WMA Blog

No more posts

March 10, 2020

“The fundamentals of the U.S. economy remain strong.”

That was the unfortunate opening line, provided by the Trump administration, of the statement by Federal Reserve Chairman Jerome Powell announcing the Fed’s between-meeting, “emergency” half-point rate cut Tuesday on account of the global spread of the coronavirus and the anticipated economic consequences therefrom. However, as the economist John Kenneth Galbraith reminded in his Introduction to The Great Crash, 1929:

“Always when markets are in trouble, the phrases are the same. ‘The economic situation is fundamentally sound’ or simply ‘The economic situation is fundamentally sound’ or simply ‘The fundamentals are good.’ All who hear these words should know that something is wrong.”


Something indeed is (at least potentially) wrong. Even so, the Fed is doing what it can, but its tools are limited: “a rate cut will not reduce the rate of infection — it won’t fix a broken supply chain,” Powell warned. Moreover, the Fed can’t “print a vaccine,” it can’t “help companies deal with delayed orders or an infected workforce,” and it can’t “get people to go out.” What’s needed is what Powell called a “multifaceted” response – first and foremost a competent and effective health policy (which there are very good reasons to doubt) and, secondarily, a carefully enacted fiscal policy, neither of which are in the Fed’s toolbox (although the president signed an $8 billion funding bill to deal with the coronavirus last week). Still, the projected economic problems seem largely temporary, empty hotel rooms notwithstanding.

Worse, at least for the markets, is that the Fed pulled the fire alarm without pointing out the fire.

It’s clear that problems – potentially big problems – are looming, but they don’t appear to be here yet. The G-7’s finance ministers and central bankers talked Tuesday morning and produced a statement that the market found disappointingly weak. The Fed’s precipitous action came shortly thereafter and despite still generally strong economic data. A between-meeting “emergency” rate cut suggests that another is likely at the next regular meeting…in a week-and-a-half.

What does the Fed know (or fear) that the market doesn’t? The Fed’s latest beige book suggests that U.S. firms could be in for a significant slowdown in March, but anecdotes are not data. Service businesses are seeing some lower demand, but not to a level that screams, “Emergency!” Without evidence of a real fire to this point and without any clear idea of what’s burning, the Fed’s abrupt action limits an already limited toolbox of responses and suggests that it has lost control or succumbed to political pressure.

Bond markets were on fire (rallied hard) in a flight-to-safety trade last week, and that mostly happens when some other big thing is on fire (but not in a good way). After falling sharply the previous week, the yield on the benchmark 10-year U.S. Treasury note tumbled further following the Fed’s rate cut, moving below 1 percent for the first time in history on Tuesday and then reaching a new record low of 0.66 percent on Friday before rising a bit into the close. Despite violent price action in stocks both up and down since the rate cut, bond markets have continued to push yields lower – into historic territory such that real yields are below zero – and haven’t taken a break from the unrelenting pressure.

That’s never happened before. On a risk-adjusted basis, the long-bond has outperformed every S&P 500 stock since its most recent peak yield (3.4647%) in November 2018. President Trump wants more. He wants negative interest rates. Already in record territory, there’s no way to know if rates will continue to go down or by how much.

What does the bond market know that we don’t? What’s on fire?

Nearly 100 years ago, Frank Knight made his famous distinction between risk and uncertainty. In neither instance do we know for sure what will happen? However, when we know the potential outcomes in advance, and perhaps even the probabilities thereof, we’re talking about risk. Think dice or poker.

On the other hand, when we don’t know the possible outcomes in advance, and thus their relative probabilities, we’re talking about uncertainty. Think complex systems like economies or the global spread of a dangerous virus.

When markets are volatile, you can count on the financial media to point to uncertainty as a cause. However, we all face uncertainty over and over every day. The uncertainty trope takes center stage when we recognize how uncertain life is – how little we know – as with the breadth, scope, and impact of a global pandemic. We don’t deal with uncertainty very well, especially at the extremes. That’s why we routinely overpay for insurance policies and lottery tickets.

Even when we know (or at least someone knows) about a specific fire, real or metaphorical, there will always be many, many more fires and potential fires “out there.” When we think uncertainty is somehow limited or contained, we delude ourselves.

Something is always on fire, somewhere. But we’re not usually as aware of it as we are right now.

If you hadn’t been paying attention last week, you might have thought the market was no big deal…mostly up a little. If you were paying attention, you had quite the ride.

Last week saw the second week of extraordinary volatility driven by COVID-19 fears. The large-cap benchmarks and the tech-heavy Nasdaq recorded gains, thanks to sharp rallies on Monday, Wednesday, and late Friday, but the smaller-cap indexes ended modestly lower. Monday-Thursday saw alternating moves of at least 2.5 percent, with Friday seeing moves of at least that size in both directions.

Within the S&P 500, the typically defensive utility sector performed best. Health care shares were also strong after the prospects of “Medicare for All” seemed to diminish following former Vice President Joe Biden’s excellent Super Tuesday performance. Energy shares again led the declines as U.S. oil prices plunged to multiyear lows on Friday following OPEC’s failure to convince non-OPEC member Russia to agree to production cuts.

Stocks seem more skittish than fragile, but that may be a distinction without a difference. When the market jumps, in either direction, lots of people are jumpy, too. Accordingly, the markets rode a rollercoaster last week, coming full circle to nowhere.

European shares resumed their decline last week, wiping out earlier gains triggered by hopes for coordinated stimulus efforts. The pan-European STOXX Europe 600 fell 2.21 percent. Germany’s DAX slipped 2.77 percent, France’s CAC-40 declined 3.18 percent, and Italy’s FTSE MIB dropped 5.25 percent. The UK’s FTSE 100 slid “only” 1.75 percent.

In Asia, Japan’s Nikkei 225 declined 1.86 percent while Chinese stocks – counterintuitively – continued to rise. The Chinese government continues to provide substantial policy support to bolster the flagging economy there. The Shanghai Composite closed 5.4 percent higher for the week, while the CSI 300 large-cap index gained 5.0 percent, despite sharp losses on Friday.

It is possible, perhaps likely, that in a few weeks or months COVID-19 will have been contained, with limited economic damage. However, to this point, that is far from certain.


In The News…

This would be an important point even without coronavirus. A 2019 survey found that, on average, people touch their phones 2,617 times per day. These devices generally host 10 times more bacteria than toilet seats, mostly because people don’t commonly clean them as often. Wash your hands. Then wash your phone. Here’s how. Hand sanitizer, an aloe vera concoction with 60 percent alcohol by volume, was projected to be a $5.5 billion product by 2024 before COVID-19. Why doesn’t somebody make one that doesn’t smell? Oh, and stop touching your face.

On Tuesday, a day in which the Fed cut short-term interest rates by 50bp, the yield on the benchmark 10-year U.S. Treasury note traded below 1 percent for the first time, and kept dropping throughout the week. Even so, President Trump wants negative interest ratesMight they be possible? As the week progressed, and as traders bought safe assets and mortgage paper owners bought Treasuries to try to hedge their shortening duration, bonds moved further into unprecedented territory, such that 10-year U.S. Treasury notes now yield less than many bond funds charge.

Fed rate cuts are most often followed by poor market performance and, although the sample size is extremely small, market performance after an emergency rate cut is even worse: the average one-year return for stocks following an emergency rate cut is -7.3 percent. However, that should be seen as more indicative of market conditions at the time than that rate cuts are ineffective.

