Mutual Funds' Trends in Flow of Funds

$92bn is the net amount that flowed out of actively managed US equity funds in the past 12 months.

$156bn is the net amount that flowed into passive US equity funds over the same period.

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$1tn is the new money flowing into mutual funds each year.

$37tn is the estimated amount of money managed by the mutual fund industry globally.

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$275bn is the new money that flowed into ETFs (exchange traded funds) in the past 12 months.

$2.76tn is the estimated amount of assets in ETFs globally, versus 1/10 this amount 10 years ago (2004).

Source: Financial Times, Dec. 22, 2014, p. 6

Author is also on Twitter.

US Share Buybacks

If the US stock market is over-valued, then how come stock prices keep going up?

In my blog dated Nov. 30th, I discussed QE's timeline and wrote that over the 6 years ending in October 2014, the total amount of intended and actual QE were approximately $5 trillion and $4 trillion, respectively. Expressed in terms of a monthly rate, these figures translate to $68bn and $54bn, respectively. 

In that same blog, I estimated that the cumulative amount of QE was about half of after-tax corproate profits during the same period.

In this blog, I compare the scale of QE to US share buybacks, which is the act by which a company whose stock is publicly traded enters the market and buys its own shares. The effect is that its share price rises, all else being equal.  My data comes from an article published in the Financial Times on Dec. 5, 2014, page 24.

According to the article, since the start of 2010, companies have spent $3.3 trillion on share buybacks and dividends. Expressed in terms of a monthly rate (so as to be comparable to QE's rate), this figure translates into $56bn. (I wish they had broken this out between buybacks and dividends, but they don't. They only provide a chart from which I can crudely estimate that buybacks represent 2/3 of this figure, or under $40bn per month. The article itself quotes a monthly rate of $40-$50bn.)

So, we have QE at a monthly rate of more than $50bn and US share buybacks at the monthly rate of $40bn. Buybacks have been a force to reckon with.

Now, how does the scale of buybacks compare to the scale of investors' purchases of stocks?

According to the same article, over the past 5 years, i.e. over the same period as for which I reported US share buybacks, US investors have poured $301.5bn into domestic equity exchange traded funds. However, redemptions from US stock mutual funds have been $411.1bn. Taken together, this means that net outflows from the US stock market have been more than $100bn. This figure translates into a monthly rate of $1.8bn out of the stock market.

So, we have US share buybacks at the monthly rate of $40bn versus redemptions at the monthly rate of $1.8bn. The latter figure is less than 5% of the former figure. The dominant force has been US share buybacks, by more than 20 times! It probably mattered little how investors voted with their money, and note that investors voted in the opposite direction of US share buybacks.

Here some interesting observations:

1. About 1/4 of S&P 500 members reduced their share count by more than 4% in the 3rd quarter, up from 1/5 during the first 3 months of the year. (The 4% level is significant as it affects price/earnings ratios, according to the article.)
2. Nearly 1/4 of all share buybacks occur in November and December.
3. The largest US share buybacks in the past 12 months have been as follows:
1. Apple: $45.0bn, share price up 45% in past 12 months, 18 p/e, $115 latest share price
2. IBM: $15.7bn, down 5%, 10 p/e, $163.27
3. Exxon: $13.2bn, up 2%, 12 p/e, $93.82
4. Cisco: $9.1bn, up 36%, 19 p/e, $27.50
5. Oracle: $8.8bn, up 22%, 18 p/e, $41.93

US share buybacks would be one way to answer those who ask, "If the US stock market is over-valued, then how come stock prices keep going up?"

Author is also on Twitter

Alan Greenspan Conversation

 at Council on Foreign Relations 

 on Oct. 29, 2014

Alan Greenspan, former chairman of the US Federal Reserve, recently participated in a conversation at the Council on Foreign Relations with Gillian Tett of the Financial Times. Gillian Tett is an award-winning journalist at the Financial Times, where she is a markets and finance columnist and US managing editor. She holds a PhD in social anthropology from Cambridge.

