☀️☕️ Why financial literacy is not taken more seriously by governments

16 February 2023

Happy Thursday!

US large-cap S&P 500 closed 0.28% UP ▲ Tech-heavy Nasdaq Composite closed 0.92% UP ▲ Pan European STOXX Europe 600 closed 0.53% UP ▲ HK’s Hang Seng Index closed 1.43% DOWN 🔻 Japan’s Nikkei 225 closed 0.37% DOWN 🔻  

📝 Guest Feature: The Final Part of Our Series With the MAIAs

Why is financial literacy not taken more seriously by governments?

📊 In the Markets

Defending Hong KongCOYS: Come On You SoccerplayersRegulate Now Buy Later

📖   MoneyFitt Explains


📝 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. 

Part 3: Why is financial literacy not taken more seriously by governments?

I would love to be more conspiratorial about this. It is tempting to believe that governments deliberately keep people from knowing how to take financial control of their lives. I hear people getting into those arguments, and want to join in – theorising about how governments and financial institutions are in on it together – but these days, I hold back.

First, I’ve realised it’s impatient to think this way. Civilisation existed for roughly 5,000 years before it decided, only about 200 years ago, that universal education would be a good idea. We couldn’t take financial literacy seriously before that. 

Second, governments themselves aren’t financially literate. Liz Truss’s UK government is almost comical evidence of that. But real financial literacy is so rare in the world that it is unlikely to be concentrated in government. Instead, it is more likely to be more focused in the financial industry, and so it is, but not as much as you might hope!

Perhaps most controversially, I think governments don’t take financial literacy seriously because we don’t want it enough. 

You may think you want it, but when did you last start a strike at school for not teaching it? When did you last glue yourself to a bank? If we want it so much, where is our Greta? 

Governments generally don’t know what they’re doing, and instead just respond to the loudest, most awkward voices in society. And people who want financial literacy are sadly not (yet) those voices.

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

After a soggy start to the session, markets ended higher on Wednesday despite stronger-than-expected January retail sales in the US showing the overall resilience of the economy. Along with the previous day’s very slightly higher than expected inflation, this kept traders edging towards the prospect of “higher for longer” interest rates for 2023, exactly the scenario painted by Fed officials for the last few months. Retail sales surged 3% in January, the largest increase since March 2021, compared to an expected 1.8% gain. This followed a drop in sales in the prior two months, though that seems to have been from the well-anticipated front-loading of holiday shopping (e.g. Amazon’s 48h Prime Early Access in October.) 

It’s also possible that the mechanism they use to strip out seasonal fluctuations may have bumped UP retail sales in January but then might show a reversal in February. If that happens, prepare for traders to lose their minds (again) and assume a recession has landed and therefore interest rates will plummet.

Meanwhile, Lael Brainard, the vice chair at the US central bank, the Fed, is leaving to head Joe Biden’s National Economic Council. Brainard was known as one of the most “dovish” members of the rate-setting Federal Open Market Committee, which refers to a preference for stoking growth with lower interest rates as opposed to single-mindedly battling inflation. She will coordinate economic policymaking across the executive branch, perhaps also opening a path to becoming a future Treasury Secretary. 

And in the UK, one bank showed the difference in two distinct areas of banking in 2022: Barclays, which fell 7% after posting a 4% drop in profits. Profits at its consumer lending business rose 13% thanks to higher interest rates in the fourth quarter (as charged to borrowers… not so much what was paid out to depositors), but this was more than offset by a collapse in fee income at its investment bank.

Defending Hong Kong

The Hong Kong Monetary Authority (the de facto central bank) intervened in the currency market to defend the peg to the US dollar for a second straight day. On Wednesday, the HKMA stepped in to buy HK$14.9 billion, sharply higher than the HK$4.2 billion it picked up on Tuesday and the largest buy since last May

The latest interventions further reduce the aggregate balance (the clearing accounts maintained by banks with the HKMA) – which means less money available in the local economy and banking system, which usually leads to higher local interest rates, triggering traders to pile back into the HK$. But it didn’t, so they didn’t. (See the MFM from Nov.) 

