If a cartoon is worth a thousand words, then the above should suffice for a blog post about sustainable investing.
Following the Trump administration’s decision to separate families, I’ve felt a mix of sadness for the families, anger at those directing & facilitating this policy, and troubled by the stories of neglect and abuse coming out of the childrens’ “shelters.” Like many, I was moved to donate towards family reunification efforts but eventually opted not to. My intention in writing this is not to discourage anyone from donating towards important causes, but to illustrate that some problems cannot be solved by fundraising more donor dollars.
Without getting into the history, details, or politics of immigration policy, a major barrier preventing separated families from reuniting was the detained parents’ lack of money to post bail. If the arrested parents could pay for a bail bond, they could be released and reunited with their children. Immigration bail bonds reportedly cost between $1,500 and 10,000 and several organizations fund bail for detained immigrants.
However, after reading up on immigration bail bonds and reading about the viral fundraising successes, it was clear that more than enough money had been raised by dedicated immigration bail bond funds. If there were only one kid per family (roughly 2,500 kids) and the maximum allowable bail of $10,000 was set in every case, it’d only take $25M to bail out at least one parent from each family. Some organizations raised that amount single-handedly. In short, additional dollars donated would have no impact on the issue of family separations (although the early donors may have had a marginal impact and all donations can hopefully be used to fund bail bonds unrelated to family separations).
The second area I looked into was legal services. It’s difficult for residents of the US to understand the legal system and even harder for a new immigrant (and especially under the duress of being separated from their children)! However, my back-of-the-napkin analysis also indicated that the organizations doing this work had raised more than enough to hire sufficient legal personnel. The primary problem does not seem to be lack of funds or capacity for hiring enough people, but the government has not properly documented all the people that they’ve detained and likely deported many parents without their child(ren). It has and will continue to take time to reunite families and it’s difficult to see how more money will expedite the process at this point.
What I Did Do
While I declined to donate, I did advocate in small ways; posting on social media, mentioning here, joining a local rally with my family and friends, and continuing to advocate and donate to organizations that attack the root problems in Central America. Trump created and enacted the policy and had the power to reverse it, which he eventually did when it’s existence and details became known and deeply unpopular even within his family, party, and among his staunchest supporters. In this case, media attention, public scrutiny and advocacy, and legal action were the influential factors.
Should I donate at all?
The point of this post is not “don’t donate.” I believe in giving and giving generously, but giving money isn’t always helpful (and can sometimes be harmful). I find that my initial reaction to donate is often based on a desire for some sense of agency (“don’t just sit there, do something!”) or driven by my ego (“good job Matt, you’re helping out”), which are not good reasons to donate. I believe that if we ignore false narratives and selfish desires, then we can be more efficient and effective with what we do give. At some point, I should probably post some case studies of instances where I did donate, rather than solely focusing on times that I declined. I believe that we should give, but thoughtfully.
Although the headline numbers on last week’s job report were below expectations and tariffs may create further drag, the labor market remains quite strong. One of the metrics that I have been watching has been the continued decline in unemployment rates among groups with historically higher unemployment. While all jobs and compensation are not equal, low unemployment rates are an encouraging sign.
One way to look at the breadth of the labor market’s health is to look at unemployment rates by education level (see below). As the bottom panel shows, the difference in unemployment rates between those with a bachelor degree and those with a high school diploma is historically low.
Similarly, we can slice the data to view unemployment rates by race. Currently, the gap between black and white unemployment rates is also historically low.
Another metric worth following is the U6 unemployment rate, which includes the official headline U3 unemployment rate plus those who are underemployed (discouraged workers or those marginally attached to the labor force, as well those working part-time for economic reasons).
While low unemployment benefits workers today, it also provides valuable training and experience that will benefit those workers, their future employers, and the overall economy for years to come and beyond the current cycle.
I visited Seattle twice last month and saw the boom that everyone’s been talking about. Seattle is home to both the most competitive neighborhoods and the most construction cranes in the US (see below).
To left of my photo above, Amazon has raised multiple skyscrapers and many more are going up between where I took the photo and the lake. How many cranes can you spot?
Negative screening (or exclusionary screening) is the process of screening specific assets out of an investment universe or strategy. Implementing these screens is called divesting and results in divestment.