The conversation took place shortly after the publication of Greenspan's latest book, The Map and the Territory 2.0: Risk, Human Nature, and the Future of Forecasting. 

The conversation almost coincided with the end of Federal Reserve's Quantitative Easing, an expansionary monetary policy that had been ongoing for 6 years.

In this article, I will cover the following topics:

• Alan Greenspan's comments

• Gillian Tett's thoughts

• My own excerpts from Greenspan's comments, which lead to presenting the following:
• QE's timeline
• Corporate profits as a baseline for judging the amount of QE 
• Greenspan's views quantified

Greenspan's comments

• Video
• Transcript

I recommend watching the video over reading the transcript because Greenspan speaks in ambiguous terms, so one loses less by listening to him than by reading. He himself admits in his comments that economists are good at "equivocating". 

Gillian Tett concluded the conversation with the following remarks.

"I take away three keys points, firstly, that the current state of the world is very unhealthy and unbalanced; secondly, that we're not going to be able to exit this without some form of turmoil or crisis, let's call it turmoil; and, thirdly, that Chairman Greenspan is trying to engage with these fundamental problems in a very refreshingly frank manner." 

Gillian Tett's thoughts

Gillian Tett then wrote an article in the Financial Times on Nov. 21, 2014 in which she provided the following synopsis ((alternative link):

"For what he [Greenspan] revealed on the CFR platform was that he harbours considerable doubts about whether recent western monetary policy experiments have actually helped economic growth. He also fears that such experiments have been so wild that it will be very hard to exit from these policies in the future – in the US or anywhere else – without sparking huge market volatility. Indeed, Greenspan is so worried about future turbulence that he apparently sympathises with investors (and central banks) who are currently stocking up on gold."

Note that "market volatility" seems to be a euphemism for "turmoil" which itself is a euphemism for "high risk of market correction."

My own excerpts

1) On gold. Greenspan is bullish on gold. Eventually, people are going to grasp the fact that paper money is being devalued by all the quantitative easing that has occurred. Gold is the only kind of money whereby the seller of goods and services isn't concerned about the buyer's creditworthiness. Gold's price movement is driven by two factors: to the extent that gold is a commodity, it's price will move along with other commodities, which is why it has fallen since peaking in Sept. 2011. On the other hand, to the extent that gold is a currency, it will move independently of other commodities.

2) On the Euro. For the Euro to work, Europe has no choice but to unify politically. In the absence of this, the Euro will eventually collapse. It's only a matter of time.

3) On the (US) economy. The economy is not healthy because there is not enough aggregate demand.

4) On (US) interest rates. Long-term interest rates are much lower today than their historical levels that span many centuries.

By the way, Greenspan refused to provide his opinion as to what the Fed ought to be doing now (regarding raising or not raising interest rates).

But he did seem to be saying that asset prices and financial market levels were high.

5) On the success of QE. QE (quantitative easing) has succeeded in lowering long-term interest rates. QE has not succeeded in spurring aggregate demand.

Side note: QE involved buying mortgage-backed securities and long-term Treasury bonds. The act of buying exerts upward pressure on price. When the price of a bond rises, its yield falls, and we say that long-term interest rates have fallen. 

Lowering interest rates was a goal of QE because (a) it made it easier for borrowers to refinance outstanding loans and avoid / postpone bankruptcy and (b) it took pressure off from the interest rate payable on variable interest rate mortgages.

6) On the economic health of US vs Europe. Europe is in much worse shape than the US.

Side note: The reason for this may be because the debt-to-GDP ratio in Europe is higher than in the US. For more on this, please see Hoisington's report below at the very end.

7) On the level of investments. Greenspan lamented that gross domestic investment relative to GDP is depressed, and this is a pattern seen in many countries. One reason that he gave was the abnormally high level of perceived uncertainty. For example, in the US, there is concern for rising taxes, so investors don't invest. The reason for this is that entitlements (e.g. Social security and other benefits promised by the government) haven't been fully funded, so investors seem to conclude that they'll eventually get funded through tax hikes.

