Jonathan Clements's Blog, page 10

Tariffs and PPP (People Purchasing Power)

Since Trump's return as POTUS everyone is inundated with the news about Trump's tariffs on just about every country in the world. His reasoning is that other counties have always taken advantage of the USA, and it is time that the USA rights the imbalance of trade.  He has said that he has always believed in tariffs, harking back to before 1913 when income tax was implemented. Of course, any thinking person would know that these tariffs are paid by the importers, and eventually by the consumers if they are passed on.  Since 1913, the world has undergone phenomenal changes that have affected all aspects of life, leading to the current global economic situation, where it appears that no country can stand alone. In my lifetime, I have seen China, once referred to as a "paper tiger" bustling with people on bicycles, to a current tech-developed world with all its trimmings. This is also true for many developing countries as the world turns.

What I have not seen or heard from economic pundits is the role of people purchasing power (PPP) on trade imbalance. It has always been my belief that the concept of supply and demand is dependent on PPP, viz. the ability of people to have the means to buy what they want.  Thus, in my view a trade imbalance may always occur if a country with a small population sells to a country with a large population, regardless of the PPP of each of the countries.  In the developed western countries where the affluence/living standard is similar but not the population, should one not expect a trade imbalance?  For example, Canada's population of 40M selling to the USA with a population of 330M will, undoubtedly, result in a negative trade balance for the USA with a larger population whose need/consumption is greater.  What about poorer countries whose population does not have the means (PPP) to buy items beyond those necessary for survival? Those countries are not exempted from Trump's tariffs.

Since I am not an economist, am I missing something in my thought process in this arena?

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Data’s Double Edge: Why Spreadsheets are Both a Lifeline and a Possible Lie

Can you even begin to imagine the confusion and chaos that follows a major disaster, and the difficulty of communicating and coordinating a response? This is a situation where data management, especially with a simple but powerful tool like a spreadsheet, shows its magic.

One very well-known situation that comes to mind is the Space Shuttle Challenger disaster. Facing a complex amount of data, engineer Richard Feynman and his team had a hunch about the cause. They used a simple spreadsheet to plot launch temperatures against O-ring damage, creating an easily understandable graph that clearly showed more brittleness with temperature drops. This simple act cut through a massive amount of data that would have taken months to examine, quickly determining the reason for the failure.

A bit of online research reveals another great example: the 2014 Ebola outbreak in Africa. After a shaky start with manual data entry, a spreadsheet was developed and used to vastly improve the tracing and tracking of infected people. Using data visualization, public health officials were able to identify disease hotspots and enact quarantine areas, which slowed the outbreak to an eventual standstill and saved many lives.

While spreadsheets are powerful for analyzing and presenting data, they share the same vulnerability with handwritten math: they are only as good as the information you put into them. A single mistake—whether a miscopied number in a manual calculation or a flawed assumption in a spreadsheet—can invalidate the entire result.

The danger, I feel, with spreadsheets is that their automated power and clear outcomes can hide these errors, creating a false sense of certainty. This is the case for everything from public health data to retirement planning, where a small, incorrect input can lead to a dangerously misleading outcome. The usefulness of the output will always depend on the accuracy of the input. In simple terms, it's just the same as using the wrong numbers in an equation.

Spreadsheet skeptics, it seems to me, confuse this fundamental characteristic of all "variable driven" mathematics to debunk the very nature and real world utility of a well-designed spreadsheet.

 

 

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Back to the Future

The first movie I ever saw in a theater was 2001: A Space Odyssey. My sister Carol took me to it when I was six years old. She wasn’t sure I’d like it, but I really loved it—except for a bit of primitive violence in the opening scene that was too intense for my young eyes (and stomach). In particular, the future technology depicted in the film fired my imagination. People in 2001 casually used video telephone calling and iPad-like tablet computers. And who could forget the talking, intelligent—but ultimately sinister—computer named HAL 9000? In 1968, when the movie came out, these were indeed just technological fantasies. Spurred on by that movie, throughout my childhood and adolescence I had a keen interest in reading science fiction and predictions about future technology. As a pre-teen, I was fascinated with my father’s copy of the best-selling book Future Shock by Alvin Toffler, which was published in 1970.

