The Financial Landscape – August 2019

Global Macro Environment

Global Growth Slowing
Global economies appear to be approaching stall speed. The Purchasing Managers Index contracted in the Eurozone for the sixth consecutive month, China’s economy seems to be fading from the tariff impact and the UK is experiencing fragile domestic demand due to the uncertainty around Brexit. Given this backdrop, the European Central Bank signaled it is prepared to cut short-term rates for the first time since early 2016. Economic growth in the US remains resilient by comparison. The second quarter grew at a healthy clip (2.1% annual rate) as higher consumer spending offset a decline in business investment. Non-manufacturing is still providing good support versus manufacturing and the US consumer story continues to be responsible for the vast majority of GDP growth.

Fed Cuts: Not If, But How Many?
The Fed delivered the first interest rate cut since 2008 at their July meeting in a proactive strike to cushion the economy from a global slowdown and escalating trade tensions. Officials also announced they would end the runoff of their $3.8 trillion asset portfolio two months earlier than previously expected. Chairman Powell signaled this was a mid-cycle policy adjustment, but the bond market is currently pricing in multiple cuts for the rest of 2019.

Geopolitical Risks
The end of July and beginning of August brought renewed escalation to the trade war. Tedious progress in negotiations seemed to be a new tactic from Beijing, which increasingly thinks waiting may produce a more favorable agreement. Chinese experts have said that Beijing wants to appear willing to negotiate, but thinks they can extract better terms by not hurrying into concessions. President Trump, sensing this, said the US would impose 10% on an additional $300B in Chinese goods and products beginning September 1, after trade talks failed to yield any significant results. The resulting tariffs have officially cost China its position as the top trading partner of the US, as exports and imports between the two largest economies continue to fall sharply. China’s retaliation came in the form of currency depreciation, as it allowed the Yuan to fall and breach the psychological ceiling of 7.0 USD/CNY, leading the US to label China a currency manipulator for the first time since 1994.

Boris Johnson, the former foreign secretary and mayor of London who has pledged to take the UK out of the EU on October 31, was elected as the next British prime minister succeeding Theresa May after winning the leadership of the ruling Conservative Party. His term will almost certainly be defined by Brexit, arguably the greatest political challenge faced by any British prime minister since World War II.

Market Observations

US Equities
July was a positive month for US equity markets. A flight to safety by investors worried about global growth, America’s trade war with China and now currency battle caused equities to fall in the early days of August. The consensus around second quarter growth in earnings per share has officially turned positive. The healthcare sector led the way with surprised earnings and growth. Healthcare companies in the S&P 500 saw 95% of reported earnings come in above estimates.

International Equities
International and emerging markets equities did not keep pace with US equities in July as both were slightly negative for the month. Given the tight trade relationship between China and developed international and emerging markets economies, additional stimulus implemented by China to prop up their domestic economy could be beneficial.

Fixed Income
The US 10-year Treasury ended the month at 2.0%. Since then, a flight to safety has resulted in yields falling dramatically. The current US 10-year Treasury yield sits at 1.7% as of date of writing. US credit indicators, specifically BBB spreads, look contained for now. Globally, negative yielding debt continues to rise and is nearing $14T in market value. The entire German government bond curve is in negative territory.

Real Assets
Global oil prices slid into a bear market. Brent crude has fallen more than 20% from an April high amid fresh concerns that the US-China trade war will hurt the global economy and curb fuel consumption. These concerns are in addition to the Middle East tensions between the US and Iran which may continue to keep oil volatility high as worries over global demand and growth expectations persist. In precious metals, the three main drivers of gold demand (portfolio diversification, inflation hedge and safe-haven assets) are currently buoying the recent price rally.

This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 8.19.19 and is subject to change at any time due to market or economic conditions or other factors. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice. Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford.

Investors Fight the Last War: Relative Value in Mortgage-Land

The recent past tends to bias our expectations of the future. Nobel Laureate Daniel Kahneman says it’s due to our reliance on what he calls the Representative Heuristic. Call it an evolutionary adaptation if you like, but long-term investors might as well call it opportunity.

History shows that investors and regulators collectively overestimate the likelihood of recent low-probability events repeating themselves following periods of market crisis. The visceral experience of gut-wrenching losses typically leads investors to abandon certain risk types leaving many assets orphaned and strategies hopelessly out of favor. The abandonment of the offending risk type in preparation for the “last war” often creates attractive investment opportunities for rational, margin-of-safety investors. The unmitigated disaster that was the mortgage debacle in the mid-2000s appears to have created just such opportunity in mortgage loans today.

The benefits of loan securitization were pushed way beyond any semblance of prudence in the early 2000’s driven by misaligned incentives at every step of the process (borrowers, originators, banks, securitizers, rating agencies etc.). The steady decline in borrower credit quality and deterioration in structural protections of mortgage backed securities were enabled by the nearly insatiable demand from the institutional investor community (insurance companies, bond funds, sovereign wealth funds, etc.). With subprime risk being the input, the credit derivatives market later metastasized into a series of increasingly leveraged side bets based on the dubious assumption that housing prices countrywide (pun intended) wouldn’t fall in value simultaneously. The sheer size of this ill-fated market sparked very real solvency and liquidity issues that had ripple effects throughout the entire global economy. This saga ended in tears as most market excesses tend to, and the reputation of the securitized credit market remains damaged to this day.

