Capitalization Ratios for Global Systemically Important Banks (GSIBs)

Source: Federal Reserve Y-9C Reports, Securities and Exchange Commission Form 10-K, SNL Financial (Data update as of September 12, 2016).

 

Tier 1 Capital is a measure of bank’s financial strength, and assigns different weightings to less risky assets. It also includes other instruments that can absorb losses, rather than just focusing on the value of the bank’s equity capital. US regulators have traditionally focused on the leverage ratio, while European regulators have focused on Tier 1 Capital.

The leverage ratio is a measure of a bank’s financial sustainability, and shows how much equity capital a lender has against assets such as loans. Regulators like the leverage ratio because it’s a fairly simple measure of how active a bank is compared to its equity capital and is difficult for a lender to manipulate. The US calculation includes the amount of derivatives banks have on their books. A higher percentage suggests a bank is in a better position to weather losses and defaults.

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The Big Mac Index and The Purchasing-Power Parity

Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in July 2016 was $5.04; in China it was only $2.79 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 45% at that time.

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index. Below there are the data as of July 2016.

 

Raw index

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Mapping the World’s Jewish Population and Migration Patterns

The map and chart below show where the biggest Jewish populations live and how this has changed over the past century. In 1939, Jews numbered 16.5m people, up from 10.6m in 1900. By the end of the second world war, the Nazis had wiped out one-third of them, sweeping away a thousand years of Jewish civilisation in central and eastern Europe. The death toll might have been even higher, but a flurry of pogroms that started 60 years earlier across the then-tsarist empire had sent waves of Jewish emigrants westward. By the time Hitler struck, some 6m Jews were safe in North and South America and in Britain, with 3m more living in the Soviet Union. From 1948, most of the Jews of north Africa and the Levant emigrated. The break-up of the Soviet Union brought the latest big wave of Jewish migration to Israel in the early 1990s.

 

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The charts all inflation watchers need to see

“Getting the inflation call right is one of the most important decisions an investor can make today. Inflation expectations are quite soft, and it’s important to consider such market-based inflation measures in any inflation outlook. The two charts below may be of help as well.

We have seen an incredibly robust period of hiring in the United States, and even if payroll growth is likely to slow somewhat going forward, job gains have greatly outpaced total labor force growth over the past several years. As a result, there are numerous signs that firming wages are on the way, if not here already. Average hourly earnings rose last month at a year-over-year growth rate of 2.6%. Other recent wage growth indicators have also increased solidly, meaning an extended period of fairly anemic wage growth may have come to an end amid increasing labor market tightness. One implication of stronger wage growth: a changing U.S. inflation picture. The chart below shows how stronger wage growth has supported core inflation lately.

 

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Vanguard: The Disruptive Innovation Company

Vanguard is one of the world’s largest investment companies, offering a large selection of low-cost mutual funds, ETFs, advice, and related services. From its start in 1975, Vanguard has stood out as a very different kind of investment firm. Vanguard was founded on a simple but revolutionary idea—that a mutual fund company should be managed in the sole interest of its fund shareholders. Founder John C. Bogle structured Vanguard as a client-owned mutual fund company with no outside owners seeking profits.

  • More than $3 trillion in global assets under management, as of December 31, 2015
  • About 175 U.S. funds (including variable annuity portfolios) and about 145 additional funds in markets outside the United States, as of December 31, 2015
  • More than 20 million investors, in about 170 countries, as of December 31, 2015
  • Average expense ratio: 0.18% (U.S. fund expenses as a percentage of 2015 average net assets)

 

Vanguard is different from the rest

Vanguard's unique ownership structure, the Vanguard funds own Vanguard

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Religiosity is the Highest in World’s Poorest Nations

“Gallup surveys in 114 countries in 2009 show that religion continues to play an important role in many people’s lives worldwide. The global median proportion of adults who say religion is an important part of their daily lives is 84%, unchanged from what Gallup has found in other years.

Each of the most religious countries is relatively poor, with a per-capita GDP below $5,000. This reflects the strong relationship between a country’s socioeconomic status and the religiosity of its residents. In the world’s poorest countries – those with average per-capita incomes of $2,000 or lower – the median proportion who say religion is important in their daily lives is 95%. In contrast, the median for the richest countries – those with average per-capita incomes higher than $25,000 – is 47%.