Employers added 273,000 jobs in February and the jobless rate was 3.5 percent, signs of labor-market strength before COVID-19 spread widely in the U.S. Wages increased 3.0 percent from a year earlier in February, in line with recent months.

Monday, the OECD updated its economic forecast, cutting its expectation for global growth this year by half a percentage point, to 2.4 percent. But in the worst-case “domino scenario,” a widespread outbreak could push global growth down to 1.5 percent, the worst result since — you guessed it — the 2008 financial crisis.

The COVID-19 outbreak began weighing on U.S. businesses even before the virus had begun its spread in the U.S., the Fed’s latest beige book shows, suggesting that U.S. firms could be in for a significant slowdown in March. Concerns about the novel coronavirus epidemic also clouded the outlook for the U.S. service sector. The Institute for Supply Management’s U.S. manufacturing index barely held in expansionary territory last month.

Congress passed an $8 billion funding package to deal with the coronavirus with virtually unanimous support.

Does Warren Buffett sense a buying opportunity?

Record low mortgage rates.

Top 20 stocks of the last 20 years.

A slew of SEC risk alerts are on their way.


October 23, 2019

I have written about this many times, of course, including at some length last week, but consensus game theory analysis suggests that the U.S. and China are likely to settle their trade differences before much lasting economic damage is done. Since both sides benefit from a deal, it only makes sense. The markets generally reflect this viewpoint, since they express the outlooks of many of the world’s great game theorists. Accordingly, when trade war news suggests that a deal is nearer, global stock markets rally and, when the news is more pessimistic about a deal, the resulting losses don’t linger.

However, I have been more skeptical of this view than most because (a) China wants to establish and assert itself as the world’s great power, not subordinate to or dependent upon the U.S. or any other country; and (b) China, as an authoritarian state and as a matter of history, is plenty willing and able (far more so than the U.S.) to foist hardship upon its people in order to gain what its leaders perceive to be some broader advantage. China thinks we’re weak.

In that context, the opening to the NBA season on Tuesday will provide an interesting test case. As almost everyone knows by this point (and as I also wrote last week), an October 4 tweet by GM Daryl Morey of the Houston Rockets expressing support for pro-Democracy demonstrators in Hong Kong more than a little unnerved the Chinese Communist Party — with the fallout including canceled NBA events in China and league commissioner Adam Silver meeting with the Los Angeles Lakers and Brooklyn Nets in China during their preseason tour. That meeting featured LeBron James and other players speaking out against Morey and, implicitly at least, against free speech and democracy itself.

Despite substantial criticism, LeBron doubled down on his rhetoric upon his return home. Rockets’ star James Harden offered an unqualified apology. Nets owner Joe Tsai, a Chinese national, was similarly subservient. Significantly, China is the source of 10-15 percent of NBA revenues. Since the Morey tweet, 11 Chinese companies who partner with the NBA have suspended their working relationships with the league and China’s main television outlet CCTV has suspended broadcasts of NBA games. Tencent, which has a $1.5 billion deal to stream NBA games in China over the next five years, has stopped showing Rockets games but has not totally dropped all NBA content.

On Thursday, Silver admitted that the league’s losses as a result of the situation “have already been substantial.” He added that the league has faced pressure from China to fire Morey, but that it will not give in to that pressure (despite significant early missteps by the NBA in responding to the problem). China denies Silver’s claim. “I felt we had made enormous progress in terms of building cultural exchanges with the Chinese people,” Silver said. “Again, I have regret that much of that was lost. And I’m not even sure where we’ll go from here.”

As with trade, “most observers” expect the NBA’s problem with China to go away: “Business will return to normal because it’s good for both sides.” Accordingly, the opening of the NBA season on Tuesday will be worth watching for reasons far beyond on-court wins and losses. If the games are not broadcast in China and business does not go back to normal soon, my skepticism about a comprehensive U.S. trade deal with China would seem a bit more plausible.

In last week’s market action, most of the major domestic stock indexes recorded modest gains on the backs of some upside surprises in third-quarter earnings reports. The gains brought the large-cap S&P 500 within 0.65 percent of its record high on Thursday morning before falling back to close the week. The small-cap Russell 2000 outperformed last week, although it remained in correction territory, down over 10 percent from its August 2018 peak. Health care shares outperformed within the S&P, while technology shares underperformed. Despite the upside surprises, analysts polled by FactSet expect overall earnings for the S&P 500 during this reporting period to have declined slightly for the third consecutive quarter.

Enthusiasm over earnings reports may have been restrained by the week’s economic data, which missed expectations on several fronts. On Tuesday, the International Monetary Fund cut its 2019 growth forecast for the global economy from 3.2 to 3.0 percent, citing the drag from rising trade tensions.

The week’s most discussed data point may have been an unexpected 0.3 percent decline in U.S. retail sales in September, the first drop since February. However, core retail sales (excluding auto sales and purchases at gas stations and building materials stores) rose slightly in September, and core sales in August were revised higher.

The yield on the benchmark 10-year U.S. Treasury note ended slightly lower for the week at 1.76 percent. The safe-haven bid for Treasuries led to volatility as news arrived about a revised Brexit agreement, sending the British pound sharply higher. Subsequent reports about the agreement and its waning likelihood of passage in the UK Parliament, coupled with the weak U.S. retail sales data, caused intraday yields to fluctuate throughout the week.

Equity markets in Europe were mixed last week, largely due to the Brexit news. Reports of a sharp contraction in the Chinese economy also pressured global stocks, setting off a fresh round of worries about slowing global growth. For the week, the pan-European STOXX Europe 600 was flat, the exporter-heavy German DAX was up 1.4 percent, and the UK’s FTSE 100 fell about 1 percent.

In Asia, Japan’s Nikkei 225 jumped 3.2 percent last week on expectations of monetary easing. Meanwhile, Toyota Finance is said to be preparing to issue Japan’s first zero interest rate corporate bond. Stocks in China posted a weekly loss after the country’s third-quarter economic growth missed forecasts, underscoring the continued toll of the U.S. trade battle and raising the recession risk for the global economy.

From the headlines…

U.K. Prime Minister Boris Johnson’s government and the European Union surprisingly agreed to new terms for the country’s exit from the bloc Thursday, paving the way for a high-stakes vote in the British Parliament. Yesterday’s delay vote by the House of Commons may become a defeat for Johnson.

China’s economic growth slowed further in the third quarter to 6 percent, landing right on the central government’s full-year baseline target for gross domestic product as business activity continued to deteriorate in the world’s No. 2 economy.

Investors should avoid being misled by developments that cast complex and festering issues in a positive light. For example, announced “deals” on Brexit and U.S.-China trade are improvements, but only marginal ones, at least to this point. Much work remains to be done.

strong dollar continues to eat into the profit margins of American companies, contributing to what is expected to be 2019’s weakest quarter for corporate earnings.

U.S. manufacturing production fell in September, adding to evidence that slowing global growth and trade frictions are weighing on the economy.

U.S. retail sales, which had been the highest-flying piece of American economic data for most of the year, fell in September for the first time in 7 months, raising fears that the U.S. manufacturing recession may be bleeding into the consumer side of the economy.