Driven by investor bias and substantial new regulation, many of the traditional providers of consumer credit have effectively exited the market following the financial crisis. This limited supply of willing lenders comes at a time when the US consumer’s creditworthiness is near all-time highs by many measures. The now fragmented non-agency mortgage market appears to offer attractive prospective returns with comparatively low risk relative to traditional stocks and bonds.

One example of an opportunity created by the aforementioned supply/demand mismatch is in investor mortgages. Post-crisis, it is exceptionally difficult to obtain financing to purchase a rental property, for example. The relative scarcity of funding is hugely advantageous to lenders with only the most creditworthy borrowers having access to such loans. These types of mortgage loans are well underwritten with low loan-to-value ratios, high debt service coverage ratios, fully verified borrower statistics and, in most cases, even personal guarantees from the borrowers. These conservative mortgage loans sporting relatively high interest rates represent a sufficient “margin of safety” in our estimation.

I can envision more than a few crisis-scarred readers scoffing at the idea of non-agency mortgages and mortgage backed securities being attractive, low risk investments. That’s exactly the mindset that allows such opportunities to persist! The below table highlights just how far the pendulum has swung in favor of conservatism in non-agency mortgage lending. It would now take a truly draconian scenario for investors in recent vintage mortgage pools to experience principal losses. For example, to impair even $1 of investor principal with loans issued at 67% loan-to-value, not only would the creditworthy borrower need to default, but the collateral backing the loan would need to decline in value by an amount 1.5x worse than the declines experienced in the global financial crisis1.

At Oxford we believe that embracing complexity and capitalizing on fragmented market segments are some of the surest ways to enhance client’s risk-adjusted returns. As noted above, these scenarios are often a direct result of increased regulations and irrational market participants preparing to fight the “last war.” The opportunities we currently see in mortgage-land are a prime example of a differentiated return source offering valuable diversification not often found directly in more pro-cyclical traditional (read “60/40”) asset allocations.

As seems to be true in most aspects of life, doing the difficult thing is often right. Investing is no different. Most market participants seem biased against digging through the wreckage following market traumas. Adding to recent underperformers is emotionally difficult, and often fraught with reputational risk. But it is often in these formerly challenging sectors where market imbalances produce the best risk-adjusted return opportunities.

1S&P/Case-Shiller 20 City Composite Home Price Index
2RCO 2018-VFS1 Trust
3Long Beach Mortgage Loan Trust 2006-1

The above commentary represents the opinions of the author as of 7.24.19 and are subject to change at any time due to market or economic conditions or other factors. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice. 

Financial Landscape – July 2019

Global Macro Environment

Global Growth Slowing
Global economies appear to be approaching stall speed. The Purchasing Managers Index contracted in the Eurozone for the fifth consecutive month, China’s economy seems to be fading from the tariff impact and the UK is experiencing fragile domestic demand due to the uncertainty around Brexit. Economic growth in the US remains resilient by comparison. The Atlanta Fed’s GDP model suggested a solid increase in domestic demand in Q2, implying steady underlying growth within the US economy. The US consumer remains in great shape and is responsible for a vast majority of GDP growth.

Fed Cuts: Not If, But How Many?
Despite the strong June jobs report, market expectations still point towards multiple rate cuts in 2019, with near certainty of a cut in the fed funds rate after the July Fed meeting. Chairman Powell did little to push back against market expectations this year during his June press conference indicating that multiple cuts are on the table. How quickly has the landscape changed? In March not a single Federal Open Market Committee member expected rates to fall this year. In June eight members penciled in rate cuts, seven of whom say they expect 50bps of easing for the remainder of 2019.

Geopolitical Risks
President Trump and President Xi Jinping met at the G-20 Summit in Tokyo and the dark period of trade talks seems to have passed. However, a quick resolution can’t be expected yet. Both sides are starting to feel the economic pain of the trade escalation that began on May 5. This was enough to stall new tariffs from coming into effect and motivate negotiators back together. The most significant news was China’s Huawei, the largest telecommunications-equipment manufacturer in the world, regaining access to US suppliers in exchange for the US getting agricultural purchases. Currently, most of the specifics of a trade deal look to be complete, however, debates like intellectual property requirements and repeal of existing tariffs remain sticking points to getting over the finish line.

Tensions between the US and Iran have escalated and sent oil prices higher. Two oil tankers were damaged off the coast of Iran, with government officials pointing at Iran as the culprit. As a result, President Trump announced new sanctions on Iran, targeting Supreme Leader Ayatollah Ali Khamenei, his office and persons appointed by the Supreme Leader. In recent days Iran said it would begin enriching uranium beyond the 3.67% limit set in the 2015 nuclear deal, raising pressure on Europe, China and Russia to provide relief from the crippling US sanctions.

Market Observations

US Equities
Equity markets bounced back from declines in May and rallied in June as the probability of the Fed cutting rates increased and renewed US – China trade hopes developed. The S&P 500 reached all-time highs throughout the month and returned +7.1%. The index also posted the best first half of a calendar year since 1997. All sectors are positive with information technology, consumer discretionary and industrials leading the way.

