☀️☕ The financially illiterate

14 February 2023

Happy Valentine’s Day! 💕 

US large-cap S&P 500 closed 1.14% UP ▲ Tech-heavy Nasdaq Composite closed 1.48% UP ▲ Pan European STOXX Europe 600 closed 0.9% UP ▲ HK’s Hang Seng Index closed 0.12% DOWN 🔻 Japan’s Nikkei 225 closed 0.88% DOWN 🔻

📝 Guest Feature: The Money Awareness and Inclusion Awards (MAIAs)

The financially illiterate

📊 In the Markets

Overspending isn’t romantic!Multiple Regulators Circle Crypto (Binance, COIN)UK wages, really downChina to export inflation?

📖 MoneyFitt EXPLAINS

🎓 Inflation, Deflation and Disinflation

📝  Guest Feature: The Money Awareness and Inclusion Awards (MAIAs)

The MoneyFitt team wants to help you make better personal finance and investment decisions. This week, we’ll be showcasing the work of the MAIAs, the first global financial literacy body aiming to solve the problem of weak financial literacy by finding and celebrating the best solutions. We sat down with Founder Michael Gilmore to learn more about the financial literacy problem. 

What are the consequences of being financially illiterate? 

The consequences of being financially illiterate are too numerous to list, as they affect every person on the planet in different ways, but they’re also too dire not to think about. Unfortunately, most of the world doesn’t think about it, and as a result suffers those numerous, dire consequences. 

If we keep our version of financial literacy short and simple, along the lines of “knowing how to make money work for you”, then “not knowing how to make money work for you” becomes the opposite. 

In many cases, it is much worse than that. In reality, many people don’t know that money can work for them, so they don’t know where to look for better answers or solutions. Even worse, they don’t know that money can work against them, and will work against them if they don’t know how to stop that from happening. 

An example? Credit card and consumer debt, paid back at high compounding interest rates on things that weren’t necessary. Gambling debt that breaks families. A reasonably well-off family dragged into a spiral of poverty by an unexpected cost or loss of income and no emergency fund. Ok, that’s three. 

On a large scale, the single huge consequence of financial illiteracy is widespread avoidable poverty and inequality. While there are many reasons poverty exists, with complex solutions, the one that is least understandable, and forgivable, is poverty and inequality that could be avoided with simple, basic lessons at school and later.

We’ll be back for Parts 2 and 3 tomorrow and Thursday!

About the MAIAs: The Money Awareness and Inclusion Awards are the first global financial literacy body aiming to solve the problem of weak financial literacy by finding and celebrating the best solutions. The winning solutions in 2022 ranged from academic research on gamifying education, to 12-year-old influencers making videos about money. Enter MAIAs2023 before March 28th at enter.maiawards.org

📊 In the Markets

Wall Street opened the week sharply higher and was, as usual, thrilled to bits with regular working people losing their jobs, this time -actually, again- from Facebook parent Meta Platforms, which added to cuts announced last November.

If you believe the commentators, investors are laser-focused on January CPI inflation 🎓 data due out at 8:30 am on Tuesday so they can reassess their call on the Fed’s monetary policy path for the rest of the year, which Fed officials have already told them for months. Like most other central banks, though, that path remains data dependent, but is unlikely to swerve wildly based on one data point (and not even the measure of inflation that the Fed cares most about.) For the record, Wall Street’s Finest expect headline CPI to spike to 0.5%, from 0.1% in December, but core prices — excluding food and energy — will be steady at 0.4%. Year-over-year, inflation is expected to recede to 6.2%, from 6.5%, with core down to 5.5% over the past 12 months, from 5.7%.

Meanwhile, reports in The Daily Mail, of all places, seem to be correct that a wealthy consortium from Qatar is preparing to bid for Manchester United, the resurgent  NYSE-listed Premier League club with the owners, the Glazer family, looking for a buyer. QSI, the Qatari sovereign wealth fund which owns the French side Paris St Germain, is not bidding but will help with preparations for the bid. (See the MFM from last month explaining how the Glazers originally bought MANU in an LBO, and the interest from local billionaire and lifelong fan Sir Jim Ratcliffe.)

And in HK on Monday, local property companies plunged, led by a 12.8% drop by Link REIT after announcing its HK$18.8 billion rights issue at a nearly 30% discount to the last closing price. (More on LINK and REITs in yesterday’s MFM.)

Overspending isn’t Romantic: A Guide to Valentine’s Day

Happy Valentine’s Day! Or “Black Tuesday”, as some people call it. Click here for the unique MoneyFitt take on Valentine’s Day… its dark origins, the impact on retail and “Better Ways to Spend your Valentine’s Day (On a Budget)!”

Multiple Regulators Circle Crypto

The New York Department of Financial Services has ordered Paxos Trust to stop minting Binance USD (BUSD), at US$16 billion in circulation, the third-biggest stablecoin after market leaders Tether and USD Coin (and the seventh-biggest cryptocurrency overall.) The NYDFS cited “unresolved issues” regarding Paxos’ obligations for “tailored, periodic risk assessments” and due diligence checks on Binance. (Stablecoins are digital tokens typically backed by traditional assets and are designed to hold a steady value for trading from “fiat” money into and between more volatile tokens.) 