Side note: Here's the data on investment-to-GDP ratios by country and year and the data on GDP by country and year. (Afterthought: GDP forecasts by country) I didn't have the resources to analyze all countries, so I limited myself to the US, Germany, Japan, and China. The first three may be thought of as a proxy for the developed world and the last a proxy for the developing world. The data supports the fact that in US, Germany, and Japan, gross domestic investment has been growing at a slower rate than GDP for the last 30 years. This is not true for China however, where gross domestic investment has been growing at a faster rate than GDP.

Here is an interesting question which I won't be answering in this article: Why has the ratio of investment-to-GDP been falling while the debt-to-GDP ratio has been rising?

8) On what's in store for financial markets. When the Fed had its first tapering discussion, the markets reacted strongly, so the Fed backed off. That's all Greenspan said, so I will elaborate.

Side note 1: My research shows that the time frame that Greenspan was referring to when he spoke of  "tapering discussion" was the first half of 2013.

Tapering doesn't mean increasing interest rates. It means slowing down the rate of bond buying, which is still expansionary. So, the act of increasing interest rates, which is synonymous with tightening, is bound to have a bigger effect. I believe this is what Greenspan was getting at.

Side note 2: As of this writing, expectations are for the Fed to increase (short term) interest rates sometime between the second half of 2015 and early 2016.

Side note 3: I thought it would be interesting to provide the timeline of QE. It appears next.

QE's Timeline

I have highlighted in yellow the duration of each leg so as to provide a heightened sense of time. I have also highlighted the rate of the liquidity injection, but this time in blue.

1. 2008 Financial Crisis
1. Time frame: Sept./Oct. 2008 -- 2 months
2. Intended purchase amount = $985Bn -- see note below regarding the word "intended"
3. Intended purchase rate = $492Bn / month
2. No pause
3. QE1
1. Time frame: Nov. 25, 2008 - March 31, 2010 -- 16 months
2. Intended purchase amount = $1.75Tn
3. Intended purchase rate = $109Bn / month
4. Open-ended when first announced
4. 7-month pause
5. QE2
1. Time frame: Nov. 3, 2010 - June 30, 2011 -- 8 months (half of QE1)
2. Intended purchase amount = $600Bn
3. Intended purchase rate = $75Bn / month
4. End-date was announced at the outset
6. 14-month pause (twice as long as the pause before QE2)
7. QE3
1. Time frame: Sept. 13, 2012 - Dec. 18, 2013 -- 16 months (same as QE1)
2. Intended purchase amount = $1.36Tn
3. Intended purchase rate = $85Bn / month (greater than QE2 but less than QE1)
4. Open-ended when first announced
8. No pause, but taper's start was postponed from Sept. 2013, i.e. by 3 months
9. Taper
1. Time frame: Dec. 18, 2013 - Oct. 21, 2014 -- 11 months
2. Intended purchase amount = $480Bn estimated
3. Intended purchase rate = $44Bn / month (started with $75Bn/mo and ended with $15Bn/mo)
4. Apparently open-ended when first announced, originally scheduled to end by mid-2014

Sources for QE Timeline: Bankrate, About, BloombergView, Forbes, Bloomberg.

Overall statistics of QE

• Aggregate duration of QE = 6 years, 1 month
• Aggregate duration of pauses during QE = 21 months, i.e. 29% of the time
• Aggregate intended purchase amount = $5.175Tn
• Average intended purchase rate = $70Bn / month including the pauses, $100Bn / month excluding them

(Side note: The reason that I have used the word "intended" before "purchase amount" is that apparently, the Fed's balance sheet hasn't expanded by a full $5.175Tn since Sept. 2008. According to the following article, "the Fed’s balance sheet expanded from about $850 billion to more than $4.4 trillion", as of Aug. 14, 2014, which equates to an actual "purchase amount" of $3.55Tn up to Aug. 14, 2014. If one assumes additional purchases of approximately $40Bn before the taper came to an end in October 2014, then the estimated actual "purchase amount" would amount to $3.95Tn.