International Equities
The dovish tone from global central banks positively impacted investor sentiment and supported asset prices overseas. Both international developed and emerging market equities have recovered from the Q4 2018 drawdown that bottomed near the end of last year. Developed and emerging market returns for the first half of 2019 are 14% and 11%, respectively.

Fixed Income
The US 10-year Treasury yield dipped below 2.0% for the first time since 2016. In Europe, France was the latest country to see their 10-year yield fall into negative territory. It’s historically rare to see, but total fixed income ETF flows outpaced total equity ETF flows in the first half of 2019.

Real Assets
OPEC agreed to extend production cuts of 1.2mm b/d into 1Q20 at their meeting in Vienna. The cuts mean that supply growth will remain constrained as we enter the peak summer demand season. The Mid-East tensions between the US and Iran should keep oil volatility high as worries over global demand and growth expectations persist. Additionally, tensions are disturbing the global supply side. One big concern is the Persian Gulf, which accounts for approximately 20% of global output. In precious metals, the three main drivers of gold demand (portfolio diversification, inflation hedge and safe-haven asset) could continue to sustain the recent price rally. Midstream energy (including MLPs) and global real estate continue to deliver strong relative performance.

This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 7.11.19.
Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford.
The above commentary represents the opinions of the author as of 7.11.19 and are subject to change at any time due to market or economic conditions or other factors. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

Location, Location…Kilowatts?

On the surface, it might appear the opportunity set in publicly-traded real assets is similar to what it has been in the past – natural resources, real estate, infrastructure, etc. To a certain extent this is true. But advances in technology have also created important new growth opportunities for the real asset strategies in which Oxford clients invest.

Within infrastructure, prolific domestic natural gas production enhanced by advanced drilling techniques as well as the lifting of US export bans has created new opportunities for investors. Midstream energy companies are pursuing liquefied natural gas (LNG) terminal projects to take advantage of the US position as the world’s low-cost producer of gas. According to the US Energy Information Administration (EIA), US capacity for LNG exports will rise from 4.9 Bcf/d to 8.9 Bcf/d by the end of 2019. To put this in context, 1 Bcf (billion cubic feet) of natural gas meets the needs of approximately 10,000 US homes for 1 year. Given the price differential of natural gas in the US compared to other countries, this is a sustainable opportunity going forward.

Companies focused on alternative sources of energy are also gaining more prominent allocations within natural resource equity strategies. Importantly, this is occurring not simply because of an investor preference for clean energy technology, but because select companies in the space are generating impressive free cash flow and trade at reasonable price multiples within a high-growth segment. Even more traditional resources, like copper, have experienced greater demand from technological advances within clean energy. Consider the fact that copper intensity for an electric vehicle is approximately 3.5 times greater than a vehicle with a gasoline-powered engine1.

Finally, let’s take a closer look at one way technology is impacting real estate investing.

When most investors hear “REITs” it invokes images of shopping malls, office buildings and industrial warehouses. But this well-established and mature asset class is also at the center of a significant growth market in support of high-tech industry and cloud services.

Data centers are facilities dedicated to organizing and storing critical systems and large amounts of data. Physical component parts – primarily computer servers – are stored in these tightly controlled and secure buildings. In a world that is becoming more connected, companies have a growing need to secure and store valuable information in various locations, leading to opportunities for REIT investors. The largest technology companies will typically build their own data centers (the picture below is of a Google data center in Oklahoma), but REITs have come into the space as well to specialize in developing data centers that serve the needs of tenants focused on outsourcing this data storage requirement.


The specialization of these data centers creates a natural barrier to entry for those companies that build and manage these assets. Most importantly, data centers need abundant power supplies and adequate redundancies for power outages. A typical enterprise-level data center requires 5 megawatts of power2. For context, 1 megawatt can simultaneously power approximately 750 homes! Sophisticated cooling and fire suppressant systems must also be in place to maintain a stable environment for the equipment.

Rental rates of data centers are expressed in terms of kilowatts and as you might expect, prime locations to build them are areas with both cost-effective energy sources and proximity to users as a way to reduce latency. Examples of major data center markets in the US are Northern Virginia, Chicago, Northern California and Dallas.

While still relatively small compared to the total US REIT market, this sector has grown to represent 4.8% of the US REIT market as measured by total funds from operations (FFO). This is up from 2.8% of total FFO in 2013. Cloud services are the most prolific users of data centers and will likely drive future growth. Cisco estimates cloud data traffic through data centers will increase 83% from 2018-2021.

From an investment perspective, valuations of data centers are in-line with broad real estate and offer investors a diversified exposure from other REIT sectors. While historically more volatile, this sector has outperformed broad US REITs the last 3 years ending 4/30/19.

Source: Bloomberg

Strategic exposure to real assets remains an important component of client portfolios. The allocation objective of capital growth, inflation hedging and diversification remains the same, but the opportunity set within real assets to achieve that objective is expanding thanks to technological advances. Oxford clients are participating in this evolving landscape and we expect these trends to continue into the future.