Over fifty years have passed since those early childhood days. For better or worse, our world is filled with the stuff of yesteryear’s science fiction. If time travel to today from 1968 were possible (spoiler alert: not quite yet), a cinematic camera crew simply filming day-to-day life in an advanced country like the U.S. or Japan would have the elements for an epic sci-fi blockbuster.  In my lifetime, technology has advanced at a staggering pace. The period from 1969-2000 is sometimes called the Third Industrial Revolution, encompassing the use of ever-more sophisticated electronics and computers to automate processes, as well as the rise of the internet. We are currently in the mind-boggling Fourth Industrial Revolution, where a mature internet has evolved to include “the internet of things” and artificial intelligence (AI) is rapidly advancing.

Sophisticated technology used to be quite expensive and out of the reach of many people. Today, due to technological advances, just about everyone can afford a compact smartphone that contains many amazing capabilities—including video calls—that could not be obtained at any price in 1968. Personal computers have come way down in price, and the internet, providing access to almost unlimited stores of information, is free for all to use. Our friends living 50 or 60 years ago would be in complete awe of what we take for granted.

Interestingly, in 1970 Alvin Toffler foreshadowed the rise of the internet and AI. Here’s a bit of what Toffler said about a computer concept called OLIVER (On-line Interactive Vicarious Expediter and Responder): “As computerized information systems ramify, (OLIVER) would tap into a worldwide pool of data stored in libraries, corporate files, hospitals, retail stores, banks, government agencies, and universities. OLIVER would thus become a kind of universal question-answerer…. It is theoretically possible to construct an OLIVER that would analyze the content of its owner’s words, scrutinize his choices, deduce his value system, update its own program to reflect changes in his values and ultimately handle larger and larger decisions for him…. Meetings could take place among groups of OLIVERs representing their respective owners, without the owners themselves being present.”

I would have been flabbergasted if, as a youngster, I’d been clued in about the technological advances I would witness in my lifetime. I’ve truly lived a science fiction kind of life. But all the technology hasn’t resulted in a utopia. Advances in AI make deepfakes more believable all the time. My Facebook feed is increasingly cluttered with AI generated videos and pictures, making it harder to distinguish between fact and fiction—especially judging by the comments people leave. The connected nature of the internet adds to the seeming cloudiness of truth. Cybercrime is a constant threat. Sometimes I wonder if it will all come crashing down, as in the Biblical story of the Tower of Babel.

How about you? Are you optimistic that our technological advances eventually will be self-correcting and propel society to greater heights? Or do you have an uneasy feeling that technology has raced ahead of what mankind is capable of handling? Is the best yet to come? Or have we peaked?

 

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Free Lunch?

On the Fidelity account page that displays my holdings online, I noticed banners saying I could make extra money by lending my securities. I ignored this on the premise of “too good to be true.”  Then I got an email from Fidelity advertising their Fully Paid Lending Program and read what they had to say. By following a link, I was able to get an assessment of each of my accounts telling me which holdings might be eligible and how much they might yield.

The account assessments said I did have eligible securities, all of which were ETFs, and that I could earn interest by loaning them to others, apparently short sellers. The interest estimates ranged from 1% to 10% based on the loan market for each security. This interest rate is security specific and varies from time to time based on the market for each security. Interest accumulates during the month and is paid out after month end.

Still skeptical, I did an online search independent of Fidelity and found that other brokerages have substantially identical programs, including Vanguard, Schwab and Interactive Brokers. The primary caution I picked up from my online search was that tax favored qualified dividends paid on a security while it is on loan will be passed on to you, but it will be in the form of ordinary income not as a qualified dividend. Of course, this only matters in taxable accounts.

The security does not have SIPC insurance coverage while it is on loan. The program description explains that when a security is loaned out, Fidelity deposits an equivalent dollar amount into a bank account as collateral in the event the borrower fails to return the security. The collateral is adjusted periodically to account for changes in the market value of the loaned security.

I’m also relying on the reputational risk Fidelity would suffer if a client-lender lost money on this.

I enrolled my wife’s and my Roth IRA accounts as a test. I had to answer a few questions to qualify each of us for the program. Also, only accounts with a balance of $25,000 or more are eligible.

The pixels on my electronic signature were barely dry when an ETF we both own was loaned out. The interest was 8.88% and together we would receive $45 per day in interest. Counting my chickens before they hatched, I quickly calculated we’d realize $1350 per month. Not so. Both loans lasted one day. We made $45.

I now have 3 months experience. I have made fifteen loans and my wife has made six. I say “made,” but we do nothing… the security is just swept away and returns just as seamlessly. The loans have been for as little as one day while some have been as long as five days. Sometimes my entire position in an ETF is borrowed and other times it is just a partial position. The actual interest rate paid has ranged from 0.75% to 13% being a somewhat broader range than the initial assessment predicted.