The Ivy League endowment investing strategy is losing luster.

Fisher Investments has seen a growing backlash since the firm’s founder made offensive comments about women. The firm has lost over $1 billion in assets under management.

Institutional investors representing some $10 trillion in assets under management were recently surveyed and asked which trends would drive global economies and the resulting investment landscape over the next three decades. The top ten responses are listed below.

·     Aging population (78%)

·     AI and machine learning (69%)

·     Impact of climate change (66%)

·     Urbanization and smart cities (42%)

·     Redefining global trade (40%)

·     Personalized medicine (27%)

·     Electric and autonomous vehicles (23%)

·     Depleting natural resources (22%)

·     Privacy (13%)

·     Population growth in Africa (13%)


September 25, 2019

The attack on a Saudi Arabian oil field last weekend is still sending reverberations through markets, far and wide, and it could have long-term implications for much more than the price of crude. Most immediately, Saudi Aramco could take some time fully to restore output at its giant Abqaiq plant, with oil analysts saying that damage at the facility is more severe than originally thought.

This event and its aftermath remind me of I game we used to play when I worked on one of Wall Street’s big trading floors (and recounted in Michael Lewis’s first book, Liar’s Poker): “What’s the trade?” The idea of the game was to propose a hypothetical world event and decide what the best trade is in response (e.g., nuclear plant problem in Russia — buy potato futures).

Here is how “What’s the trade?” played out immediately after the oil field attack: I filled my car’s gas tank right away, even though I didn’t need to. Not surprisingly, oil prices saw the biggest move, with U.S. WTI crude futures rising by 15 percent, the largest uptick since 2008. Stock prices fell, with the Dow, S&P and Nasdaq all ending moving lower. Airlines were hit hard as JetBlue and United Airlines both fell nearly 3 percent while American Airlines dropped 7.3 percent. Energy stocks, on the other hand, had their best day of the year, with the S&P Oil & Gas Production ETF jumping almost 11 percent, and the S&P energy sector rising out of a bear market with its best session of 2019. Yields on the benchmark 10-year U.S. Treasury note fell by the most in 3 weeks, as traders sought safe haven U.S. government debt. Gold prices also jumped 1 percent.

Since Monday, not nearly so much has happened, as markets moved on to look for “new news,” most notably last week’s Fed meeting. On Wednesday, the Federal Reserve voted to cut short-term interest rates by a quarter-percentage point for the second time in as many months to cushion the economy against a global slowdown amplified by the U.S.-China trade war. While they left the door open to additional cuts, officials were split over the decision and the outlook for further reductions. The differing opinions among FOMC members helped drive the spread between two and 10-year U.S. Treasury yields close to inversion, with shorter-term yields rising as the long-end dropped. “Jay Powell and the Federal Reserve Fail Again,” President Trump tweeted. “No ‘guts,’ no sense, no vision! A terrible communicator!”

That doesn’t sound like positive news, does it? Moreover, at his post-meeting press conference, Fed Chairman Jerome Powell said:

“Since the middle of last year, the global growth outlook has weakened, notably in Europe and China. Additionally, a number of geopolitical risks, including Brexit, remain unresolved. Trade-policy tensions have waxed and waned, and elevated uncertainty is weighing on U.S. investment and exports. Our business contacts around the country have been telling us that uncertainty about trade policy has discouraged them from investing in their businesses.”

Domestic equities closed last week modestly lower. The broad stock market showed little reaction to the attacks and the ensuing jump in oil prices. Large-cap stocks outperformed small-caps. Higher-valuation growth companies held up slightly better than value stocks, with companies in the value-oriented transportation industry, which experienced steep losses as a result of the jump in oil prices, weighed on returns for the value category.

Oil prices remained volatile all week as Saudi Arabia adjusted its estimates for when it expects the production and processing facilities to come back online. Although oil prices moderated midweek, they still finished the week up approximately 6 percent.

Domestic stocks also displayed little reaction to Wednesday’s Fed’s decision to lower rates. Market participants had widely anticipated the move, and the Fed’s statement following the meeting had no substantive language changes from the previous meeting. Fed Chair Powell also seemed to stick closely with his script in his post-meeting press conference, giving investors little information about the central bank’s potential next move.

U.S. Treasury yields decreased as the jump in geopolitical risk in the Middle East seemed to convince some investors to move into safe-haven assets. Overnight lending rates were unusually volatile relating to the amount of bank reserves available for lending in the money markets. This caused the fed funds rate to break through the upper end of its target range before the Fed stepped in to inject more reserves into the system via overnight repurchase operations.

Stock markets in Europe were largely range-bound last week, even as trade negotiations between the U.S. and China resumed after two months and hopes for a Brexit deal rose. In Asia, Japanese stocks were up for the fifth straight week, while Chinese stocks retreated as a batch of closely watched indicators underscored the continued toll of the U.S. trade war on the country’s economy.

From the headlines…

As noted above, Wall Street is buzzing about the repo market. On Friday, the New York Fed injected an additional $75 billion into the repo market, its fourth liquidity injection of the week, after swap spreads fell to their lowest level on record.

Funds that track broad U.S. equity indexes hit $4.27 trillion in assets as of August 31, according to Morningstar, giving them more money than stock-picking rivals for the first-ever monthly reporting period.

The OECD cut its global growth outlook to 2.9 percent this year — down from its 3.2 percent projection four months ago, and the slowest since the financial crisis.

U.S. business optimism dropped this quarter to its lowest level in three years. U.S. home sales in August rose to the highest level in nearly a year and a half, sparking fresh hope that a protracted slump may finally be starting to reverse. Existing-home sales in August were up from a year earlier for the second straight month — following 16 straight months of declines.

Last year’s U.S. college graduates averaged about $29,200 in student loan debt — a record.

Economic activity in China cooled further in August, with industrial output and retail sales data suggesting sluggish demand and low confidence among businesses and consumers.

In 2010, coal supplied nearly half of America’s power, but this April, for the first time ever, renewables supplied more power to the U.S. electric grid than coal. Solar and wind are expected to power half the globe by 2050.

The U.S. continues to lag other developed nations when it comes to ensuring retirement security, according to the 2019 Natixis Global Retirement Index. In fact, the U.S dropped two spots to no.18 for retiree well-being, according to the annual index, which gives a snapshot of the well-being and financial security of retirees in 44 countries. And for all four indices measured, the U.S. ranked the same or lower this year.

What “retirement” means now.

The Nest Egg Game: Your life in 10 financial milestones.


September 11, 2019

The post-WWII economic order was built on ever-increasing global integration, but that is changing – here in the U.S. (where President Trump opposes it vehemently), in China, (which seems willing to try to deal the U.S. out over the long-term and which seems to want Hong Kong out of the global order), Great Britain (where roughly half the country wants to leave the EU, even if they can’t agree how), and elsewhere. Irrespective of how this plays out, individually and in the aggregate, there is no precedent in modern history for how — or even whether — the global economy can cope with its opposite.

Implicitly, at least, the capital markets seem to be conceding that this question should be top of mind since news about it has been the leading market-mover for weeks now. The default setting seems to be status quo focused in that any hint of a possible settlement, no matter how ill-founded or far-fetched, moves stocks higher while bad news about settlement prospects is carefully parsed for reasons to discount it.