2Source: Real Estate Issues
Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford.
The above commentary represents the opinions of the author as of 6.25.19 and are subject to change at any time due to market or economic conditions or other factors.
The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

Peace, Preservation and Passing Down Property

Maybe it’s a lake home that’s been a family destination for generations, a place where grandchildren learn to ski and spend their days with cousins at the sand bar. Or maybe it’s a beach cottage where your kids bring their friends and the days are filled with laughter. Your family’s vacation home is likely a haven of lifelong memories. So how do you ensure it survives for generations to come?

A family vacation home is a unique asset that deserves suitable planning for decision-making and managing transitions within the family. Advance planning is critical not only for ensuring that the home will be truly multi-generational, but also for the survival of healthy family relationships that could otherwise be strained by disagreements.

Although there are several ways to plan for a family vacation home, this article focuses on the utilization of a Limited Liability Company (LLC) as a superior vehicle to hold and maintain the legacy of the family vacation home.

Ask First, Plan Second

The first matter to address is gaining a clear understanding of what you, your children and possibly your grandchildren would like to have happen to the family vacation home. It’s possible that not everyone is on the same page. Assumptions can jeopardize family harmony. Key questions include:

  • Does the next generation really want to keep the property in the family, or are some family members looking to cash-out?
  • Do some members of the family live far away and rarely use the vacation home?
  • How will the expenses be funded so everyone can afford it and be responsible for it?

Parents should have a frank and open discussion with their children as to how all foresee the future use and ownership of the property. If the goal is to keep the property within the family, then the next step is to plan how to structure the LLC in a way that will preserve family harmony.

Limited Liability Company (LLC)

The attractiveness of an LLC is that it provides the transferability and operational flexibility of a partnership along with the limited liability protection of a corporation1.

An LLC is governed by an Operating Agreement, which can be tailored to meet the unique needs of multiple generations. It is used to establish a system for managing and controlling the property, restricting transferability of ownership interests, preventing and resolving disputes among family members and providing estate planning and gifting options.

Key Benefits

  • Asset Protection
    An LLC has the potential to limit liability exposure by protecting the LLC members from the creditors of the LLC and by protecting the LLC from the creditors of the LLC members. For example, if someone is injured on the property and files a judgment, only the LLC assets are at risk. The members’ personal assets are protected from exposure to the claim. Likewise, if an LLC member has a personal claim against them, the member’s LLC interest is shielded from the creditor.
  • Control
    An LLC can be structured to give control to either a minority or a majority owner. Thus, a parent can retain control even after transferring much of their ownership interest in the LLC to their children and grandchildren.
  • Tax Benefits
    There is a distinct tax advantage to transferring an LLC interest as opposed to the assets held inside of an LLC. The LLC wrapper allows you to engineer discounts and maximize the use of the estate exemption. You can leverage gifts to future generations by applying valuation discounts to gifts of LLC interest.
  • Governance
    An Operating Agreement serves as a rulebook for managing the property. The Operating Agreement addresses a wide variety of issues, including those that may be specific to your family dynamics. A well-conceived governance structure may minimize the likelihood of disagreements among family members.

Key Governance Considerations

The LLC Operating Agreement sets forth the rules of engagement for the entire family and should contain considerable detail, including the following:

  • Transfer of Interest
    Transfer restrictions stipulate who can be a member of the LLC and the constraints on transferability of ownership to non-permitted transferees. These terms can potentially prevent members from selling their interest to someone outside the family.
  • Care and Maintenance
    The LLC members need to agree upon how expenses will be funded, how the decision to approve the expenses will be made and who will handle the administrative items regarding maintenance or future improvements. Expenses can be funded in a number ways. Parents can contribute assets when the LLC is funded to create an endowment fund or purchase life insurance that will pay out to the LLC on their death. These options ensure that the property will be truly multi-generational by allowing all generations to use the home equally regardless of their own finances. Alternatively, expenses may be required on a pro rata basis, based upon future ownership or property usage.
  • Real Estate Usage
    It will be important for everyone to have guidelines regarding the use of the property. This includes who can use the property and when, as well as the expectation of the condition of the property for the next user. These proverbial ‘keep the peace’ rules are typically established by the patriarch and matriarch of the family and can be memorialized in the Operating Agreement.
  • Sale
    Finally, mechanisms can be put in place to address disputes regarding when to sell the property, which may require a majority vote, super majority vote or unanimous vote of the members. Alternatively, a buy-sell provision can be used that sets forth the process, price and terms of a member’s sale of their interest in the LLC in the event that one member wants to sell the property but the other members do not.

An LLC marries the world of corporate governance with the soft and emotional issues surrounding a family’s love of their vacation home. Together with your team of advisors, your Oxford partners can structure and guide the details and nuances to ensure generational enjoyment of your family’s legacy home.

1 An LLC is a separate legal entity and requires that certain formalities be followed in order to reap the benefits that the entity structure provides. These include executing and following a legal Operating Agreement: maintaining a separate checking account for payment of expenses with no commingling of personal funds; holding annual member meetings and submitting annual filings to the State and IRS; and maintaining sufficient general liability insurance on the property.

The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.