To give a sense of the range, I had one loan of 39 shares of an ETF valued at $900 that lasted five days and yielded me 4 cents per day. The largest windfall was a four-day loan on a $128,000 position at 12% yielding $171.40.

The ETF position that has had the most activity is FENI (Fidelity Enhanced International ETF). We hold it in both accounts and together those two positions represent 96% of our 3 months of income payments with interest rates varying from 8.88% to 13%. The high interest rate and the frequency of the loans suggests that during this time period, there has been a big demand to borrow this ETF. I realize this could evaporate. As an example, I hold another ETF in my account that has never been borrowed… will there be demand for that in the future?

Our total additional income for three months for both accounts was just over $500, or just over $160 per month. This will cover several free lunches.

Clearly, this is not going to make me rich. On the plus side, I don’t have to do anything. And, since the interest is paid into our Roth accounts, I will never have to pay taxes on it.

Would this work for you? It depends on whether you have holdings that are desirable for lending and how big those positions are. This is where the assessment comes in.

This may be the closest I’ll get to an investment free lunch. What am I missing?

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The spreadsheet conundrum when the stakes are high.

The Congressional Budget Office (OMB), the Council of Economic Advisors (CEA), the Committee for a Responsible Federal Budget (CRFB), the Office of Management and Budget (OMB) all use quite sophisticated forms of a spreadsheet and they all come up with different projections for debt, deficits, GDP and inflation, etc. … because they use different assumptions. 

See, I told you so, those darn spreadsheets will find any answer you like.😱😁

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The Cloth Seller Who Invented Social Security

I've always had a deep fascination with maths, and recently, thanks to my retirement and the freedom of time it's given me, I've been conducting a bit of “self-educating” on the topic of actuarial science. During this process, I discovered a little-known but fascinating historical character named John Graunt.

He was a 17th-century cloth seller from London who had a very strange hobby. Before starting his workday, he liked to study the Bills of Mortality, which were weekly records compiled by parish clerks, detailing births, deaths, and their causes.

Over time, he started to compare causes of death with age and gender. His first key insight was noticing that although more males were born in London, the actual adult gender ratio was roughly balanced because of lower female mortality rates. This act of statistical inference—of looking for trends in what seemed like random data—is what makes him the father of demography and a pioneer of actuarial science.

Graunt's work didn't stop there. He created one of the first life tables, a revolutionary concept that used his mortality data to estimate survival rates to a certain age. This innovation was the direct ancestor of modern actuarial tables, which insurance companies use to calculate premiums. He was the first to scientifically show that longevity and death followed predictable patterns within a population—a foundational idea that was entirely new at the time.

This little-known person established the very foundations of the discipline that directly impacts your Social Security and the baseline income you build your retirement from. Alongside this, the very systems used to price your insurance policies to give you peace of mind evolved. Next time your Social Security deposit hits your bank account or you're glad for insurance after an accident, maybe tip your hat to the pioneering work of John Graunt and his odd little hobby.

The sad irony of his life is that although he developed the tools and ideas that applied not only to actuarial science but also the same principles that were co-opted by the developing insurance industry, it was sadly too late for him. The misfortune of the Great Fire of London destroyed his house and livelihood, making Graunt a victim of a risk that his own work would help others mitigate just a few short years later, leading him to a life of poverty before his death.

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Smart Move?

EARLIER THIS SUMMER, Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins Act—GENIUS, for short. This sounds obscure, but it’s a story worth following. The GENIUS Act’s purpose is to promote the growth of—and to regulate—a new type of financial instrument known as a stablecoin.

What’s a stablecoin? It’s similar to a cryptocurrency but differs in one important way: Bitcoin and other cryptocurrencies have exhibited wide price swings. That makes them interesting to investors but less-than-useful as currencies for everyday transactions. Just ask Laszlo Hanyecz, an early adopter of bitcoin.

Back in 2010, Hanyecz paid for a Papa Johns pizza order with 10,000 bitcoin. At the time, this translated to about $40, an appropriate price. But today, those same 10,000 bitcoin would be worth more than $1 billion. That’s why the term “cryptocurrency” has become somewhat of a misnomer. Even in the past 12 months, bitcoin has nearly doubled in value. It’s also experienced steep declines. In 2022, it lost more than 60%. This volatility makes bitcoin and other cryptocurrencies impractical as currencies.

