Warren Buffett — Annual Letter to the Shareholders of Berkshire Hathaway, Inc.
Source: Berkshire Hathaway
Berkshire’s gain in net worth during 2013 was $34.2 billion. That gain was after our deducting $1.8 billion of charges – meaningless economically, as I will explain later – that arose from our purchase of the minority interests in Marmon and Iscar. After those charges, the per-share book value of both our Class A and Class B stock increased by 18.2%. Over the last 49 years (that is, since present management took over), book value has grown from $19 to $134,973, a rate of 19.7% compounded annually.
Market Tantrums and Monetary Policy (PDF)
Source: 2014 US Monetary Policy Forum
Our focus is on market “tantrums” (such as that seen during the summer of 2013) in which risk premiums inherent in market interest rates fluctuate widely. Large jumps in risk premiums may arise if non-bank market participants are motivated, in part, by their relative performance ranking. Redemptions by ultimate investors strengthen such a channel. We sketch an example and examine three empirical implications. First, as a product of the performance race, flows into an investment opportunity drive up asset prices so that there is momentum in returns. Second, the model predicts that return chasing can reverse sharply. And third, changes in the stance of monetary policy can trigger heavy fund inflows and outflows.
Using inflows and outflows for different types of open-end mutual funds, we find some support for the proposition that market tantrums can arise without any leverage or actions taken by leveraged intermediaries. We also uncover connections between the destabilizing flows and shocks to monetary policy.
We draw five principal conclusions from our analysis. First, in contrast with the common presumption, the absence of leverage may not be sufficient to ensure that monetary policy can disregard concerns for financial stability. Second, the usual macroprudential toolkit does not address instability driven by non-leveraged investors. Third, forward guidance encourages risk taking that can lead to risk reversals. In fact, our example suggests that when investors infer that monetary policy will tighten, the instability seen in summer of 2013 is likely to reappear. Fourth, financial instability need not be associated with the insolvency of financial institutions. Fifth, the tradeoffs for monetary policy are more difficult than is sometimes portrayed. The tradeoff is not the contemporaneous one between more versus less policy stimulus today, but is better understood as an intertemporal tradeoff between more stimulus today at the expense of a more challenging and disruptive policy exit in the future.
The High Burden of State and Federal Capital Gains Tax Rates
Source: Tax Foundation
Savings in an economy is important. It leads to higher levels of investment, a larger capital stock, increased worker productivity and wages, and faster economic growth. However, the United States currently places a heavy tax bias against saving and investment. One way it does this is through a high top marginal tax rate on capital gains.
Currently, the United States’ top marginal tax rate on long-term capital gains income is 23.8 percent. In addition, taxpayers face state-level capital gains tax rates as low as zero and as high as 13.3 percent. As a result, the average combined top marginal rate in the United States is 28.7 percent. This rate exceeds the average top capital gains tax rate of 18.2 percent faced by taxpayers throughout the industrialized world. Even more, taxpayers in some U.S. states face top rates on capital gains over 30 percent, which is higher than most industrialized countries. In fact, California’s top marginal capital gains tax rate of 33 percent is the third highest in the industrialized world.
Revenue Increased in Most Service Sectors in 2012, Census Bureau Reports
Source: U.S. Census Bureau
The U.S. Census Bureau today released its 2012 Service Annual Survey, which shows a revenue increase in 10 of the nation’s 11 service sectors for employer firms between 2011 and 2012. The utilities sector was the only sector to show a year-to-year decline in revenue, down by $22.7 billion to $533.4 billion for 2012.
The Service Annual Survey provides the most comprehensive national statistics available each year on service industry activity in the United States. In 2009, the survey was expanded to collect data for all service industries, which account for 55 percent of U.S. gross domestic product (GDP).