Financial Landscape – June 2019

Global Macro Environment

Cloudy Global Economic Outlook
US GDP increased at an annual rate of 3.1% in the first quarter. Healthy spending, accelerating wages and a strong labor market all indicate the US consumer remains in good shape. Outside the US, the Chinese economy has yet to gain traction. The strong March PMI reading was short lived as April saw the measure fall back near the 50 boom/bust line. This doesn’t help Europe and emerging markets as both are significant trading partners. Tariff increases between the US and China cast a cloudy outlook on the global economy looking forward as global trade represents 25% of global GDP. It doesn’t appear the trade war narrative will be resolved anytime soon.

Fed Vigilant
At the end of May futures markets were pricing in rate cuts over the next 12 months (54bps) and 24 months (64bps). The most recent Federal Open Market Committee (FOMC) meeting minutes signaled that US monetary policy is appropriate and members pointed to solid economic growth, strong labor market and muted inflation pressures. However, they have since signaled their willingness to cut rates should the Trade War have a further negative impact on the economy.

Geopolitical Risks
Recently, China released a government white paper blaming the US for the breakdown in trade talks and demanded that all existing tariffs must be removed for any deal to be signed. The US responded that China was at fault for the breakdown in talks which suggests that the two sides are still far apart. However, both have indicated that President Trump and President Xi Jinping could meet at the G‐20 Summit in Tokyo at the end of June. In a surprise announcement, President Trump announced plans to impose a 5% tariff on Mexican goods until the government acts to stop immigrants from entering the US illegally and threatened to increase the rate to 25% by October. Mexico’s exports to the US account for about 80% of total international sales, which equates to about 28% of GDP.

On May 24 U.K. Prime Minister Theresa May said she would resign as Prime Minister after failing repeatedly to win parliamentary backing for the Brexit agreement she negotiated with the European Union (EU). May said she would step down as Conservative leader on June 7, but stay as PM until her successor had been chosen. The next leader of the party will likely be won by a supporter of a sharper break from the EU The new leader will have until October 31 to push a deal through Parliament. All options, from delaying the deadline again, to whether to proceed with Brexit at all, to announcing a second referendum, are all on the table.

Market Observations

US Equities
Weakness in global growth and trade tensions took a toll on equities in May. The S&P 500 declined ‐6.4% bringing the YTD performance through May to +10.7%. As of May 31 US equities had seen six straight weeks of declines, the longest losing streak since 2011. The sector laggards for May were Energy (‐11.1%) and information technology (‐8.7%) as potential antitrust probes into major tech companies took a toll on the industry. Defensive sectors such as utilities (‐0.8%), health care (‐2.4%) and consumer staples (‐3.8%) held up well relative to other sectors.

International Equities
Australia was the shining star (+0.7%) in a tough month for developed international countries. Index provider MSCI upgraded Argentina from frontier market to emerging markets status sending a wave of passive flows into Argentine stocks. The country was up (+12.9%) for the month. Year-to-date performance through May is still positive for developed international (+7.6%) and emerging markets (+4.1%).

Fixed Income
Bond yields fell across the world in May and the US inverted yield curve may be signaling that the Fed is too tight. The 10‐year Treasury yield was 2.14% on May 31 down 69bps over the last year. Flows into municipal bond mutual funds this year have been the strongest since 1992.

Real Assets
Brent Crude has risen from $55.75/barrel at the end of 2018 to $61.99/barrel at the end of May. Oil markets remain relatively tight as we enter the peak summer demand season. Iran has escalated tensions in response to the US decision to let waivers expire on oil‐export sanctions. This is raising concerns over the oil supply in the Persian Gulf, which accounts for approximately 20% of global output. A bottom in China’s credit cycle would be a tailwind for industrial metals given the nation is by far the largest consumer (e.g., 40% of the global copper demand is consumed by China alone). Midstream energy (including MLPs) and global real estate continue to deliver strong relative performance.


This Financial Landscape represents the consensus of the Oxford Investment Fellows as of 6.12.19.
Statistical data is derived from third party sources believed to be reliable and has not been independently verified by Oxford.
The above commentary represents the opinions of the author as of 6.12.19 and are subject to change at any time due to market or economic conditions or other factors. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

The Wealth of Nations

Long before the time of presidential tweets, there was a Scottish philosopher named Adam Smith. Regarded as the father of modern economics, this eighteenth century pioneer was a strong advocate of free markets and competition as pillars of long‐term prosperity.

These views translated into the realm of international trade, supporting the notion that free trade among nations leads to increased wealth on both sides.

What would the old man from Fife have to say about the current leaders of the two largest economies in the world?… I imagine he’d say “Yer aff yer heid!”

The recent trade spat between the US and China recently took a turn for the worse. Unable to agree on the terms of a new trade agreement, the US increased tariffs from 10% to 25% on $200 billion of Chinese imports. In addition, the US may impose tariffs on the remaining $325 billion of imports. A tariff is simply a tax levied on imported goods. The effect of this US tax hike (tariffs) will be higher prices paid by US consumers and lower US demand for Chinese goods. I suppose the logic behind this antiquated lose/lose proposition is the estimation that the pain imposed on Chinese exporters will be greater than the pain imposed on US consumers.

