pointer.svg Subscribe to The BID podcast on iTunesSpotify or wherever you get your podcasts.

Pulido: So start with e-commerce, because you’re right, I probably have an Amazon package at home I have to pick up. I’m guessing that’s where you’re headed with this.

Young: Exactly. We’re all aware of how easy it is to order something from Amazon, as you just noted, and how the internet has made price discovery as simple as a few clicks on your cell phone. But what is interesting is that consumers prioritize speed and convenience when shopping. Thirty-nine percent of consumers rank speed as the largest factor when choosing purchases online, versus 23% who say that price was the determining factor. This makes e-commerce competitive with traditional stores, which has allowed online sales growth to be quite rapid. This in turn is creating more demand for industrial or logistic space around the United States to warehouse all of these products. Consumers are quickly being accommodated to ordering things and having those things arrive really quickly. My daughter thinks if it’s not arriving in two hours, there’s a problem.

Pulido: You also touched on 5G as another disruptor. How does 5G affect real estate?

Young: Global urgency to deploy 5G is heightening competition between governments, companies, and investors to achieve 5G leadership and capture a multitude of new market opportunities. The advances in technology it allows for, such as driver-less cars and even battery storage, will have material implications for real estate. We see it particularly in the construction industry; drones, building development, taking pictures and architectural design are all leveraging this 5G technology. Believe it or not, wearable technology is all transforming the way we construct buildings.

Pulido: It’s estimated that two-thirds of the world’s population will live in cities by 2050, which would be double the percentage of what it was in 1950. What is actually driving the move into cities and away from more rural or suburban areas?

Young: Cities have been the leading areas for job and wealth creation. This is largely a function of where talent is choosing to reside. Young educated workforces have been drawn to what we call a live, work, play environment. We’re seeing this in areas like New York City, but even in countries like Japan. I think a lot of people know that the overall population of Japan is declining given the ageing population. But what people don’t necessarily realize is in cities like Tokyo, the population is increasing, and it’s increasing at a rapid rate. What’s really important to remember is that cities are going to need to adapt and be smart. They’re going to need to continue making technological and infrastructural improvements to drive connectivity between real estate and infrastructure.

Pulido: Thank you, Ben.

Make sense of financial markets with The BID, BlackRock’s bi-weekly podcast that discusses our perspective on timely market events and investment ideas. 

This material is for informational purposes and is prepared by BlackRock, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of date of publication and are subject to change. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable and are not guaranteed as to accuracy or completeness. This material may contain ’forward looking’ information that is not purely historical in nature. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not indicative of current or future results. This information provided is neither tax nor legal advice and investors should consult with their own advisors before making investment decisions. Investment involves risk including possible loss of principal.

In the U.S., this material is intended for public distribution.

© 2019 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.

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Source: https://www.blackrockblog.com/2019/09/16/building-the-cities-of-the-future/

Adjusting Your Withholding and Estimated Tax Payments

Now is a good time to look at the amount of tax that you have withheld from your pay, pension or Social Security, as well as any estimated payments that you make throughout the year. The amount of any payment that you had to make on April 15 should be fresh in your mind. If it was a sizable amount you should review the situation and quite possibly adjust your withholding or estimated payments.

It’s also possible that you’ve been having more tax withheld than necessary. If you received a rather large refund, you’re essentially giving the government a tax-free loan of your money for a good part of a year. Many folks like to receive a big refund, it’s sort of a “bonus” each year, but you could help yourself out paycheck-by-paycheck if you adjusted withholding. If you still want the “bonus” effect, set up an automatic deposit into a savings account and make it “hands off”. Then in April you can withdraw the money and do whatever you would have done with the refund.

Withholding Water
Image by GStevens via Flickr

For example, if you commonly receive a $2,500 refund, you could adjust your withholding so that you get an extra $100 per month in your take-home pay, and still have a $1,300 refund after filing your taxes. Better yet, adjust your withholding to have an extra $200 in take-home pay and then you’ll still get a $100 refund.

So How Do You Do It?

First of all, you need to estimate how much your total pay is going to be for the year. You can start with your pay stub for the current month – then project out for the remainder of the year how much your total pay will be at the end of the year.  The same would be true for pensions and Social Security payments. Be sure to use the “taxable gross” or perhaps “gross pay” figures for your calculations, not the take-home amount. If you only have a “gross pay” figure, understand that some deductions will come out of your check pre-tax, like a 401(k) contribution, so you’ll want to reduce the “gross pay” figure by those deductions to come up with your taxable income.