Using Ballot Measures to Drive Economic Investment in States and Metropolitan Areas
Source: Brookings Institution
Throughout the nation, elected leaders and voters alike increasingly understand that some level of public investment will be necessary in order to set their economies on the path to widely shared prosperity. However, conventional budgetary processes are in many instances failing to address the critical economic challenges confronting American communities. As a result, states and metro areas are increasingly seeking other ways to finance large-scale, economy-shaping efforts.
Ballot measures represent one possible tool that leaders can use to secure funds for critical investments in economic growth amid diminished federal support and continued fiscal challenges at the state and local levels. Initially conceived as a check on corporate interests and a way to effect reform, legislative referendums and citizen-initiated measures today can offer an alternative vehicle when further investment is needed and cannot be obtained through traditional channels.
Foreign Investors Increasingly Cautious amidst Ongoing Global Turbulence, MIGA Finds
Source: World Bank (Multilateral Investment Guarantee Agency)
Foreign investors are increasingly cautious about investing in developing countries in the face of continued global economic and political turbulence, finds the World Investment and Political Risk 2013 report published by the Multilateral Investment Guarantee Agency (MIGA). A survey conducted for the report finds that macroeconomic instability and political risk rank neck-and-neck as top concerns for investors as they plan over the short and medium terms. Despite this, the survey finds nearly half of respondents expect to increase their investments in developing countries over the next 12 months—with that number increasing to 70 percent when the horizon is extended for three years.
The fifth annual MIGA-EIU Political Risk Survey finds that breach of contract and regulatory risks once again top survey respondents’ political risk concerns. Survey results show that these concerns are based on actual experience as well as sentiment.
World Investment and Political Risk 2013 notes that the continued level of investor caution has been a boon for the political risk insurance industry. The dramatic increase in political risk insurance issuance of recent years has continued, rising 33 percent in 2012 and on track for similar growth in 2013.
Political risk insurance issuance has once again exceeded the pace of increase in FDI flows into developing economies over the same period. The report notes the ratio of FDI to PRI now stands at 14.2 percent for developing economies, a marked increase on the low-water mark of nearly 5 percent in 1997.
Navigating the market
Source: Consumer Financial Protection Bureau
To understand the wide range of information sources consumers could be exposed to in making financial decisions, we commissioned a study of the size and scope of the financial information field. The results give an overall indication of the relative amounts spent in the U.S. on financial education and on the marketing of certain types of financial products. The report found that for every dollar put towards financial education, $25 is spent on financial marketing, which can make it difficult for consumers to find objective information.
“Amount of Savings Needed for Health Expenses for People Eligible for Medicare: More Rare Good News,” and “IRA Asset Allocation, 2011”
“Amount of Savings Needed for Health Expenses for People Eligible for Medicare: More Rare Good News,” and “IRA Asset Allocation, 2011”
Source: Employee Benefit Research Institute
Amount of Savings Needed for Health Expenses for People Eligible for Medicare: More Rare Good News
In 2010, Medicare covered 62 percent of the cost of health care services for Medicare beneficiaries age 65 and older, while out-of-pocket spending accounted for 12 percent, and private insurance covered 13 percent. Individuals can expect to pay a greater share of their costs out-of-pocket in the future because of the combination of the financial condition of the Medicare program and cutbacks to employment-based retiree health programs.
Because women have longer life expectancies than men, women will generally need larger savings than men to cover health insurance premiums and health care expenses in retirement post-65 when examining needed savings regardless of the savings targets. In 2013, a man would need $65,000 in savings and a woman would need $86,000 if each had a goal of having a 50 percent chance of having enough money saved to cover health care expenses in retirement. If either instead wanted a 90 percent chance of having enough savings, $122,000 would be needed for a man and $139,000 would be needed for a woman.
Savings targets declined between 6 percent and 11 percent between 2012 and 2013 for a person or couple age 65. For a married couple both with drug expenses at the 90th percentile throughout retirement who wanted a 90 percent chance of having enough money saved for health care expenses in retirement by age 65, targeted savings fell from $387,000 in 2012 to $360,000 in 2013.