Maybe this will induce both parties to resume negotiations? Hmmm…

As of the time of this writing, China announced it will increase tariffs on certain US imports, effective June 1st, but the details haven’t been released. They may also resort to non‐tariff barriers because the value of their imports from the US is significantly lower than the value of their exports. Possible retaliatory tactics could include a currency devaluation, the large scale sale of US Treasuries and increased red‐tape bureaucracy applied specifically to US companies operating in China. Chinese authorities may also implement export bans on goods the US needs but can’t easily find elsewhere. For example, China currently produces 90% of the world’s supply of rare earth minerals, which are critical in the production of most electronic equipment; they may simply prohibit sales to US companies.

These policies will result in lower economic growth for both countries. Strategas Research Partners estimates the impact of the recent policies will depress US GDP growth by approximately 0.1% every two months, or 0.5% per year. This estimate is before any retaliatory measures imposed by China or additional measures taken by the US. In other words, things could get worse before they get better. Viewed from a different perspective, the new tariffs will cost American households $500 to $800 per year in the form of higher cost of goods ranging from cellular phones to washers and dryers.

An important consideration of the current trade war is the impact on monetary policy. Having achieved its dual mandate of stable inflation and full employment, the Federal Reserve now has to contend with the impact of the trade war on the economy. Should the trade war continue, economic activity may slow and the current level of interest rates may prove to be too high. We may hear increased rumblings of a Fed rate cut before year end if the situation drags on. Let’s hope it doesn’t.

The challenge is that we’re looking at a binary outcome. In other words, economic prospects will either get worse with every escalation and retaliation or be greatly improved should both sides reach an agreement. Compounding the challenge for prognosticators is the likelihood that the news could come in the form of a tweet.

One compelling conjecture is that President Trump and President Xi Jinping will sign an agreement at the next G20 meeting in Japan at the end of June. This would give both presidents the opportunity to showcase their strong personal leadership for the benefit of their respective countries. Trade is, after all, a win/win proposition!

Adam Smith made a compelling case against mercantilist and protectionist policies when he published his magnum opus the same year the United States declared independence. History is rife with examples of the harmful effects of these policies; the Smoot‐Hawley Tariff Act is widely considered to have significantly exacerbated the Great Depression. And yet here we are, in a tit‐for‐tat.

The above commentary represents the opinions of the author as of 5.15.19 and are subject to change at any time due to market or economic conditions or other factors.


Modern Monetary Theory?

A drop kick is a technique used in rugby whereby a player drops the ball and kicks it immediately after it hits the ground. This is the visual that comes to mind when I think how investors will react to the US Dollar (USD) and dollar‐ denominated assets should Modern Monetary Theory (MMT) be implemented to its full extent. So, what is MMT and why should we be concerned about it?

The challenge in discussing MMT is that it isn’t really a formal theory supported by econometric models such as those studied in mainstream economics. MMT is a set of ideas that challenges conventional economic wisdom and generally endorses the following tenets:

  • A government that borrows in its own currency cannot be forced to default
  • A government can simply print money to pay its debts
  • A government deficit creates a “non‐government” surplus
  • Deficit spending doesn’t matter until there is evidence of inflation
  • If inflation begins to rise, it can be curbed with a tax hike (or cut in government spending)

The logic described in these statements is of particular consequence to the US because of its status as the primary reserve currency. Proponents of MMT suggest that the government could easily increase its deficit financing in order to pursue policy goals. This thought process is now influencing economic policy prescriptions for some politicians in the US and abroad.

On the surface, the MMT statements above appear to be reasonable. So why be concerned about MMT? Let me start by asking the following rhetorical question: if economic goals of full employment and output gaps can be solved with unconstrained deficit financing, why hasn’t anyone tried before? The answer, of course, is that it has been tried many times. It was tried by the U.K. in the 1970s, France in the 1980s, Germany in the 1990s, and many others. The world champion of this strategy is Argentina. In all cases, the policy had to be reversed through the political system or its hand was forced by a market‐driven collapse.

The first tenet described above is in fact false. A government that borrows in its own currency can indeed print more money to pay its debts, BUT under certain circumstances it may be forced to do so at a cost of high inflation. The erosion in purchasing power can be considered a partial (if not total) default on the government’s obligations.

The argument that the US could engage in unlimited deficit financing because it borrows in dollars and prints the world’s reserve currency is upside‐down. The opposite is true: the USD is the reserve currency in part because the US has NOT abused the value of its currency. If the US were to grow its deficit to the point where inflation begins to rapidly accelerate, in effect devaluing its liabilities, that would deal a catastrophic blow to confidence in the currency.

Why has this concept, which has been discussed in the fringes of academia for decades, resurfaced in the political mainstream now? Part of the answer lies in the fact that populism has resurfaced across the political spectrum and across the world. This can be seen in the spheres of international trade, immigration and (anti‐)globalization. Populist movements are much more willing to remove policy‐making authority from technocrats (Federal Reserve) and give it to politicians (Congress).

Another reason is that a particular version of MMT was implemented in the throes of the financial crisis in the form of Quantitative Easing (QE). A naïve view would contend that authorities used deficit financing to buy assets (bonds in the QE program) in order to “save the banks and bail out the wealthy shareholders.” Ten years later, some are observing that this experiment 1) didn’t cause inflation, 2) produced a long economic expansion, and 3) didn’t materially devalue the dollar.

So if we used QE to “save the banks,” why not use it for healthcare for all? Or universal employment? Or minimum income?