There is still an unexplained gap of $1.225Tn between my $5.175Tn and others' $3.95Tn figure ... )

Side note: Federal Reserve System's balance sheet reports are consistent with the aforementioned article.

Story of QE

The above numbers tell the following story for QE. For the first two months, the Fed injected liquidity at the massive rate of almost a half trillion dollars per month. Then for 16 months, it injected at a rate of almost $110Bn per month; this was QE1, and at its outset, was an open-ended operation with no upfront end-date. The Fed then paused for 7 months. Then it began QE2 with an injection of $75Bn per month for a relatively brief 8 months, with the end-date having been announced upfront, after which it took a rather long 14-month pause.  This pause was twice as long as the pause following QE1. It then began QE3 for a relatively long period of 16 months, which was the same duration as QE1, during which it injected at a rate of $85Bn per month, which was 15% higher  than the rate of QE2's monthly injections. QE3's end-date wasn't announced up-front, but after QE3, the Fed began the "taper" with a delay of 3 months, which it then conducted for 11 months as an open-ended operation with no upfront end-date.

Baseline for QE

It is rather difficult to come to grips with the meaning of numbers in the billions and trillions of dollars. It is also difficult to imagine what it means for the Fed's balance sheet to expand by 5 times over 6 years. We need some kind of baseline against which we can compare a liquidity injection at the rate of $70Bn per month which persists for 6 years.

The baseline that comes to my mind is corporate profits. 

It would be interesting to look at cumulative corporate profits during these 6 years and to compare them to the amount of QE. Profits represent the reward for economic activity and are what the private corporate sector aims at maximizing.

According to this source, corporate profits, after-tax, for the 12 months ending in Sept. 2009 were $1.273Tn in the US.

For the 12 months ending in Sept. 2010, they were $1.499Tn.

Similarly,

Sept. 2011:   $1.430Tn

Sept. 2012:   $1.715Tn

Sept. 2013:   $1.803Tn -- I used this other source to double-check my figures.

Sept. 2014:   $1.873Tn

The sum of the above figures is $9.593Tn.

Therefore, for the 6 years spanning the same time frame as QE (albeit to within one month), cumulative after-tax corporate profits amounted to $9.6Tn rounded. The cumulative amount of QE was $4Tn rounded according to others and $5Tn rounded according to my own estimates. By comparing figures, we can say that the cumulative amount of QE was about half of the cumulative after-tax corporate profits during the period of QE.

Stated the other way around, for every dollar of after-tax profits that the US economy generated, the Fed injected about 50 cents. Note that in making this statement, I am not implying anything about a cause-and-effect relationship. I am merely comparing magnitudes.

In this light, QE appears to have been substantial.

I will now take a detour and present Hoisington's quarterly report for 2014q3.

Greenspan's Views Quantified

In the conversation covered above, Greenspan basically said that he didn't find the state of the world economy as being healthy. But he didn't elaborate, perhaps as encouragement for us to read his book. Or perhaps he didn't want to burden us with numbers and figures.

Dr. Lacy H. Hunt, executive vice president of Hoisington Investment Management Company, a firm with $5Bn assets under management for institutional investors, produces a quarterly report along with Van R. Hoisington, president and chief investment officer of the same company.

Here's Hoisington's quarterly report for 2014q3. This report does go into the numbers, which I will spare the reader, and covers the following:

• low household income
• high debt
• low economic growth
• low inflation
• asset bubbles
• rising US dollar
• falling Treasury bond yields

A sentence from the report that caught my attention was the following: "[We] would define an asset bubble as a rise in prices that is caused by excess central bank liquidity rather than economic fundamentals ....  Eventually, ... the crowd understands the imbalance, and markets correct."