IRA Asset Allocation, 2011
Individual retirement accounts (IRAs) are a vital component of U.S. retirement savings, representing more than 25 percent of all retirement assets in the nation. A substantial portion of these IRA assets originated in other tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans, and were subsequently moved to IRAs through rollovers.
In the entire EBRI IRA Database in 2011, 44.4 percent of the assets were in equities, 10.7 percent in balanced funds, 18.0 percent in bonds, 13.0 percent in money, and 13.8 percent in other assets.
Male and female IRA owners had virtually identical allocations to bonds, equities, and money. However, males were more likely to have assets in the “other” category, while females had a higher percentage of assets in balanced funds. For IRA owners above age 25, the percentage allocated to money and balanced funds decreased as the age of the owner increased, while bond allocations increased with age.
Providing adequate and secure income throughout retirement is the objective of a risk-managed defined contribution (DC) plan. The sweeping generalization that defined benefit (DB) plan designs provide benefits at lower cost to public employers than could a DC structure is simply incorrect. A best-practice DC plan can provide secure retirement income at equivalent cost to a DB plan.
Features producing the purported DB cost advantage, such as annuitized benefit payments and low-fee, professional asset management, can easily be incorporated into the DC model, and in fact, are inherent to the best-practice, risk-managed DC design. In practice, a large number of DC plans already exhibit these features, in particular, 401(a) and 403(b) plans sponsored by public and private colleges and universities.
Report on U.S. Portfolio Holdings of Foreign Securities at End-Year 2012
Source: U.S. Department of the Treasury
The findings from the annual survey of U.S. portfolio holdings of foreign securities at year-end 2012 were released today and posted on the Treasury web site at http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/fpis.aspx.
The survey was undertaken jointly by the U.S. Department of the Treasury, the Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System.
A complementary survey measuring foreign holdings of U.S. securities is also conducted annually. Data from the most recent such survey, which reports on securities held at end-June 2013, are currently being processed. Preliminary results are expected to be reported on February 28, 2014.
Towers Watson’s extreme risks ranking has a new top three: Food/water/energy crisis, Stagnation and Global temperature change – while Sovereign default and Insurance crisis have both fallen five places and Depression loses the top spot for the first time since the research began in 2009. While Food/water/energy crisis (previously Resource scarcity) rose ten places to take the top slot, other extreme risks that have also risen up the ranking this year are Global trade collapse (+4) and Global temperature change (+3). Extreme risks that, in Towers Watson’s view, are less of a threat than in 2011 include Sovereign default, which has fallen five places, as has an Insurance crisis, while a Currency crisis and a Banking crisisfell three and two places respectively.
Towers Watson’s research and ranking, entitled Extreme risks 2013, categorises very rare events that would have a high impact on global economic growth and asset returns if they occurred. The top 15 Extreme risks now for the first time include: Stagnation, Health progress backfire, Nuclear contamination, Extreme longevity and Terrorism, while those that have dropped out of the top 15 this year are: Euro break-up, Hyperinflation, Political crisis, Major war, End of fiat money and Killer pandemic.
With the Dodd-Frank Act’s creation of the Consumer Financial Protection Bureau (CFPB) in 2010, lawmakers signaled the beginning of a new era in consumer protection. The CFPB’s subsequent introduction of the Consumer Complaint Database in July 2012 underscored the CFPB’s intent to fulfill two core objectives: enforcing federal consumer protection laws more vigorously and analyzing consumers, financial services providers and market activities.
More than two years after the CFPB began collecting complaint data, the Consumer Complaint Database is now a public repository of over 100,000 consumer complaints. It’s a rich resource for CFPB analysts and financial institutions searching for emerging trends about consumer complaints relating to financial services products, including reasons for those complaints and actions financial institutions are taking to resolve them.