The devil is in the details, and the details sometimes are nuanced. When QE was implemented, the economy was in the first innings of what is normally described as a debt‐deflationary spiral. This means that economic agents (individuals, companies, etc.) had a good deal of leverage on their balance sheets. As their assets (homes, property, etc.) dropped in value, they tried to dispose of them in order to lower their debt ratios. The selling pressure in turn caused the aggregate value of assets to drop at a faster rate, creating more selling pressure, and so on and so forth. I believe QE did in fact create inflationary pressures which resulted in a low observed inflation during the past decade instead of deflation if QE had not been implemented. If we were to implement QE in today’s economy (for whatever political purpose) it would likely cause inflation to accelerate.

I trust the Federal Reserve to fine tune our economy through Monetary Policy (the real thing) much more than I trust Congress to do it via modifications to the tax code and spending policies. Despite a less‐than‐perfect track record, the Fed has the know‐ how, the expediency and the political independence to manage our economy toward the dual objectives of full employment and price stability. The policy prescription suggested by MMT could lead us down the wrong path and be met with a rugby‐style tackle.

The above commentary represents the opinions of the author as of 4.24.19 and are subject to change at any time due to market or economic conditions or other factors.

The Adaptable Spousal Lifetime Access Trust

“All failure is failure to adapt, all success is successful adaptation.”
Max McKeown,Adaptability: The Art of Winning in an Age of Uncertainty.

This quote from the English writer and researcher of innovation strategy, Max McKeown, applies ironically well to modern day trust structures. While ‘innovative estate planning’ may seem like an oxymoron, a good estate plan should indeed be innovative and designed to adjust to a family’s evolving financial circumstances. Within an estate plan, a truly successful trust is one that will adapt.

A Spousal Lifetime Access Trust (SLAT) is such a trust. The SLAT is an ideal vehicle to embed flexibility into a family’s estate plan, while allowing for significant multi-generational estate tax savings.

Typically a SLAT is funded during life by one spouse for the benefit of the other spouse, as well as potentially children, grandchildren and even future descendants. The SLAT removes the assets from both the grantor’s and the beneficiary spouse’s estates, providing an estate ‘freeze’ because the gifted assets grow outside the taxable estate.

A key advantage of a SLAT is that the beneficiary spouse may still receive income and distributions from the trust, providing the couple with contingent access to trust assets during their lives. For SLATs structured properly and utilizing the laws of key ‘trust friendly’ states, an independent Trust Protector may later add additional contingent beneficiaries which may include the grantor as well.

As such, a SLAT is a good option for families who would like to make lifetime gifts to utilize at least one (or both) of their gift/estate and, perhaps, generation-skipping transfer (GST) tax exemptions, but are concerned about losing all access to the trust assets or depleting their current or future income.

Tax reform doubled the federal gift/estate and GST exemptions to $11.4 million per person for 2019. This increased exemption, however, is due to expire December 31, 2025 and is also vulnerable to further tax law changes. A SLAT is ideal for families concerned they may lose the opportunity to make larger gifts should the exemption levels be reduced in the future.

As a general rule, a SLAT should be funded with assets that are expected to appreciate significantly over time, thereby enhancing the growth of wealth in the tax-advantaged SLAT and not in the taxable estate.

A SLAT is also an ideal vehicle to hold life insurance on the grantor’s life. During the grantor’s lifetime, the trustee can take a loan or cash withdrawals from the policy to provide the trust with liquidity for distributions to supplement income or to fund other financial goals.

Upon the grantor’s death, the death benefit and other SLAT assets continue to provide for the beneficiary spouse and family and are kept outside of the grantor’s taxable estate. Upon the beneficiary spouse’s passing, proceeds can enhance legacy wealth and provide for future generations, and can be used to lend money to the grantor’s estate to offset estate tax.

A SLAT can also be designed as a Dynasty Trust when created in a jurisdiction that allows trusts to extend in perpetuity. A Dynasty SLAT is designed to benefit the family as well as multiple future generations, providing an effective way to utilize the GST tax exemption.

With this type of trust, the couple captures the use of their GST tax exemptions along with all of the other advantages of a traditional SLAT.


  • Estate Tax Advantage: The SLAT is structured as an irrevocable trust. As such, upon funding (with assets held in the individual name of the grantor), the assets are removed from the grantor’s estate and are also not included in the spouse’s taxable estate. Note, the transfer of assets to a SLAT is a gift and will utilize the grantor’s gift/estate exemption. Also, spouses may not create ‘identical’ SLATs or assets will be taxed in their respective estates.
  • Spousal and Beneficiary Provisions: The spouse has a lifetime interest which can be designed as either required or discretionary income or income/principal distributions, or as unitrust payments. Children and grandchildren may also be named as current beneficiaries or their interest may begin at the spouse’s death as remainder beneficiaries.
  • Maximizing Tax Impact: Adding a power to substitute assets enables ‘basis planning’ to mitigate capital gain tax and also ensures that the most rapidly appreciating assets are held in the tax-advantaged SLAT, thereby maximizing the estate tax savings.
  • Flexibility Provisions: The beneficiary spouse can be given a limited power of appointment to redirect assets among a class of recipients, generally descendants, in order to create flexibility for unknown future circumstances.
  • Favorable Grantor Trust Status: The trust will be taxed as a grantor trust as long as the beneficiary spouse is living, thereby protecting the trust assets from being depleted by taxes and allowing the grantor to make tax payments on behalf of the trust without being considered a taxable gift. Certain provisions can be included to allow ongoing grantor trust status even if the beneficiary spouse predeceases the grantor.
  • Trustee: The grantor may not serve as Trustee but the spouse may, provided the power to make distributions to him or herself are restricted to an ascertainable standard, i.e. amounts needed for health, education, maintenance and support.
  • Divorce or Death of Spouse: To mitigate concerns, the SLAT can be drafted to include only a ‘current’ spouse and can be established in a jurisdiction that enables a Trust Protector to have the power to add beneficiaries, including a future spouse.