I wonder if this could have been what Alan Greenspan was implying during the conversation.

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However, the bubble may continue to inflate because now that quantitative easing has ended, something else seems to have taken its place. It's called called "quantitative greasing"! I'm referring to the collapse in the price of crude oil (Brent) to $70 per barrel, down from $110-$120 per barrel in June (i.e. only 5 months ago). This is a 4-year low. See historical oil price chart and current price quote.

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An article published in the Financial Times on Jan. 30, 2015 caught my attention. The article comes shortly after the ECB announced that it would engage in QE in Europe from March 2015 through September 2016 (total of 18 months) and inject at the monthly rate of 60Bn Euros. 

The article in question mentions that if QE is intended to create inflation in Europe, the fact of the matter is that US inflation is currently the same as in Europe. However, the US has had QE for a good 6 years. 

Link to article.

Author is also on Twitter.

China's Warren Buffet, Guo Guangchang

Guo Guangchang elaborated his investment strategy during an interview with the Financial Times, which was published in the November 8/9, 2014 edition of the daily newspaper.

"The aim of tai chi is not to strike first to gain dominance over an opponent but to wait and hit at the right moment. That is, to be the first one to take action after feeling the change in momentum. Investing is similar to doing tai chi. No one holds a permanent speed advantage in the market due to the limits of human intelligence and vision. Your advantage comes from your ability to feel the change faster and take decisive action faster."

Buddhism teaches you that "everything starts from your heart, and feeling the heart of others is the most important doctrine in Buddhism. In doing business that means seeing things through other people's eyes. I feel that doing business is just like practicing Buddhism. Money is not your only purpose. Your purpose is to make things better for other people, and in the end, money will come as a result."

"Business is also the best form of charity. By making a company successful, you can provide more employment, and, if you treat your staff well, then your business itself becomes a charity."

Guo Guangchang, age 47, is the co-founder of Fosun, an $8bn conglomerate in China, which he co-founded with three university friends in 1992, using Rmb38,000 as the company's founding capital. (Today, Rmb6 = 1 US dollar.) Fosun is the largest private conglomerate in China. It has investments ranging from steel to mining, tourism to pharmaceuticals.

The name Fosun means "star of Fudan University", Guo's alma matter and Shanghai's most prestigious academic institution. At Fudan, Guo got a degree in philosophy.  He also honed his business skills by selling bread to hungry classmates when they finished studying at 11 each night. He earned Rmb5 a night, which seems a paltry sum until he points out that his monthly expenses were only Rmb30 at that time.

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Quiz. Calculate Guo's monthly profits from selling bread while in college. Next, express the founding capital for Fosun in terms of number of months of profits. Next, compare the result to the number of years required to complete a college degree. Did the founding capital for Fosun come entirely from Guo's selling bread?

If we assume that Guo sold bread for all 12 months of the year and that his college term lasted 4 years, then his profits from selling bread amount to only 15% of Fosun's founding capital! Derivation: [(Rmb5 earnings/day x 365 days/year x 4 years) - (Rmb 30 expenses/month  x  12 months/year x 4 years)] / (Rmb 38,000 Fosun founding capital) = 15%.

So, Guo must have had other sources of capital.

Author is also on Twitter.

New Analysis of the Financial Crisis

Nobel laureate Joseph Stiglitz reviewed and applauded the latest book by Martin Wolf, chief economics commentator at the Financial Times.  Inside finance ministries, few are cited as often as Wolf, according to the Economist.   

The book is entitled The Shifts and the Shocks. The review appeared on Aug. 29-30, 2014 in the weekend edition of the Financial Times. 

See Stiglitz' review.

Quoting Stiglitz, "The dismal picture painted by The Shifts and the Shocks is a forceful warning against the unfounded optimism that has episodically struck each of the countries in the north Atlantic as they grasp at any wisp of positive news: we are mired in a malaise, from which we are not likely to emerge any time soon."

(Also, see the Economist's review, which I discovered after the fact.)