That said, there are some good reasons for liking the U.S. markets. At 1.55 percent on Friday, the benchmark 10-year U.S. Treasury note yield is remarkably high compared to yields available overseas, making U.S. fixed income markets attractive. That the 10-year Treasury yield is below the S&P 500 dividend yield (1.90% during Q2-2019) is a very good reason to remain bullish on domestic stocks. Moreover, the forward earnings yield of the S&P 500, at 6.06 percent during August, is even more outstanding compared to the fixed income yields.

Domestic stocks recorded a second consecutive week of solid gains last week, as optimism again grew that progress will be made in the U.S.-China trade dispute. The large-cap S&P 500 moved within 2 percent of its July 26 record high, while the smaller-cap indexes remained well off their 2018 peaks.

Within the S&P 500, energy shares outperformed as oil prices rose in response to falling U.S. inventories and Iran’s announcement that it was scaling back its commitments under the nuclear deal negotiated in 2015. Tech shares were also strong, aided by a rise in semiconductor shares. Utilities stocks lagged as longer-term bond yields increased, making their typically above-average dividends less attractive in comparison. Potential for infrastructure damage from Hurricane Dorian may have also discouraged some.

Another factor driving stocks was some favorable economic data. U.S. productivity rose more than expected in the second quarter, and factory orders jumped 1.4 percent in July, their best gain in nearly a year. The Institute for Supply Management’s gauge of service sector activity also rose more than expected.

The rest of the week’s economic data were more mixed. The ISM’s gauge of manufacturing activity, released Tuesday, moved into negative territory in August for the first time since 2016. August payroll gains, reported Friday, were fine but less than expected. Overall payrolls rose by 130,000 versus consensus expectations for a gain of 160,000, while private sector employers added only 95,000 jobs. Average hourly earnings rose a healthy 0.4 percent in the month, however, and the labor force participation rate moved back to the multi-year high (63.2%) it had reached at the start of the year. Friday’s jobs data seemed to weigh a bit on bond yields, and trade hopes helped push Treasury yields higher for the week as a whole.

European stock markets experienced one of their best weeks since June. The pan-European STOXX Europe 600 rose almost 2 percent. Chinese stocks unequivocally posted their best weekly performance since June, and Japan traded higher too.

From the headlines…

U.S. employers added 130,000 jobs in August while the jobless rate held steady at 3.7 percent.

CEOs, central bankers and money managers say they’re operating in a world where they have no idea what’s coming next, leaving them with few options but to prepare for the worst. Uncertainty about a handful of unprecedented phenomena — the grinding trade war with China, the ever-changing Brexit debate and President Trump’s government-by-tweet — is inflicting pain on the global economy and making decision-makers very nervous.

The U.S. and China said last week that talks to end their trade war would resume next month. The escalating trade war between the U.S. and China is rippling through the global economy. Before September 1, goods such as clothing and shoes had been spared from the tariff war with China. Not anymore. Uncertainty over trade policy is likely to reduce U.S. economic output by more than 1 percent through early 2020.

As the U.S., U.K., and China are all putting up trade barriers, protectionism abounds. “Everywhere the trend seems the same. Except in Africa.”

The dollar reached its strongest level in over two years as the gloomy outlook for global growth, rising U.S.-China trade tensions and political turmoil in Europe weighed on major currencies world-wide.

The Fed delivered the first non-unanimous rate decision of Chair Jerome Powell’s tenure in June and in July it saw two dissenting votes. The increasing polarity of opinions on the Fed does not bode well for a central bank facing an unprecedented era in monetary policy and weakening U.S. and global economic data.

Taking advantage of low, low rates, U.S. companies issued $74 billion of investment-grade bonds last week, the most for any comparable period since records began in 1972. That was nearly double the previous record of $40 billion set in 2013.

“The consumer is now carrying all of the weight, or much of the weight” of the U.S. economy’s growth, New York Fed president John Williams said.

The Federal Reserve released its “beige book,” that said most U.S. businesses remain optimistic despite concerns over tariffs and trade.

The U.S. manufacturing sector shrank for the first time in three years last month, the latest sign that trade tensions and cooling global growth are weighing on the American economy.

Corporate profits are down, but wages are up.

Truck makers are logging sharply lower orders, adding another stress point for a decelerating U.S. manufacturing sector.

The world is aging fast. By 2035, Americans aged 65 and older will make up 21 percent of the population, outnumbering those under 18. It’s a trend being replicated in many countries all over the world, driven by lower fertility rates and longer lives.

The nuclear family, religious fealty, and national pride – family, God, and country – are a holy trinity of American traditionalism. The fact that allegiance to all three is in precipitous decline tells us something important about the evolution of the American identity.


September 5, 2019

Course Reversal

Worldwide, politicians left and right are demanding that their central banks aggressively cut rates to juice their economies, irrespective of whether doing so is prudent. And central bankers obviously seethe with a desire, most recently expressed (last week) by former New York Fed President William Dudley, to force politicians to do their jobs, make difficult decisions, and make necessary corrections so that central banks might keep some ammunition for a real crisis, retain their independence, and simply do their jobs. As Mr. Dudley said, “Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices….”

Thus far, largely because the central banks – perceiving themselves as the only grown-ups in the room – are unwilling to force the politicians (and, most importantly, their constituents) to pay for their mistakes, the politicians are clearly winning (as they should – central bank officials aren’t elected and shouldn’t go about trying to decide elections). That the politicians are winning suggests that the economy will be the worse for it and that the Fed (or other central banks) won’t be able to stimulate the economy when doing so really becomes necessary. But the economy will probably remain fine, at least for a while. As ever, politicians – for whom lunch is a long-range plan – favor right now over what is in the longer-term best interest of their countries. Moral hazard is right in their wheelhouse.

In the capital markets last week, domestic stocks enjoyed their best week in nearly three months, as traders appeared to grow more confident in the prospects for a U.S.-China trade deal. Within the S&P 500, industrials outperformed while health care, consumer staples, real estate, and utilities shares lagged.

Futures markets were sharply lower before markets opened Monday, as traders reacted to President Trump’s announcement the previous Friday evening of additional tariffs on Chinese imports. However, Mr. Trump appeared to reverse course on Monday, stating that prospects for a trade deal were the best they had been in some time and asserting that the Chinese “want to make a deal very badly.” Markets pulled back as hopes for a deal faded again Tuesday, however. The editor of a state-owned Chinese newspaper tweeted that he had no knowledge of any recent talks and that China “didn’t change its position” and “won’t cave to U.S. pressure.”

On Thursday, trade prospects took another turn for the better. A spokesman for China’s Ministry of Commerce told reporters that China had no plans to respond to the White House’s latest tariff escalation, although he also remarked that “China has ample means for retaliation.”

Reflecting the week’s mixed economic signals, the yield on the benchmark 10-year U.S. Treasury note ended the week little changed at 1.50 percent.

Most major European stock markets rose last week, buoyed by the seeming improvements in U.S.-China trade talks and the agreement of Italian political parties to form a new government. The pan-European STOXX Europe 600 rose more than 2 percent, while the exporter-heavy German DAX advanced 2.5 percent, and Italy’s FTSE MIB gained almost 4 percent.

In Asia, traders of Chinese stocks appeared less encouraged by the latest trade developments and braced for the next wave of U.S. tariffs and both major Chinese indexes traded off slightly. All the Japanese indexes advanced.