Having calculated the total taxable income you’ll receive for the year, make the same sort of calculation to project the amount of income tax you’ll have withheld for the year. Do the same thing for your state income tax withholding (if you’re lucky enough to live in one of the states that imposes an income tax).

Don’t forget to include any planned IRA distributions (including Roth Conversions) as income, along with any tax you plan to withhold from these distributions. Also calculate any capital gains or losses you may be planning during the year, as well as your dividends you’ll receive.

If you have self-employment income, the calculation becomes a bit more difficult. To be conservative, just subtract your expected expenses from your expected income to produce a net income figure to work with.

Next, go to the IRS website and locate Form 1040-ES for the current year. This form will help you to complete the calculations. Follow the instructions on the form, using your prior year’s tax return to help you with things like any credits you will receive. In the instructions for form 1040-ES, you’ll also find the tax rates to apply to your projected taxable income for the year.

You’ll need to make sure that your total withholding and estimated payments tally up to at least 90% of the projected tax you’ll owe, or 100% (110% if your AGI is $150,000 or more) of your prior year’s tax amount (whichever is less). If your withholding is less than the prior year’s tax and more than $1,000 less than the 90% figure for this year’s tax, you could be subject to a penalty for underpayment. Generally this is only applied if you have had a significant underpayment in the previous year (the first year is a “gimme”).

You’ll also want to locate the estimated tax payment calculations for your state tax withholding and run through the numbers there as well.

Okay, I did that. Now what?

If you’re underpaying your tax significantly, now it’s time to figure out how to reconcile the situation. (If you’re overpaying tax and you want to increase your take-home pay or net payments from pensions or Social Security, you can use similar measures.) The tactics you use depend upon the type of pay that you receive:

W2 Pay (regular employee pay): If you are receiving a paycheck from an employer, you can make adjustments to the amount of pay that is being withheld by using Form W4 – available from your Human Resources department. Follow the instructions for the form, making adjustments for your pay as it continues through the remainder of the year so that you have a total withholding that is appropriate for your projected taxable income. A simple way to do this is to request a specific amount to be withheld in addition to your regular withholding. Many employers provide access to a substitute Form W4 online.

Pensions: Much the same as with W2 pay, you make adjustments to your withholding for pension payments using Form W4P, which will be available from your pension administrator. Use the same methods of calculation mentioned above with W2 pay. Many pension providers have an online facility to allow changes to Form W4P withholding.

Social Security: Same as pensions and W2 pay. You will be using Form W4V, available from the Social Security Administration. This is also available online at SocialSecurity.gov.

IRA or 401(k) Distributions: When you take a distribution from an IRA or 401(k) account, one part of your distribution includes the ability to withhold taxes from the distribution. You can increase the total tax you’ve had withheld for the year by having some of your distribution withheld in taxes. Distributions from 401(k) plans automatically have 20% withheld, although you can increase that amount. You may not decrease it, however. IRAs do not have this mandatory withholding.

When doing a Roth Conversion, you need to keep in mind that any amount that you don’t convert by either having it withheld for taxes or just taking as a regular distribution will not only be taxed but also can be subjected to the early withdrawal 10% penalty if you’re under age 59½.

1099 Pay (such as an independent contractor) or self employment income: In this case you can make estimated payments using the vouchers included with Form 1040-ES. You’ll want to make these payments in a timely fashion – April 15, June 15, September 15 and January 15 – for the amount of net income you’ve received up to the end of the prior month. Don’t forget to run the calculations for your self-employment income and include that in your estimated payments.

You can make estimated payments no matter what sort of income you receive throughout the year, in addition to the Form W4 adjustments mentioned above. Failure to make these payments in a timely manner can also result in interest and penalties for underpayment.

Timeliness

Bear in mind, the quarterly estimated payments are necessary to be made within specific timeframes. Form W4 withholding is also sent to the IRS (by your employer) regularly, in a timely fashion. Withholding from an IRA or 401(k) distribution is the only one that doesn’t have to be spread out over the year. For example, if you found that your tax withholding was going to be too little for the year, you could wait until December and make up the difference using an IRA distribution withholding mentioned above (this is not recommended). See the article IRA Trick – Eliminate Estimated Tax Payments for more details.