(Also, see the book's other editorial reviews, which were also discovered after the fact. For example, George Soros writes, "The crisis is not yet over.")

The Cause: Excessive & Rapidly Growing Private Debt

Reading Stiglitz' review led me to the subsequent discovery -- don't ask me how! -- of Richard Vague, former banker and credit card expert, and co-founder and CEO of three companies. He has authored a book entitled The Next Economic Disaster.

Vague has done his own analysis regarding the primary cause of the financial crisis of 2008/2009.

He says the primary cause was rapidly growing private debt which reached excessive levels.  This has always been (and will always be) the primary cause of major financial crises, he says. 

Today, U.S. private debt stands at $26 trillion compared to public debt of $16 trillion, according to Vague -- see reference below. Today, U.S. private debt-to-GDP ratio stands at 156%, down from 170% at its peak before the financial crisis. In 1950, it stood at 56%.

Vague claims that the following rule may be used to predict future financial crises, a claim which is based on having studied 22 major financial crises.

When private debt relative to GDP grows more than 20% over 5 years and when private debt relative to GDP exceeds 150%.

Today in the US, the second criterion has been met but not the first one. However, in China, both criteria have been met and make the situation alarming: private debt relative to GDP has grown by at least 40-50% over the past 5 years and the private debt-to-GDP ratio stands in excess of 180%. 

The basic message is the following: Excess private debt creates too heavy of a burden for servicing that debt. This then puts a dampener on economic growth.  

For example, today in the US and Europe, the consumer is overburdened with underwater mortgages, which means that he cannot spend as much on goods and services. (In Japan in the late 80's, the problem was excess debt on commercial property, and Japan's economy is still suffering after 25 years.)

What has been missing from public policy since the financial crisis is a comprehensive plan for restructuring private debt (i.e. reducing the debt burden).

To prevent future financial crises, one would have to curb the rapid growth of excess private debt.

To further explore Richard Vague's thinking, please visit:

• Home page for Richard Vague's analysis.
• A good starting point is his interview: sections of it (3 minutes); full version (26 minutes). 
• The article from the Atlantic is noteworthy as well as the one from the Financial Times. 
• There's also a report and a book. 
• There's also lots of historical data and charts.

An article on Yahoo's finance web-site dated Sept. 18, 2014 quoted an article just published in Foreign Affairs which argues that the Fed could have given money directly to the people instead of following QE (quantitative easing). This seems consistent with what Vague is advocating. (1) Link to summary article on Yahoo. (2) Link to original article in Foreign Affairs, which is authored by a Brown University political economist and a hedge fund manager.

Private debt is to be distinguished from public debt. Private debt consists of debt held by individuals and businesses. Examples of debt held by individuals are: home mortgages, consumer loans, car loans, credit card debt, and student loans.  Examples of debt held by businesses are: business loans and corporate bonds.  Public debt consists of government issued bonds (e.g. what are known as Treasuries in the U.S.)

Elements of the Malaise

Perhaps the malaise described by Martin Wolf and confirmed by Joseph Stiglitz could be shortened if Richard Vague's policy recommendation was enacted. 

Stiglitz points out some of the elements of the malaise as being:

• high income inequality 
• high unemployment rates
• dysfunctional banking sector
• investor focus on speculation instead of investments in infrastructure and global warming solutions
• insufficient progress on health and education

The Wall Street Journal had an article detailing the weakness in median household income growth as a long-term historical phenomenon in the US. See article here, as published by Yahoo on Sept. 24, 2014. The same topic was picked up by the Financial Times on Sept. 16, 2014 in this article. 

The Other Cause: Psychopaths in Wrong Playground

On Sept. 2, 2014, the Financial Times published a letter from an 80 year old retired physician formerly from Las Vegas who now lives in Switzerland. The letter was a response to Joseph Stiglitz' review. 

The physician argues that the financial crisis was caused by psychopathy. See the letter here.