The gap between the HK$ HIBOR interest rate and its US$ counterpart LIBOR is the widest in years. With such a wide spread, traders can borrow HK$ cheaply to buy US$ for higher yields – known as a “carry trade” – and between pegged currencies, this can be for effectively zero risk… provided the expectation from traders is that peg holds.

(In 2022, US rate hikes led investors to sell HK$ to get higher US$ interest rates, prompting the HKMA to intervene 41 times and buy HK$242bn to keep the local dollar within its trading band, with the last intervention in November. The HKMA uses the enormous HK$4tn -US$500 billion- Exchange Fund to defend the HK$ and maintain the US$ peg that’s been in place since 1983, a narrow trading band between HK$7.75 and HK$7.85 per US$.)

COYS: Come On You Soccerplayers

Another Premier League football club takeover? An Iranian-American billionaire is preparing a blockbuster US$3.75 billion takeover bid for North London’s loss-making and perennially underachieving Tottenham Hotspur, which has been trophyless since 2008. 

Jahm Najafi of MSP Sports Capital is heading a consortium (including 30% from Abu Dhabi-led Gulf investors) to buy the privately-held club from billionaire owner Joe Lewis for $3bn and also take on $750mn of debt. Besides Premiership success, Najafi will have his eyes on Spurs’ property development rights.

Lewis and chairman Daniel Levy first bought into Spurs in 2000 with a 26% stake from Alan Sugar for £21.9mn, valuing the club at £84mn ($101m at today’s exchange rate.)

Fellow Premier League clubs have also been recent targets of investor interest, with Chelsea bought for £2.5bn by Lakers and Dodgers owner Todd Boehly in 2022, Qatari interest in the American Glazers’ Manchester United and interest in Liverpool (bought by Boston-based Fenway in 2010 for £300mn.) Of course, the flip side of the trade is to ask why sophisticated investors with many years of Premier League business experience like Lewis, the Glazers and Fenway are prepared to sell at current prices.

(Lewis, incidentally, teamed up with George Soros’ Quantum Funds to bet on the pound crashing out of the European Exchange Rate Mechanism, which it did on Black Wednesday in September 1992. This led to Soros’ unofficial title as “The Man who broke The Bank of England”… even though Lewis made more money from it than Soros did. In 2007, Lewis lost $1.bbn on his stake in Bear Stearns in the GFC and didn’t bat an eyelid.)

Regulate Now Buy Later

Buy now, pay later (BNPL) 🎓 instalment payment services have surged in popularity in the last few years, particularly with the cost of living crisis putting pressure on consumer finances everywhere. To date, they have generally remained relatively unregulated and in most countries have not been classified as “debt” as they are (technically) interest free. 

“Many users do not realise they are taking on debt or consider the prospect of missing payments” and getting charged steep late payment fees”

Under draft UK government proposals focused on consumer protection, BNPL products would be regulated by the Financial Conduct Authority (FCA), which would have the power to ban BNPL companies from further lending if found in breach. Like other lenders, they’d have to provide more information about their loans and do appropriate credit checks, which are currently very scanty. Reports show some UK customers have as many as 30 outstanding BNPL loans. Worse, they have pretty much no idea what would happen if they miss payments, which has been happening at an alarming rate, especially among lower-income groups and those with lower levels of basic financial literacy.

At the height of the unregulated boom in BNPL in 2021, US giant Affirm was valued at US$47 billion (now $4.3bn) and Aussie pioneer Afterpay was bought for $39bn by Twitter founder Jack Dorsey’s Block, which runs the Square retail payment system and the popular Cash App. The whole of Block (SQ) is now worth $49bn, down from $113bn.) Klarna, which is privately held, was valued at $45.6bn in 2021 but raised funds at a valuation of $6.7bn just a year later.

📖 MoneyFitt Explains

🎓 Buy Now Pay Later (BNPL)

BNPL schemes allow consumers to purchase goods and services at the point of sale and pay for them later, usually in 3-4 instalments, with no interest charges and a soft credit check. These schemes appeal to consumers with a limited credit history or lower credit scores and hence are at higher risk for late or missed payments. These lead to large late fees (but not interest charges) and can cause financial difficulties and a cycle of debt, leading to comparison with controversial payday loans.While not technically considered debt (for now), they can still impact credit scores as missed or late payments may be reported, and can count against your credit utilisation rate. Regulators are circling.

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