Religion by Income.gif

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BlackRock Investment Institute: Asset Class Expected Return For 5 Years and Long-Term

The BlackRock Investment Institute publishes capital market assumptions and asset class return every quarter. Five-year and long-term equilibrium annualised return assumptions are in geometric terms. There are long-term volatility and correlation assumptions. Global equities are represented by the MSCI World ex USA Index in the correlation assumptions; global treasuries by the Barclays Global Aggregate Treasury Index ex US. We break down each asset class into factor exposures and analyse those factors’ historical volatilities and correlations over the past 15 years. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted.

 

Fixed Income

Source: BlackRock Investment Institute, July 2016.

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Asset classes. Expected return from UBS

In the years ahead, selecting the right asset classes will be crucial.

Cash and Bonds

Source: UBS

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The Things Everyone Should Know About Bond Investing

“It seems that everywhere you turn, the press is asking, “When is the Fed going to raise interest rates?” While that may be the question du jour, for long-term investors, the question is irrelevant to the construction of a high-quality bond portfolio.

 

1. Understand the role bonds play in a portfolio. When it comes to managing a bond portfolio, many investors, especially retirees, are mainly focused on generating income, but investors need to be aware of the risks taken to achieve a set amount of income in today’s low interest rate environment. For example, when interest rates are low (and bond prices are high), the income approach would cause an investor to buy more bonds, extend duration or accept lower credit quality in order to maintain a certain level of income. Likewise, if you think back to the early 1980s, when you could lock in long-term bond rates over 10%, the income approach would cause investors to own fewer bonds — even though the lower prices (higher yields) were a once-in-a-generation buying opportunity.

A better approach is to divorce the cash flow decision from the income decision. To do this, an investor needs to set a rational asset allocation, periodically rebalance to that target, and allow the total return of the entire portfolio to satisfy any income needs as opposed to viewing the interest generated by a bond portfolio as the sole source of income. Once a monthly (or some other frequency) withdrawal rate that meets an investor’s living expenses is determined, some combination of interest, dividends and proceeds from maturities and sales will provide enough cash to meet the withdrawal each month. Read more »

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Russia’s emigration: is there a problem?

“For more than a century, Russia has suffered periodic waves of mass emigration. Now it could face yet another one, perhaps leading to the largest brain drain the country has experienced in 20 years. According to Russia’s state statistical agency, 350,000 people emigrated from Russia in 2015 — 10 times more than five years ago. The outflow began in earnest in 2012, driven mostly by political friction in the country, but Russia’s current economic crisis has accelerated the pace.

As highly skilled Russians emigrate, the future of innovation and private business in the country has been called into question. Meanwhile, migrants from mostly Muslim former Soviet states are entering Russia in search of work, altering the ethnic and religious composition of the population and heightening tension in the process.

In nearly every decade of its history, Russia has watched large portions of its population head for foreign shores. Between 1880 and 1914, 2 million Jews fled the Russian Empire, seeking refuge from pogroms. The Russian Revolution then sent roughly 1.4 million refugees fleeing the country, including some of the empire’s brightest minds: Nobel Prize-winning writer Ivan Bunin, author Vladimir Nabokov, helicopter designer Igor Sikorsky and artist Marc Chagall, among others.

It is difficult to get reliable migration statistics for the early Soviet period. All five of the Soviet statistical chiefs between 1926 and 1940 were shot, and under the Soviet government, demographic statistics became more propaganda than science. But generally, emigrants found their way out of the Soviet Union in three major waves over the union’s lifetime. During World War II, 700,000 to 1 million Russians — mostly anti-Communists, Soviet prisoners of war or those dodging the draft — fled the Soviet Union to settle in the West. Decades later, about 2 million Jews emigrated mainly to Israel and the United States, seeing an opportunity when Soviet General Secretary Leonid Brezhnev somewhat relaxed the Kremlin’s monitoring of the Soviet Jewish community. Then, with the loosening of border controls in the 1980s, people began to move across Russia’s border in both directions. Three million ethnic Russians living in the Soviet and Communist bloc outside of the Russian republic returned to Russia. At the same time, leaving the country were 700,000 ethnic Russians, along with 300,000 Soviet Jews — a number that jumped to over 1 million after the bloc’s collapse.

The rise of Russian President Vladimir Putin brought emigration from Russia to a relative crawl. Between 1999 and the mid-2000s, living standards in Russia quadrupled, the country’s economy stabilized, and the overwhelming popularity of Putin’s administration put an end to political turmoil. Russia’s renaissance had begun. As a result, emigration by ethnic Russians was consistently outpaced by the number of immigrants pouring in, particularly from former Soviet states. After peaking in 2000, the number of Russian emigrants dropped from about 146,000 that year to a mere 32,000 in 2009, even in the middle of an economic crisis.

 

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