Stablecoins intend to solve that problem. To be useful as currencies, they promise to maintain a perfect 1-to-1 exchange rate with the U.S. dollar. But that raises a question: If stablecoins never deviate from a fixed price of one dollar, what purpose do they serve? Why not simply hold dollars in the bank?

Stablecoins turn out to have potentially broad appeal.

For consumers, the pitch is that stablecoins offer a better way to transfer funds than any other existing method. Credit and debit cards, for example, are ubiquitous, but they aren’t practical for payments between individuals.

PayPal, Venmo and Zelle allow for person-to-person payments, but they too have limitations: They require some setup, and they cap the size of transactions, making them infeasible for things as basic as rent payments.

Wire transfers are quick, but they’re cumbersome, and many banks charge fees to send—and sometimes even to receive—wires, making them impractical for day-to-day use. Most people use wire transfers infrequently, if ever.

While it can be cumbersome to transfer funds within the U.S., it’s even more costly and complicated to send funds internationally. Services like Xoom (owned by PayPal) have made this easier, but these services carry fees, and also charge a “spread” on the currency conversion. By contrast, stablecoins would have no fees and no conversion costs.

Because stablecoins aren’t encumbered by any of those limitations, they represent a potentially promising alternative for consumers.

The government is also interested in stablecoins. The reason is interesting. A White House press release notes that “the GENIUS Act requires 100% reserve backing with liquid assets like U.S. dollars or short-term Treasuries,” then adds: “By driving demand for U.S. Treasuries, stablecoins will play a crucial role in ensuring the continued global dominance of the U.S. dollar as the world’s reserve currency.”

That’s stablecoins’ primary appeal to the government’s. Because stablecoins need to be backed on a one-for-one basis by either U.S. dollars or U.S. Treasury securities, stablecoins have the potential to generate new global demand for U.S. currency. And proponents argue that stablecoins have the potential to turn the dollar into a currency that can be used in everyday transactions worldwide. While this vision may sound like a stretch, it need not be all-or-nothing. If the GENIUS Act can increase demand for Treasury bills or extend the reach of the dollar by any amount, that would be positive for the U.S. economy.

A third constituency that’s very interested in stablecoins: retailers. For businesses that accept credit cards, processing fees average about 2%. For years, retailers have battled with Visa and MasterCard, which are responsible for setting these rates, but without much luck. It’s no secret how profitable the credit card business is. Visa’s gross profit margin is about 98%, and its net margin (after all expenses and taxes) averages about 53%. By way of comparison, Microsoft—itself an extremely profitable company—has net margins in the neighborhood of 35%.

For this reason, there’s speculation that large retailers, including Amazon and Walmart, will accept stablecoins and might even issue their own coins. Shopify, a company that provides back-end shopping cart tools for millions of ecommerce sites, already allows retailers on its platform to begin accepting one type of stablecoin.

Part of the motivation for the GENIUS Act is that stablecoins don’t have an unblemished history. Most notably, in 2022, a coin called TerraUSD, which was supposed to be pegged to the dollar, crashed disastrously, losing most of its value. The new rules, which require that each stablecoin have a dollar of collateral, should help consumers avoid this outcome. Terra failed because it didn’t have that collateral.

Should you try stablecoins? The good news is that there’s no rush. Since stablecoins are intended to maintain a fixed value, there’s no risk of missing out on price appreciation. For that reason, consumers can afford to take it slow, and watch and wait to see how things develop.

One reason I’d take it slow is stablecoins may not be entirely without risk. Even though they’re intended to remain pegged to the dollar, that link isn’t guaranteed. Why? Short-term Treasurys, which stablecoins are permitted to hold as collateral, can lose money. Yes, they’re generally very stable but, as we saw in 2022, when interest rates spiked up, these bonds lost about 4%. So there is a scenario in which stablecoins could lose value. That’s why I’d wait for the bugs to be worked out before committing more than a small amount to stablecoins.

That said, I see this new technology as a positive development. Whether it’s stablecoins or something else, advances like this may help put downward pressure on the high fees that continue to be stubbornly embedded in the traditional credit card system.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

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A Harsh Truth, or a Contrarian View

In a recent Morningstar article, the author pointed out a few things.

“It feels like the economy has gone through three cycles in the past six years. The future looks very messy and uncertain, yet there’s no shortage of pundits that claim to know what will happen tomorrow.

But predicting the short-term direction of the economy has always been that way. ….