Divesting does connotate excluding something that one would otherwise own. For instance, a large-cap fund might not own tobacco stocks or small-cap stocks. Intentionally screening out tobacco stocks would be considered divestment, because it is something the fund would own otherwise. However, the fund would not be considered to have divested from small-cap stocks though, as they fall outside a large-cap fund’s investment universe. In other words, divestment is the intentional act of excluding assets that one would otherwise own.
There are purely economic reasons to divest from assets, but I will focus on values-based divestment here. Values-based reasons to exclude assets may include not wanting to be associated with or derive any benefit from specific activities/products/services. Values-based screening has ancient roots as various religions have forbidden debt with very high interest (or any interest at all) for thousands of years (see here). More recent examples include the Quakers divesting from the Atlantic slave trade or US investors divesting from Apartheid-era South African assets. Today, hot topics include tobacco, weapons, and fossil fuels.
It should be noted that there are arguments that even non-economic considerations can also be economic ones. For instance, as energy consumption shifts towards renewable energy, the returns from fossil fuels may suffer. A mass shooting may bring unwanted publicity and legislation upon a firearm manufacturer. These are cases where values issues may become value issues.
There are a wide variety of objectives and approaches to divestment, each with a unique set of benefits and drawbacks. Exploring all of the applications of divestment is beyond the scope of a blog post, but we will look at some common examples in the coming weeks.
Crikey! I’ve lost my mojo!” –Austin Powers
Former Fed Chair Ben Bernanke recently joined the chorus of voices casting doubt on the predictive ability of the yield curve. Yet, others such as Minneapolis Fed President Neel Kashkari, have been quite vocal about the risks of inverting the yield curve.
Whatever your views on Bernanke, Kashkari, or inverted yield curves, it would be wise to understand that the top policymakers disagree on the topic. Nobody knows how predictive the yield curve still is. Only time will tell. In the meantime, we should approach the debate with humility and understand the opposing lines of logic thoroughly.
As the yield curve continues to flatten, there has been increased focus on the potential for “inversion” which means that short-term rates are higher than long-term rates. Central bankers have begun mentioning it, we have seen an increase in media mentions, and we have even received a few questions from clients. Below is a chart of the difference between the 10-year US Treasury yield and the 2-year US Treasury yield. The 10-year yield is usually higher than the 2-year yield, but short-term rates surpass long-term rates every now and then. Historically, these inversions have occurred prior to recessions (as indicated by red vertical bars).
A few observations:
- The yield curve may very well invert, but has not inverted yet. The curve almost inverted in 1994, but did not and the next recession was not until 2001.
- The recessions charted above have began 12-24 months after the curve first inverted, while it was nearly 3 years after the 1998 inversion.
- With rates at historically low levels, there are good reasons to doubt that a flat or inverted yield curve is as predictive as in the past. We have our opinions, but it always pays to see multiple sides of an issue and no indicator should ever been overly relied upon or used in isolation.
The above being said, we do not think that the yield curve is indicating an imminent recession. Of course, the shape of the yield curve does have implications for risk/return dynamics and portfolio positioning and investors should adjust accordingly.
“Do you have any financial advice for new parents?”
A handful of friends have asked me this question in the past week. The question often relates to childcare expenses or college savings plans, but I usually advise new parents to prioritize the below items before anything else. My typical advice sounds something like this:
- “Buy enough term life insurance to provide for your family if you and/or your spouse die prematurely. There’s no “right” amount, so ask yourself what you would want covered if you passed. Your salary of x years? Your spouse’s salary so he/she wouldn’t have to work for y years? Childcare expenses for z years? Payoff a mortgage? College tuition? Other expenses? Add those numbers up and go get some quotes.
- “Establish an estate plan, including a revocable living trust and will. The will should appoint a guardian for your children if you pass away while they’re still minors, although the courts do have the final say. The will also directs what to do with assets that were excluded from the trust (or forgotten to be put in the trust, which I have seen several times!). The trust should help avoid probate for assets placed within it and provide for supervision of the assets for the benefit of the children.
Unfortunately, the above is often news to new parents. However, both of the above can be one-time decisions, which is a relief for most new parents who are completely overwhelmed with the chaos of parenthood. Neither action is free, but the reduction in risk is well worth the expense IMO.
An extra disclaimer this week: The above is educational and describes advice I have given others, but is not legal or financial advice for readers. Every situation is different and I’m not an insurance agent or an attorney.
Related to my recent post on the ESG risks of private prisons, the United Nation’s Principals of Responsible Investing (UNPRI) recently highlighted Core Civic in a case study on credit risk.
Full paper: https://www.unpri.org/download?ac=4944