I trust you will all enjoy your Labor Day holiday tomorrow.

From the headlines…

Across the country, more than 1 million more jobs are available than there are people to fill them.

President Trump claims he has the “absolute right” to order U.S. companies out of China. The trade battle is shaping up to be a definitive issue in the 2020 presidential campaign. The world’s central bankers are increasingly worried Mr. Trump’s tactics to reorder global trade are destabilizing economies in ways they can’t easily fix. A growing number of U.S. companies say they’re hurting as the U.S.-China trade war intensifies.

U.S. consumer confidence declined in August by less than forecast as Americans’ assessment of current conditions climbed to the highest level in almost 19 years, helped by a job market that remains robust.

Second-quarter GDP was up a seasonally adjusted, annualized 2 percent, the Commerce Department said — a decent pace but down from the first quarter’s 3.1 percent and 2018’s overall 2.9 percent, as well as from the previous second-quarter estimate of 2.1 percent. Weakness in inventory investment and trade were bigger drags than previously thought. And a broad measure of corporate earnings that had dropped for two consecutive quarters rebounded.

Last week, the dividend yield of the S&P 500 went higher than the yield one can obtain from a 30-year U.S. Treasury bond. That has only happened once before in the post-WWII era – at the tail end of the 2008-09 Great Financial Crisis.

One of the broadest gauges of the American bond market, the Barclays Aggregate, is sitting on gains of 9.10 percent YTD. If it were to finish the year at that level, it would be the index’s biggest increase since 2002. Longer-term bonds have done even better. If you had simply bought the 10-year U.S. Treasury note at the end of 2018, you’d be up almost 13 percent YTD. TLT, an ETF of U.S. Treasury paper 20 years and greater in term, is up 23 percent YTD.

The U.S. Treasury yield curve completely inverted Tuesday, with 1, 2, and 3-month U.S. Treasury bills all paying higher interest rates than 30-year U.S. Treasury bonds. The yield on the 3-month bill moved as much as 52 basis points above the 10-year note (the highest since 2007) with the 10-year yield ending the trading day well below the 2-year — fully inverting another closely watched yield curve. The 3-month/10-year and 2-year/10-year yield curve inversions are closely watched precedents of recession. Economists at the Federal Reserve recently called the 3-month/10-year inversion “the best summary measure” for an economic downturn.

Greek government 10-year bonds yield 1.83 percent, yields on Italian 10-year government bonds have dropped below 1 percent, an unprecedented level, and 10-year U.S. Treasury notes yield 1.49 percent. Those levels seem out of whack in that Greece is rated B1/B+ (a junk rating) and Italy is rated Baa3/BBB (a very low investment grade rating), while the United States (Aaa/AA+) is generally considered to be the best credit on the planet. What yield might 100-year U.S. debt trade at?

Insider selling is increasing.

FAANG shares, once darlings of the tech sector, have been losing their luster.

Johnson & Johnson was ordered to pay over $572 million for its role in Oklahoma opioid crisis.

For those within 10 years of retirement, this eight-step review can help.

What are your investment beliefs and why are they important?


August 28, 2019

A Tale of Two Narratives

The capital markets can’t seem to decide if it’s the best of times or the worst of times.

All year, the markets have been driven by two dominant narratives. Those narratives involve Federal Reserve policy and what’s going on in China. In each case, the default has been to assume a positive stock market spin (the best of times), but those defaults can be undone by news, as it was last week, and feel like the worst of times in a hurry.

President Trump wants the markets to focus on the Fed narrative, but the markets are currently focused primarily on China.

On March 1, 2018, Mr. Trump announced a 25 percent tariff on steel and a 10 percent tariff on aluminum imports. The next day, he tweeted, “Trade wars are good, and easy to win.” One week later, the president signed an order to impose the tariffs effective after 15 days. Since then, U.S. Steel shares are down 73 percent and the U.S. economy has notably weakened.

Growth has slowed, probably to around 2 percent, manufacturing is down, and the trade deficit has gotten bigger, not smaller. Yet it’s by no means clear that we’re heading for an actual recession, despite many who are calling for it. That said, President Trump and his inner circle have been acting as if the sky were falling. Mr. Trump is lashing out at what he considers a conspiracy to get him. He’s accusing the Federal Reserve of sabotaging his boom, even though interest rates are actually a lot lower than his administration projected in its own rosy forecasts from last year. And the president is blaming Democrats who, he says, are “trying to ‘will’ the Economy to be bad.”

Not surprisingly, Mr. Trump and his advisors say there are no signs of recession. Still, while claiming that the “Economy is very strong,” the president also called for “at least 100 basis points” of easing, “with perhaps some quantitative easing as well.” That is the sort of drastic policy action from the Fed that is used to try to forestall truly dire economic outcomes that seem inevitable.

What is perhaps most striking about all this posturing is the panic displayed. The mixed message: Everything is great, but we need a huge stimulus immediately.

The greatest threat to any president’s reelection bid is a weak economy, and that is especially so for President Trump, who has bet his administration on his economic prowess. And the biggest threat to the economy is Mr. Trump’s trade war.

Conventional wisdom still says a trade deal gets done, at least eventually, but I’m not so sure. That’s because (a) China, as an authoritarian government, can force its people to hold out indefinitely, potentially driving Mr. Trump out of office; or (b) China can give the president something to allow him to claim victory while driving a very hard bargain otherwise. Both of those scenarios are bad for the U.S.

These narratives reached a climax on Friday. Fed Chairman Jerome Powell conceded in a speech that the Fed has no playbook for the president’s trade war and the damage it is doing to the American economy. He warned that “trade policy uncertainty” is a driving factor for the market’s fears. President Trump, after dumping on the Fed all week, proved the point just minutes thereafter.

U.S. stocks slumped early Friday after China said it would impose retaliatory tariffs on $75 billion in additional U.S. products. Mr. Powell’s speech followed, after which President Trump vowed to respond to China. On Friday alone, the Dow lost 621 points, or 2.37 percent. The Nasdaq lost 3 percent, and the S&P 500 was off 2.59 percent, closing out a fourth straight down week. Yields on U.S. government bonds tumbled, as did commodities markets that are sensitive to the two countries’ trade battle.

After market close, President Trump responded, saying he’s raising tariffs further, deepening the impasse over the two nations’ trade policies. Duties on $250 billion of imports already in effect will rise to 30 percent from 25 percent on October 1, Mr. Trump announced in a series of tweets. He also said that the remaining $300 billion in Chinese imports will be taxed at 15 percent instead of 10 percent starting September 1. Those moves are likely to weaken stocks and economic conditions even more.

It just might be harder to win this trade war than we were led to believe.

From the headlines…

Federal Reserve Chairman Jerome Powell faces scrutiny from markets and the White House over his stewardship of interest rates in an economy unsettled by a trade war with China and fears of recession. Despite traders hoping for aggressive easing, Fed minutes released last week show that Fed officials saw their move to cut interest rates last month as a recalibration rather than the start of a more aggressive easing cycle and were reluctant at their latest policy meeting to say how future moves would unfold. Mr. Powell’s challenge in the weeks ahead is to articulate clearly why the central bank is likely to continue reducing rates absent obvious signs of economic deterioration.