The media and investors alike are subject to recency bias: the tendency to place more emphasis on recent news and events than on older circumstances. There has been no shortage of economic disruptions over the past six years. Since mid-2019, the global economy has endured a pandemic, multiple supply chain disruptions, a short bout of inflation, and geopolitical tensions. Through all of that, real US GDP grew at about 2.3 percentage points annualized between July 2019 and March 2025.

It’s easy to get hung up on past problems and miss what’s important….

The US economy’s current situation has never looked better. Economic output, as measured by real GDP, currently sits near an all-time high. Real GDP broke $23 trillion in early 2024, and it is on pace to surpass $24 trillion in the next year. Inflation has cooled down to about 3% over the past 2.5 years, which is slightly lower than the long-run 3.5% average the US has experienced in the post-World War II era since January 1948.

Employment figures also look great by historical standards. The unemployment rate has hovered around 4% over the 12 months through June 2025, or below the long-term average of 5.7% dating back to January 1948. Further, the US economy has continued to employ more and more people as it has grown. It employed nearly 160 million Americans (excluding volunteers, farmers, and those self-employed) at the end of June 2025—an all-time high….

There are two major lessons that investors can glean from that data. First, publicly traded corporations perform most of the heavy lifting. Investors benefit by getting exposure to the market and reducing, if not eliminating, anything that drags on performance.

The second lesson is remaining steadfast when the inevitable drawdowns occur. Charlie Munger, Warren Buffett’s late business partner, summarized it best:

“I think it’s in the nature of long-term shareholding with the normal vicissitudes in worldly outcomes and in markets that the long-term holder has his quoted value of his stock go down by say 50%. In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you are going to get…”

Munger spoke a harsh truth, but it’s one that all successful investors eventually make peace with. Shareholders are compensated for bearing risk. Some of those risks come from individual companies or market segments, while others are consequences of the economic cycle.”

https://www.morningstar.com/funds/big-secret-long-term-investment-success

++

I am aware of a few dark clouds.  The full impact of tariffs is not yet known. AI will displace workers.  We simply don’t know how many and which skills. For example,  Microsoft is laying off about 4% of its workforce, about 9,000 people. Other large corporations will do the same.  Housing remains a problem.  The home price-to-income ratio has risen from 3.5 in 1985 to 5.0 in 2025.  (Years of income to buy the typical home). However, a 30 year mortage is about 6.8% whereas in 1985 it was 12.4%.

I also know that the recent economic reality isn’t what some were hoping to hear.  There are those who were convinced otherwise and are betting on disaster.  Of course, if that occurs they will go down with the ship, too.  The most perverse are actually wishing for disaster.  But, for long-term, rational investors, things have been very good.

Yes, a market correction is coming and there will be a recession.  You can bet on that.  But, while waiting for the inevitable don't hold your breath and don't get ahead of your skis.

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Hedge funds, venture capital. private equity, etc. in a 401k. BAD IDEA!

President Trump signed an executive order Thursday 8/7 to allow 401(k) participants to invest in private  assets.

The directive instructs the Department of Labor and the Securities and Exchange Commission to draft guidance for defined-contribution plans to incorporate private-market investments, including private equity, venture capital, hedge funds, real estate, and possibly gold and crypto.

Plan sponsors are not required to offer these investments-and I hope they don’t. This is a bad, short-sighted idea.

That's all we need in 401k plans, more complexity, more choices few people understand. The idea is participants can achieve better growth on investments.

More like the other side of the coin and bigger losses.

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Supercharging Your Retirement with Crypto: A Wise Move, or a Risky Bet?

I'm grappling with crypto at the moment. I've opened an account with eToro with a plan to make a $20,000 investment/gamble with the simple idea of leaving it for the next 10years to see what happens. I personally don't recommend this unless you're happy to lose your shirt.

With crypto in my mind I was interested to read an article this morning about how your President Trump has just signed an executive order that could change things up. It seems he's directing federal agencies to make it easier for retirement plans to include alternative assets like crypto and private equity.

It seems to be a big shift from the previous administration's approach. Supporters say it gives more choice and a shot at higher returns. But critics warn it's a risky move, exposing everyday savers to the wild swings of the crypto market

I'm assuming it will take a while to happen. But the question begs to be asked: Is this a smart way to supercharge your retirement, or a dangerous gamble? What do you think?

My view is that crypto should be treated as a long term gamble with money you can afford to lose. I'm really not sure of it being a suitable position in someone's retirement account. Would a financial advisor even be able to square this with the duty to advise in the client's best interests? I think it could probably expose them to possible lawsuits. It seems like a new can of worms is about to hit the ground. Any thoughts?

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