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Is value investing dead?

As far back as 1934, David Dodd and Ben Graham wrote about value investing in their seminal text, Security Analysis. The two Columbia Business School professors put forth the idea that stocks with low prices relative to their intrinsic value could outperform the market over time. Following their work, countless academics and practitioners confirmed their findings, making value strategies one of the most popular ways to invest. But why has value worked? Among many schools of thought is the idea that value companies are capital-intensive, allowing them to take advantage of their resources during economic recoveries. Think about an automotive manufacturer whose fixed capital gives it the ability to ramp up car production when demand is highest. During periods of economic slowdown, however, being asset-heavy and inflexible become hindrances, causing many value firms to under-perform. This cyclical risk has historically rewarded those who can stick with value over full market cycles.

Value under-performance is cyclical not structural

Given the recent under-performance of the value factor, many investors have expressed concern that the value factor is “broken” due to a structural change in value investing. Investors who share this view point to the price-to-book ratio (P/BV), a common fundamental metric used by traditional value strategies to identify undervalued companies. They highlight P/BV’s inability to account for things like brand value and invested R&D, causing it to underestimate a company’s worth.

While this critique is certainly valid, and one reason we screen for multiple value fundamentals simultaneously in our value factor ETFs, we don’t believe that any single fundamental should be a scapegoat for an entire investment style. After all, value can be found in all sectors and segments of the market, even in those that may not screen well on one individual metric such as P/BV. Rather, we would reiterate that factors, including the value factor, exhibit cyclicality. While factors have tended to outperform over the long-run, in the short-run, they can exhibit periods of under-performance based on the current phase of the economic cycle. The value factor has tended to outperform during recovery periods and may lag during periods of economic slowdown due to the capital-intensive nature of many value-oriented companies. As such, we argue that the recent under-performance of the value factor is not due to a structural change, but instead is due to the current economic environment and the factor’s cyclical nature.

icon-pointer.svg Read more stories from Holly.

Factors for the long run

In September of 2018, my colleague Andrew Ang explained  . He discussed its academic foundations, and noted recent performance to be the fourth-worst drawdown going back to the 1920’s. He also emphasized how periods of under-performance can and will occur, but that there is no reason to think that the long-term premium is gone.

To support these claims, we looked at the value premium (using Fama and French data) since the 1920’s to see just how often cheap U.S. stocks have outperformed expensive ones.

Interestingly, the percentage of positive value premium has historically been only 50% when looking at daily data over the full period. However, as the periods observed increase in length, so too does the percent of time value has outperformed. Over rolling 20-year periods, the value premium has consistently been positive, highlighting the potential benefit of sticking with factor strategies for the long-run.

Don’t forget diversification

While it’s true that value is currently in the throes of a historically significant draw-down, it’s important to realize this shorter-term under-performance is standard factor behavior. The evidence supporting the value factor is still convincing and abundant. All return-enhancing factors — value, size, quality, and momentum — have historically experienced periods of out- and under-performance at different times. Therefore, much as investors diversify across stocks and bonds, they may want to consider having exposures across multiple factors, to balance the prolonged draw-downs of any one individual factor. They also may look to tactically tilt to one or more factors based on the current economic environment.

Holly Framsted, CFA, is the Head of US Factor ETFs within BlackRock’s ETF and Index Investment Group and is a regular contributor to The Blog. Elizabeth Turner, CFA, Vice President and Christopher Carrano, Associate are members of the Factor ETF team and contributed to this post.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting http://www.iShares.com or http://www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risks, including possible loss of principal.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”).  Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

Diversification and asset allocation may not protect against market risk or loss of principal.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular. This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this material is at the sole discretion of the viewer.

 Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

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The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

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Source: https://www.blackrockblog.com/2019/09/16/is-value-investing-dead/

This Week on TRB

We held the inaugural Wealth/Stack event this past week and it blew away all expectations. 700 registered, standing room only in every session, attendees reviews off the charts. We put the CEOs and founders of the largest RIAs in the country on stage, as well as some of the leading technology providers and thought leaders from across the industry. There were a dozen demos of the latest, most cutting edge technology being…

The post This Week on TRB appeared first on The Reformed Broker.

Source: https://thereformedbroker.com/2019/09/14/this-week-on-trb-305/