Multiple studies, from researchers at Harvard, Columbia, the IMF, and two different branches of the Federal Reserve, have all concluded that the tariffs imposed by President Trump on China and others have hurt American consumers and threatened economic growth. For instance, scholars at Columbia, Princeton, and the New York Fed found that Mr. Trump’s tariffs had reduced U.S. real income by $1.4 billion per month by the end of 2018.

The U.S. Treasury is considering the issuance of 50 and 100-year bonds. In related news, the U.S. budget deficit is now expected to breach $1 trillion by 2020, two years earlier than previously projected. Surprisingly few countries have taken advantage of crazy-low rates to issue ultra-long bonds.

According to The Wall Street Journal, “more than 50 percent of America’s $22 trillion in outstanding debt matures in the next three years. The weighted average cost of that debt rests at less than 2 percent. A rise to 3 percent would increase the deficit by an astounding $220 billion a year.”

Worldwide, there is now $17 trillion of negative yielding sovereign debt and over $40 trillion of negative real yielding debt in total. For example, Germany auctioned a 30-year bond last week with a 0 percent coupon for the first time. The instrument sold with a record low yield of -0.11 percent.

Existing-home sales in July rose 0.6 percent from a year earlier, the first year-over-year uptick in 17 months and possibly a sign that lower mortgage rates are finally starting to drive sales after a weak spring selling season. However, the Labor Department reported that employers added a half-million fewer jobs in 2018 and early 2019 than previously reported, the latest evidence that the economy got less of a jolt from President Trump’s tax cuts than it initially appeared.

The SEC has published a new Investor Bulletin on indexed annuities. It doesn’t seem to demonstrate much understanding of the product.

President Trump canceled his trip to Denmark because the Danish Prime Minister, Mette Frederiksen, will not entertain the idea of selling Greenland.


August 22, 2019

Mr. Market’s Wild Ride

Domestic stocks recorded a third straight week of losses on the backs of trade and growth worries. The bulk of last week’s declines came Wednesday, with the major benchmarks suffering one of their worst daily pullbacks to date in 2019. The smaller-cap benchmarks underperformed, and the S&P Midcap 400 briefly joined the small-cap Russell 2000 in correction territory, or down over 10 percent from the highs it reached in late August 2018.

The typically defensive consumer staples and utilities sectors performed best within the S&P 500, with the former given a boost from an earnings and revenue beat from Walmart. Energy stocks underperformed as oil prices surrendered a Tuesday rally.

A plunge in longer-term bond yields and the negative signal it seemed to send about the health of the global economy appeared to be the largest factor weighing on sentiment. On Wednesday, the yield of the benchmark 10-year U.S. Treasury note fell below that of the two-year note, an inversion that has preceded the past several U.S. economic recessions, albeit not for a relatively lengthy time, sometimes as much as two years. Short-lived inversions have not always been followed by a recession, however.

Developments in the U.S.-China trade dispute also loomed large last week. On Tuesday, stocks rallied after President Trump announced that some of the 10 percent tariffs set to be imposed on Chinese goods on September 1 would be delayed until mid-December so as not to hurt the holiday shopping season — his first acknowledgment that U.S. consumers are bearing at least part of the tariff burden.

Another factor helping the market recover some of its losses late in the week was good news on the American consumer. The Commerce Department reported that retail sales, excluding autos, jumped 1 percent in July, the best showing in four months, helping build on optimism over healthy sales at Walmart. On Friday, however, the University Michigan reported that its preliminary reading on consumer sentiment fell more than expected and hit its lowest level since January. Weekly jobless claims also rose more than expected and hit their highest level since late June. Meanwhile, poor data out of China and Germany confirmed a substantial slowdown in global manufacturing, with rising trade barriers seemingly to blame. Traders also worried about political turmoil in Hong Kong and elections in Argentina.

As traders rushed to the perceived safe haven of the Treasury market, the yield on the benchmark 10-year note fell as low as 1.48 percent, just above the record low it reached in the summer of 2016. Meanwhile, the yield on the 30-year bond fell below 2 percent for the first time ever.

Stock markets in Europe came under pressure throughout the week from fresh U.S.-China trade tensions and growing signs of recession. The pan-European STOXX Europe 600 lost about 0.5 percent, the UK’s FTSE 100 dropped 1.8 percent, and the exporter-heavy German DAX index dropped about 1.3 percent. In Asia, Japanese stocks fell for the third straight week, but Chinese stocks posted a weekly gain after Beijing pledged to roll out measures to boost disposable incomes for the next two years to offset the slowing economy.

From the headlines…

All signs point to a decades-long cold war with China, one reshaping global alliances, politics and economies.

paper from economists at Columbia, Princeton and the New York Federal Reserve found that the “full incidence” of President Trump’s tariffs have fallen on domestic companies and consumers – costing them $3 billion a month by the end of 2018. The paper also found that the tariffs led to a reduction in U.S. income, by $1.4 billion per month. A separate paper found that the tariffs led to higher consumer prices. It estimated that the tariffs will result in a $7.8 billion per year decline in income.

Last week, long-bond yields dropped below two percent for the first time ever. Ten-year note yields dropped below 1.5 percent.

Historically, yield curve inversions have been reliable early indicators of a recession. This is particularly true of the spread between the 3-month bill rates and 10-year Treasury yields, in which all persistent inversions since 1960 have been followed by a recession. An explainer on inverted yield curves.

Is the Fed pushing on a string?

The U.S. budget deficit has already surpassed last year’s total figure, growing to $866.8 billion in just the first 10 months of the fiscal year.

U.S. retail sales surged above expectations in July and sales at retailers including Amazon and Best Buy posted their biggest increase in 4 months. A strong earnings report from Walmart also suggests optimism that American consumers are still shopping and perhaps are confident enough to carry the economy through trade war tensions. Small business optimism is very high, too.

U.S. CPI rose a seasonally adjusted 0.3 percent last month from June and 1.8 percent from a year earlier, with the core reading, which excludes volatile food and energy categories, up 2.2 percent year over year.

Those counting on a corporate earnings rebound in the second half of the year are risking disappointment.

Japan and three of Europe’s four largest economies — Germany, Italy and the U.K. — are heading toward recession by year-end, with China growing at its slowest pace in 27 years.

ECB governing board member Olli Rehn said the central bank will announce a fresh package of “impactful and significant” stimulus at its September meeting that’s expected to include “substantial” bond purchases as well as cuts to the ECB’s already-negative interest rate.

Jyske Bank, Denmark’s third-largest bank, is offering a 10-year fixed-rate mortgage with an interest rate of -0.5 percent, which means customers will pay back less than the amount they borrowed.

Tina” is back.

President Trump wants to buy Greenland.


August 14, 2019

Hurry Up and Wait

When this missive hit your inbox early last Sunday, I reported on a lousy week in the markets – despite a Fed rate cut – because President Trump further intensified his trade war with China. I also noted that China’s response was still to come. By the time the sun rose over the Land of the Free on Monday morning, the land of the not-at-all free had responded, and the markets didn’t like that much either. But conviction was fickle – in both directions. Despite big swings in recent days, all three major domestic indexes (S&P 500; Nasdaq; Dow) closed last week just modestly lower.