Meanwhile, The Justice Department is investigating Binance for suspected money laundering and sanctions violations, while the WSJ just reported on Sunday that the US Securities and Exchange Commission has told Paxos that it will be suing the company, alleging that Binance USD is an unregistered security.

Last week, the SEC charged Kraken for failing to register its staking-as-a-service program as a security, leading Kraken to settle the charges with a US$30 million fine and agreeing to shut down its staking offerings for US clients. This added to the pressure on Coinbase shares (down 23% in the last week) given they also offer a staking product which generates a significant part of their revenues as well as the price of its native COIN (which, on CoinGecko, is down 11% in the last 24h and 65% in the last 7 days.) Coinbase’s Chief Legal Officer called Coinbase’s staking offering “fundamentally different” from what Kraken was doing.

UK wages, really down

British employers are expecting to raise wages by the most in over a decade, which may stoke some fears of a return of the dreaded wage-price spiral, in which a higher cost of living drives employees to demand higher wages, a tight labour market forces employers to accept those demands, and then shoves those higher costs through into higher costs, pushing up the cost of living and adding fuel to the cycle (and the mixed metaphor.)

But even with the expected 2023 median annual pay hike up to 5%, from 4% three months earlier, it’s still far below both current and expected inflation, meaning that “REAL” wages (adjusting for the cost of living, essentially) are still collapsing, particularly for public sector workers (only expected to get 2% this year, DOWN from 3% expected a quarter ago.)

Last August, US bank Citi grabbed headlines with an 18% inflation forecast for early 2023… while that’s now looking remote, to say the least, the Bank of England continues to signal that inflation 🎓 is still a worry. Annual inflation fell to 10.5% in December after hitting a 41-year high of 11.1% in October.

“Skills and labour remain scarce in the face of a labour market which continues to be surprisingly buoyant given the economic backdrop of rising inflation and the associated cost-of-living crisis”

BUT… while labour costs are far from the only driver of business costs, the huge difference between inflation and wage increases does suggest that much of the current sticky inflation is coming from healthy profit margins at companies, hiding behind the cost-push narrative that defined the early stages of the “transitional” inflation of late-2021. 

Across the pond, Lael Brainard, the highly respected vice chair of the US central bank, the Federal Reserve, acknowledged back in November that the “return of retail margins to more normal levels could meaningfully help reduce inflationary pressures in some consumer goods.” 

And Robert Reich, a former US secretary of labor, contends that with most US workers’ paychecks shrinking in terms of real purchasing power (as in the UK), wages are actually reducing inflationary 🎓 pressures, with the underlying economic problem being profit-price inflation caused by corporations raising their prices above their increasing costs. Corporations can do so without losing customers because they face so little competition, with most industries having become ever more concentrated.

China to export inflation?

The abrupt and aggressive reopening of China from its lengthy period of Zero Covid has sent many commodity prices through the roof on expectations that Beijing’s renewed support for the property market will jump-start demand. Meanwhile, the Chinese government has stated that it wants consumption to be the “main driving force” of the economy, again raising hopes for a flood of spending by Chinese consumers, fuelling a global rebound.

“The greatest potential of the Chinese economy lies in consumption by 1.4 billion people… Boosting consumption is a key step to expand domestic demand. We need to restore the structural role of consumption in the economy.”

But China’s reopening may increase price pressure abroad, too, leading central banks to keep tightening (as they have said they would) and keep interest rates “higher for longer” (as they’ve also been saying.) Countries that import commodities, including oil, are at the greatest risk. 

The relatively subdued inflation 🎓 data recently released in China could make it easier for the PBOC (People’s Bank of China, the central bank) to continue with stimulative monetary policy to accelerate the recovery… in turn adding a fresh burst of inflationary pressure elsewhere, possibly pushing interest rates “even higher for even longer.”

📖 MoneyFitt Explains

🎓 Inflation, Deflation and Disinflation 

Inflation is basically a general increase in prices in an economy over a period of time. 

When this happens, the value, or purchasing power, of money goes down. Inflation is usually caused by too much demand for something relative to how much is available or by the cost of producing (or importing) something going up. Both can lead to a vicious cycle of rising prices, usually when higher prices become expected and built into wage demands.The Consumer Price Index is a way of measuring inflation in an economy based on the increase in the overall price of a “basket” of items that an average individual would spend on. (There are many measures, but the “CPI” is the most commonly used.)

Deflation is the opposite: A decrease in the general price level of goods and services. This sounds good, but can be as damaging in a different way, as buyers may sit on the sidelines and wait for lower prices, thereby sending economic activity through the floor, while their debt burden actually goes up.

Disinflation, on the other hand, is a decrease in the rate of inflation, meaning that prices are still going up, but not as quickly as before on either a month-on-month basis or year over year. This is generally seen as a good thing, especially if inflation is above the target rate.

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