Puerto Rico is on its way to one of the largest debt defaults in history, right up there with Greece and Argentina. If you want to know what’s happening in Puerto Rico, Anne Krueger is where you must start.
If one could combine in a financial asset four key attributes: the anonymity of cash, a guaranty of trustworthiness, the convenience and scalability of digital transfer, and a reliable store of value, you would have an extraordinary product. It would be ideal for champions of individual liberty and anathema to governments seeking to tax and regulate them.
On every mutual fund advertisement touting its track record is language mandated by the SEC to the effect that past performance does not guarantee future results. And the SEC is right; indeed there is little evidence in mutual fund performance statistics that past results have any predictive value at all.
But why is this the case? In almost every other field of human activity past performance does predict the future. A great violinist today is likely to be great tomorrow; similarly a heart surgeon, or a basketball player. Why is investment management one of the few spheres where yesterday doesn’t predict tomorrow? Answering this question is central to picking investment managers and strategies, so let me share some ideas.
The catch is that the guarantee is from the government of Puerto Rico.
The Commonwealth of Puerto Rico is US territory. Its residents are US citizens who can move freely to any of the 50 States. In some ways they have the best of all worlds: all the privileges of US citizens, but an exemption from federal income taxes. And Puerto Rico, though it is not a State, has the privilege of issuing municipal bonds. Interest on those bonds is free from US taxes. Typical municipal bonds pay 3 percent returns these days. But Puerto Rico’s municipal bonds pay 8 percent or more.
Peter Thiel is one of our more interesting public intellectuals, who is often willing to take stances that challenge the conventional wisdom.
“Too many kids go to college” he argued in an Intelligence Squared U.S. debate (pictured above). There, he made the point that less able students in second tier schools might be better off with vocational training (the model successfully followed in Germany and Switzerland), and that the most able students at top schools might be pushed to follow conformist career paths rather than express their entrepreneurial creativity.