What began as a rout on Monday – with U.S. stocks suffering their worst one-day drop of the year – quickly reversed course as Beijing didn’t take as aggressive a stance on weakening the yuan as some feared. The S&P 500 rebounded nearly 2 percent on Thursday, before resuming its drop Friday when President Trump suggested a meeting with China on trade might be canceled. “We’re not ready to make a deal, but we’ll see what happens,” Mr. Trump said Friday morning. “We will see whether or not China keeps our meeting in September.”

Energy shares were among the worst performers in the S&P 500 last week, dragged down by a midweek plunge in domestic oil prices following a surprise rise in U.S. inventories. Longer-term interest rates continued to fall, favoring real estate shares, and the larger consumer discretionary sector was helped by a rise in Booking Holdings (operator of Priceline and other travel sites) after an earnings and revenue beat.

The Labor Department announced on Friday its producer price index rose 0.2 percent in July after moving up 0.1 percent the previous month. In the 12 months through July the PPI increased 1.7 percent after advancing by the same margin in June. Excluding the volatile food, energy, and trade services components, producer prices edged down 0.1 percent last month, the first decline since October 2015. The print was in line with expectations. Along with the rising trade tensions, the report gives further room for the Federal Reserve to continue cutting interest rates, and futures markets ended last week pricing in a roughly 88 percent likelihood of at least two more quarter-point rate cuts by the end of the year, according to CME Group data.

The cocktail of trade tensions and rate-cut hopes has led to a stock market that has risen about 17 percent year-to-date, but which is also only up a little more than 2 percent from where it was a year ago. Many have piled into presumed safe-haven assets such as U.S. government bonds and gold amid the latest turmoil. The yield on the benchmark 10-year U.S. Treasury note hit its lowest level in three years last week and closed the week at 1.65 percent. Gold futures settled at six-year highs on Wednesday. The yield curve remains significantly inverted.

In Europe, the pan-European STOXX Europe 600, the UK’s FTSE 100, and the exporter-heavy German DAX all posted substantial losses. In Asia, Chinese stocks posted their steepest weekly drop in three months, as traders appeared to brace themselves for a lengthy U.S.-China economic battle. Japanese stocks were down too.

From the headlines…

On Monday, the (governmentally manipulated) renminbi crossed the psychologically important level of 7 to the U.S. dollar for the first time since the 2008 financial crisis and hit a record low. That indicates a growing desire by Beijing to find ways to retaliate against President Trump and his trade war.

In addition to the weakening yuan, China’s state-run agricultural firms have now stopped buying American farm goods, in a move that looks designed to inflame President Trump. The U.S. Treasury Department officially declared China a currency manipulator Monday night.

During the first half of the year, imports from China dropped by 12 percent, and U.S. exports to China fell 19 percent. China is no longer the top trading partner of the U.S. The new No. 1? Mexico. Overall, Chinese exports rebounded in July, though economists expect the turnaround to be short-lived as Beijing and Washington escalate their trade battle.

The president believes that “[t]rade wars are good and easy to win,” but he is pretty much alone in that view, as even his closest advisors nearly all oppose them. Bloomberg Economics puts the cost to the world economy of a full blown trade war at $1.2 trillion. Liberty Street Economics (from the New York Fed) looks at tariff costs at the household levelMorgan Stanley says another set of tariffs would cause a recession (tariffs are paid to the government, but their costs are passed along to the consumer in the form of higher prices). Still, the president says things are going great on the tariff front, even if Wall Street disagrees. And the trade war has now escalated beyond tariffs, obviously.

Oil prices are in the dumps, down one-third since October, but why?

Federal-funds futures, used by traders to wager on the direction of monetary policy, suggest a 100 percent chance of another rate cut in September.

Falling bond yields mean falling mortgage rates, and homeowners are rushing to refinance.

Economist Nouriel Roubini argues that the Fed doesn’t have nearly enough ammunition to protect against a full-fledged trade war.

Former chairs of the board of governors of the Federal Reserve are “united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons.”

With earnings season about 80 percent complete, we know that earnings are almost totally flat overall, and that companies have been talking down their prospects at the greatest rate since early 2015 when energy companies were writing down their own estimates in the face of falling oil prices.

Small endowments can’t successfully mimic what the big endowments do (and neither can you).

Dividends don’t fall nearly as much as stocks when the market gets crushed.

The world’s 20 biggest asset managers. Some of them are facing an existential crisis.

Individual investors are worried.

Investors in high-tax states like New York and California are piling into municipal bonds, fueled in part by the 2017 tax overhaul that raised tax burdens for many high-income households.

Mark Tibergien explains how the financial advice business will change over the next decade.

Carl Richards asks whether large chunks of unstructured time are a reward for doing great work or a prerequisite for it (video).

John Maynard Keynes thought future generations would work less and less. By 2030, he predicted in 1930, most people would work only 15 hours a week. As if. Today, many people feel they work more than previous generations. But a new study suggests that how we use our time hasn’t changed that much in 50 years.


August 7, 2019

This week’s market action is far less important than the context in which it occurred, so let’s start with what was important.

On Wednesday, after a year of almost constant wheedling, the Federal Reserve finally gave President Trump what he wanted: an interest-rate cut. Depending upon your outlook, the Fed either (a) moved to get ahead of the curve with respect to a softening economy; or (b) gave in to the president, even though many fear doing so could fuel asset bubbles and leave the Fed with fewer tools to handle a real downturn.

The rate cut came even though economy is mostly fine, unemployment is low, inflation is nominal, and the stock market has done remarkably well. The new range for the Fed funds rate is 2.00 to 2.25 percent. The Fed last raised rates just seven months ago. Fed Chairman Jerome Powell listed three reasons for the first such rate cut since 2008: “to insure against downside risks from weak global growth and trade policy uncertainty; to help offset the effects these factors are currently having on the economy; and to promote a faster return of inflation to our symmetric two percent objective.”

Among the “downside risks” the Fed sees are President Trump’s policies, as his ongoing trade war has caused companies to pull back on spending (e.g., the Institute for Supply Management manufacturing index slipped to its lowest reading in nearly three years in July, marking the fourth straight month of slowing expansion), increased the prices of consumer goods, and threatened the supply chains of American business. Indeed, S&P Global revised down its outlook for U.S. GDP growth through 2022, because “the risk of trade protectionism between the U.S. and China will persist for some time.”

Mr. Powell also said that “we’re thinking of it as essentially in the nature of a midcycle adjustment to policy.” In other words, the Fed doesn’t see this move as the first in a long series of rate cuts going into a recession. Instead, they see a few cuts to help the economy during an expansion. It’s a new approach for the Fed. Instead of looking primarily at the labor market, the main reason it cut interest rates was “the implications of global developments for the economic outlook.” Further questioning made it clear that he was talking about the trade situation and the risk of a worsening conflict.

Chairman Powell did see some good news on Wednesday: “After simmering early in the year, trade-policy tensions nearly boiled over in May and June, but now appear to have returned to a simmer.” Well, that simmer didn’t last long. The president (like Wall Street traders) was not satisfied with the quarter-point cut or the suggestion by Mr. Powell that there might not be more in the offing. No president can do much of anything about employment and inflation, but “global developments” are right in his wheelhouse. And, right on cue, Mr. Trump responded with … more tariffs (traders got squeezed; the S&P 500 experienced its biggest intraday reversal since May 10).