The Solution (Part I)

If we could agree that the true cause of the financial crisis has been precisely that which was identified above, then the solution would lie in removing these causes.  In doing so, we'd be relying on nothing more than the relationship between cause and effect, which means that if we know that the thing called "cause" produces the thing called "effect", then in order not to have "effect", we would need to eliminate "cause". 

(Of course, there may be another cause, albeit unknown, which we'll name by "cause 2", which could also produce the same effect called "effect". To the extent that such "cause 2" may exist, the proposed solution -- which consists of eliminating the thing called "cause" -- would be incomplete. Added later: Please see below for Part II of the solution.)

The causes that were identified above were twofold:

1. Rapidly growing private debt which reaches excessive levels 
2. Prevalence of psychopaths within the financial industry, and who aren't required legally to take personal responsibility for their actions, unlike in the medical field

Afterthought: The Geneva Report

The 16th annual Geneva Report was just published, as of Sept. 29, 2014.  One of the report's authors is Luigi Buttiglione, head of global strategy at hedge fund Brevan Howard.

The report warns of high world debt - private and public combined. World debt stood at 215% of GDP in 2013, up from 200% after the 2009 crisis, up from 160% in 2001. The message is that the world hasn't deleveraged since the financial crisis!

The report predicts that interest rates worldwide will have to stay low for a "very, very long" time to enable households, companies, and governments to service their debts, according to an article in Financial Times.

It warns that record debt and lower growth form a "poisonous combination".

See news coverage of the Geneva Report here. See the report's overview here with interesting charts, and the report itself here.

The Solution (Part II)

Who is the Economy Working For?

Amir Sufi, who holds a PhD in economics from MIT and is a professor of finance at the University of Chicago School of Business, prepared a statement for a hearing of the US Senate Committee on Banking, Housing, and Urban Affairs, dated Sept. 17, 2014.  

A summary of Sufi's statement is as follows:

1. The economic recovery since 20090 has been "dismal".
2. The reason is due in part to the lack of any rebound in wealth among middle and lower income households. This matter is related to real income shrinkage among all but the top 10% of households.
3. What triggered the Great Recession was the massive pullback in spending by indebted households.
4. Two important lessons from their research are:
1. Encouraging borrowing by lower and middle income Americans -- as has been the case since the crisis, and as witnessed by growing auto loans and credit card lending -- may temporarily boost spending, but is not a path to sustainable economic growth. Instead, stronger income growth is necessary among this group, and the best way to achieve it is to improve the productivity of workers.
2. The financial system in its present form concentrates risk on lower wealth households who are least able to bear it.
5. It is a matter of certainty that stagnating income growth for the majority of American households is a "serious economic threat".
6. Financial reform ought to entail introducing so-called "flexible debt contracts" which would allocate risk between debtor and creditor in proportion to the ability to bear risk.

To further explore Amir Sufi's thinking, please visit:

• Full statement for the US Senate hearing
• Bio
• Media coverage of his book, House of Debt (published in May 2014 with Atif Mian of Princeton University)
• Blog, in conjunction with Atif Mian
• Home-page at University of Chicago

Author is also on Twitter.

Menu of Fees

 charged by Fund Managers

 "The only thing an investor knows for certain when they buy into a fund is how much they are going to be charged."

Sarasin & Partners, a London-based asset management group, recently listed eight different ways that fund managers charge their investor clients. The list was printed in the Fund Management insert section of the Financial Times on July 21, 2014. It appears below.

1. Investment management fee
2. Performance fee
3. Charge for value added tax
4. Commission
5. In-house fee
6. Charge for investing in funds managed by third parties
7. Brokerage fee
8. Proportion of interest rate earned by cash on deposit

Sarasin commented that there may well be a degree of double charging among these fees.

What's the baseline? Vanguard, the pioneer in low cost, passive index funds, charges a fee of 0.19% on average across all its funds. This compares to an industry average of 1.08% across active fund managers.

Author is also on Twitter