A SLAT provides families with an opportunity to take advantage of the current larger exemption amounts while leaving a window open for access to the trust assets to meet the income needs of the family. This adaptable tool in the planner’s toolbox requires the thoughtful input of the family’s entire team of advisors. Your Oxford advisor will work with your team to coordinate the optimal solution for your family.

The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.

What’s Happening Across the Pond This Month?

As background, the European Union (“EU”) was formed shortly after WWII to create economic and political cohesion across the continent. The United Kingdom (“UK”) joined this organization in the 1970s. To advance its goals of reducing trade friction, integrating financial markets and creating a stronger presence for the EU in the global economy, the Euro was launched in 1999 as a shared currency. There were initially 11 countries which agreed to use the Euro. By doing so, they effectively relinquished their monetary policy (the ability to raise or lower interest rates) to the European Central Bank. The UK was concerned about giving up this level of control so it elected to retain its currency (Pound Sterling) but remain in the EU.

While there are a number of benefits to its membership in the EU (trade agreements, free-flow of labor from EU countries and being seen as the financial gateway to Europe) the UK gives up a degree of sovereignty. There had always been some concern amongst the UK population with this arrangement, but the 2011 to 2015 period saw growing frustration, particularly around the issue of migration from other parts of Europe and worries about domestic job losses. In 2015 the Conservative party unexpectedly won the election on a platform of leaving the EU. A public referendum was held in 2016 which narrowly (51.9%), and again unexpectedly, supported leaving the EU or “Brexit” (British exit). This outcome led to an 11% decline in the Pound Sterling and brought it to the lowest level in more than 30 years.

In March 2017, the UK invoked Article 50 of the Lisbon Treaty, which began a two-year timeline to negotiate the terms of the split. This period expires on March 29, 2019 – which is supposed to be the end of the story.

Over the past twenty three months, however, negotiations have not gone smoothly. There have been discussions of a “soft Brexit”, which would entail some degrees of continued reliance on EU policy and infrastructure, or a “hard Brexit” which would include a fully independent immigration policy and trade agreements would fall back underneath the WTO.

One significant issue, which has not generated as much media attention, relates to the fate of Northern Ireland. While the Republic of Ireland (the South) will remain in the EU, Northern Ireland remains part of the United Kingdom and is slated to leave. As such, any version of Brexit which requires a change in customs/immigration policy would necessitate a barrier between Ireland and Northern Ireland. While there has been relative peace since the 1998 Good Friday/Belfast Agreement, the decades prior were marked by protests, riots and violence. Fears of renewed tensions have been elevated in recent months, with a car bomb that was detonated outside a Northern Ireland courthouse in January 2019.

This bombing was just four days after UK Prime Minister Theresa May’s proposal to effect an exit was voted down by 230 votes (432 to 202). This was the largest ever defeat in the House of Commons. A subsequent vote on March 12 was also rejected, though by a lesser margin.

The uncertainty since 2017 has created significant stress and frictional costs on financial institutions and consumers. Banks and other institutions have moved thousands of jobs to the European mainland and in some cases developed redundant infrastructure to support a second regulatory regime. Manufacturing plants have begun stockpiling excess inventory amid worries of supply chain disruptions at the UK’s ports of entry, and some consumers have adopted a bunker mentality, purchasing canned goods and “Brexit Boxes” as the UK imports about 50% of its food.

The concern has been reflected in the economic data, as we’ve seen a slowdown in business investment in recent quarters.

GDP growth rates have also fallen on an absolute and relative basis. The UK had one of the highest growth rates in the G7 from 2013-2015, but has reported the lowest growth of this cohort over the past four quarters.

As things stand today (3/21/2019), the British Parliament has voted to seek a delay of Brexit beyond March 29 and Prime Minister May will be meeting with EU leaders to negotiate an extension. Interestingly, there is a straightforward (albeit politically painful) escape hatch given the European Court of Justice’s ruling that the UK could cancel the Brexit process without consent of the other EU members.

As difficult and challenging as globalization was to develop over the past 70 years, it will be equally challenging to unwind. Brexit and other populist/nationalist measures are at the fore, and we anticipate further trade friction and geopolitical disruption in the years ahead. This will create opportunities for our managers and our portfolios, as we closely watch the regime shifts within central banks and government houses. In any event, we can be assured the next 10 days will offer an interesting window into the fractures in Europe’s democratic systems.

The above commentary represents the opinions of the author as of 3.21.19 and are subject to change at any time due to market or economic conditions or other factors.