Deloitte’s analysis of the database has produced a number of valuable insights about the nature and sources of recent complaints, including:
- Troubled mortgages are behind the majority of the complaints – a growing trend
- Customer misunderstanding may create more complaints than financial institution error
- Affluent, established neighborhoods were more likely sources of complaints
- Complaint resolution times have improved
Our Latest Research: Debt Savers
The research analyzes the relationship between savings and debt, specifically focused on 401(K) participants. We find that a majority of participants are accumulating debt at a faster rate than retirement savings, a group that we are referring to as “debt savers.” The study analyzes consumer finance data from the Federal Reserve and the U.S. Census Bureau and underscores the need for retirement plan sponsors to provide participants with holistic, independent financial guidance. Without such support, increases in 401(k) and other account balances will be off-set by growing liabilities on the other side of a participant’s ledger.
“Fool Me Once . . . ” Did U.S. Investors Play it Safer in the European Debt Crisis?
Source: Federal Reserve Board
This paper examines U.S. investors’ portfolio investment patterns since the global financial crisis, particularly since the European debt crisis that began in late 2009. The global financial crisis during 2007-2009 was accompanied by an increase in U.S. investors’ home bias. U.S. investors experienced significant valuation losses and pulled back notably from their foreign investment, especially from foreign debt. In contrast, while they have also incurred sizable losses on cross-border investment during the European debt crisis, U.S. investors so far have not shown any increase in home bias, and they have not even pulled back from their long-term investments in Europe. Holdings data show that U.S. investors have continued to invest in European securities, particularly in government debt, but have made little new investment in the financial sector. This continued interest in European securities could owe to the fact that most of U.S. holdings of European debt have been concentrated in dollar-denominated debt issued by core euro area countries and the United Kingdom, which are deemed relatively safe. Changes in the composition of holdings over the past couple years suggest that U.S. investors have behaved in a way that reflects their diversity and differing objectives: while investors reached for higher yields in government debt, there also appears to be some shift toward safer investment in the financial sector.
Do Mergers Hurt Product Quality?
Source: Harvard Business School Working Papers
There’s a lot of worry afoot whenever companies merge. Wall Street worries about the stock price. Employees worry about potential job cuts. And consumers worry about the fate of their favorite products: Whither the price and the quality?
It turns out that consumers need not worry too much, according to a recent study by Harvard Business School Assistant Professor Albert W. Sheen. In The Real Product Impact of Mergers, Sheen finds that mergers generally have little effect on product quality over time, even while product prices tend to decrease.
After Sandy: A New ULI Report Looks at Mitigating Climate Change Through Land Use, Offers Recommendations on Strengthening Community Resiliency
The reality of climate change will forever change community building, with planning and development decisions increasingly based on strengthening community resilience through what is built, and where and how it is built, according to a new report released today by the Urban Land Institute (ULI).
Leading up to the one-year anniversary of Hurricane Sandy, ULI has prepared After Sandy: Advancing Strategies for Long-Term Resilience and Adaptability, which offers guidance on community building in a way that responds to inevitable climate change and sea level rise, and helps preserve the environment, boost economic prosperity, and foster a high quality of life.
ULI, a global research and education institute dedicated to responsible land use, has a long history of advising communities on repositioning after disasters. At the request of three ULI District Councils—ULI New York (city), ULI Northern New Jersey, and ULI Philadelphia, which serve ULI members in those market areas—ULI in July 2013 convened a panel of the nation’s foremost authorities on real estate and urban planning to evaluate local and federal plans for strengthening community resiliency post- Sandy, and offer guidance on rebuilding efforts. Candid insights and observations from these experts formed the basis for After Sandy, a comprehensive, practical set of 23 recommendations focused on four areas—land use and development; infrastructure, technology and capacity; finance, investment and insurance; and leadership and governance.
The report’s overriding message: The increased frequency of severe weather events, as well as rising sea levels, are compelling the real estate industry to address climate change by working with the public sector to implement adaptive measures that better protect both the built and natural environment.