Bond markets saw an immediate flight to safety. The benchmark 10-year U.S. Treasury note yield fell to its lowest level since Mr. Trump’s election (1.86 percent) and the trend towards a flatter or even inverted yield curve returned. Part of the impetus is economic concerns, which are real and enhanced by more tariffs. But, even more, it seems to be driven by Fed expectations and the limited tools available to it. The market’s estimate of the odds of another rate cut at next month’s FOMC meeting rose from 64 to 92 percent, according to futures data compiled by Bloomberg. By December’s meeting, the odds of at least two more rate cuts from here rose from 42 to 75 percent.

Is this a work of a “stable genius”? The “yes” argument (“three-dimensional chess”) sees that the president gets interest rate relief to stimulate the economy through the 2020 election and more runway to take his trade fight to China. The “no” argument sees that if he really pushes ahead with more and higher tariffs, the result will be lower equilibrium rates needed to keep the economy stable; they will not stimulate economic activity. The president announced new tariffs the day after the Fed Chair he chose warned repeatedly that tariffs represent the single biggest threat to the U.S. and global economies. Still, higher trade barriers (and thus higher prices for American businesses and consumers) may become “the new status quo.”

It is also noteworthy that stock markets did not respond to the good news of likely lower rates in future, but to the bad news that the risk of an all-out trade war had greatly increased. Mr. Trump takes the stock market very seriously, and it seems to be telling him he is making a mistake.

We also need to consider how China responds. China has promised a response, without elaborating what measures it would take if the new tariffs are introduced on September 1. The Chinese economy remains by far the greatest risk to global markets and the world economy. Only time will tell if the president’s gambit (if that’s what it is) works, but it’s hard not to see it as dangerous – reckless even – especially because the domestic markets had just about decided that trade concerns weren’t really that big of a deal.

As Mark Zandi, chief economist at Moody’s Analytics, told CNBC, if President Trump follows through on the tariffs, “that is the fodder for recessions,” and would more than likely force Chairman Powell’s hand, out of fear of the impact on business confidence and spending. New tariffs would also impact consumer spending, as products like Nike sneakers and iPhones will be much more expensive.

Usually, the monthly employment data is a big deal. This time, not so much. Employers added jobs at a steady pace in July and unemployment held at a historically low level, signs of an assured labor market despite a broader cooling of economic momentum. Nonfarm payrolls rose by 164,000 in July, the Labor Department announced, right in line with expectations. The jobless rate held steady at 3.7 percent, near a 50-year low. Wages advanced 3.2 percent from a year earlier, an improvement from the prior month’s pace. The week’s manufacturing data were mixed, while June construction spending fell unexpectedly.

Now to market performance…

Domestic stocks suffered their worst week thus far in 2019. Every day was negative, but most of the damage was late in the week. The tech-heavy Nasdaq fell the most and the small-cap Russell 2000 stood fell back into correction territory, or more than 10 percent below its August 2018 closing high.

Within the S&P 500, technology shares performed worst as new trade and global growth worries, along with some earnings disappointments, caused many semiconductor stocks to give back a portion of their strong July gains. Consumer discretionary shares were also weak as retailers selling goods imported from China faced the prospect of significantly higher costs and reduced demand. The small real estate sector fared best as longer-term bond yields plunged to levels not seen in almost three years, promising lower mortgage rates.

European stock markets closed sharply lower for the week, consistent with U.S. markets. The pan-European STOXX Europe 600, the UK’s FTSE 100, the exporter-heavy German DAX, and Italy’s FTSE MIB all recorded steep losses.In Asia, weakness was the rule too. Chinese and Japanese markets generally traded off 2.5-3 percent for the week.

From the headlines…

More than 90 percent of developed-market government bonds have yields that are lower than the Federal Reserve’s benchmark overnight interest rate, according to Bianco Research, up from about 40 percent in 2015. Even the yield on 10-year debt from Greece, buffeted in recent years by economic and political toil, trades below the federal-funds rate. The Fed has raised interest-rates nine times in recent years, while the Bank of Japan adopted a negative interest-rate policy and the European Central Bank pulled rates further below zero. The divergence has contributed to a widening gap between the yields on U.S. government bonds and other sovereign debt. About 25 percent of all bonds in the world now have negative yields and about 40 percent of global bonds yield less than 1 percent. Today, 43 percent of the global ex-U.S. IG index (excluding U.S. Treasuries, U.S. corporate bonds, MBS, CMBS, and ABS) is trading at negative yields, up from 20 percent late last year.

U.S. crude-oil prices closed down 7.9 percent Thursday, their biggest one-day drop since February 4, 2015, as analysts worried that slowing demand will lead to a glut. Prices are now down 19 percent from their April highs and 29 percent below their 52-week high hit in October. The cause: trade hostilities.

Borrowing by the federal government is set to top $1 trillion for the second year in a row. The Treasury Department said it expects to issue $1.23 trillion in debt in 2019, more than twice as much as the $546 billion it issued just two years earlier.

The Senate passed that massive budget deal, previously passed by the House, that lifts the debt ceiling and prevents automatic spending cuts. Some GOP senators grumbled that the bill does nothing about the national debt, which will grow to further record levels due to this deal, but nobody is willing to do anything about it. President Trump has said he’ll sign it.

A decade or more of lagging doesn’t mean the value investing landscape has changed permanently.

Average earnings among S&P 500 companies that have reported are up 0.7 percent from a year earlier, according to FactSet. That has helped improve analysts’ forecasts for earnings to a 2.6 percent contraction for the quarter, better than the more than 3 percent pullback they had been predicting last week. Check out this S&P 500 earnings scorecard.

The invention of money.

The Wall Street Journal reported that the Certified Financial Planner Board of Standards, which runs LetsMakeAPlan.org, hasn’t been informing users about customer complaints, regulatory skirmishes and other problems. The CFP Board responded by saying it will upgrade its scrutiny of financial planners and appoint a task force to review its enforcement and disclosure procedures.


July 31, 2019

Domestic stocks rebounded from the previous week’s losses last week, lifting the large-cap S&P 500 and the tech-heavy Nasdaq to record highs. The Nasdaq outperformed, helped by a 10 percent surge in Alphabet (parent of Google) shares on Friday, following the media and tech giant’s report of better-than-expected second-quarter earnings, as well as plans to repurchase $25 billion of its shares.

Within the S&P 500, Alphabet’s gains, along with an earnings and revenue beat from Twitter, helped the communication services sector handily outperform other segments of the index. The sector got a further boost Friday following the Justice Department’s announcement of its approval of a $25 billion merger of wireless carriers T-Mobile and Sprint. Energy shares were laggards as oil prices surrendered gains from an unexpectedly sharp drop in domestic crude inventories, with traders seeming to focus instead on the clouded global economic outlook.

The second-quarter earnings season continued apace, with 145 of the S&P 500 companies reporting results last week. Aside from Alphabet, prominent movers on earnings releases included Boeing, which fell back on confirmation of a large quarterly loss resulting from suspended deliveries of its troubled 737 MAX airliner. Fellow industrial giant Caterpillar also sold off after reporting disappointing earnings and guidance. So far, more companies than usual have been beating estimates.

Nevertheless, many traders continued to look beyond earnings and focus on the broader economic and political environment. Hopes for progress in U.S.-China trade talks seemed to give a lift to markets early in the week, with Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer scheduled to fly tomorrow to Shanghai to renew talks. On CNBC Friday, however, White House economic adviser Larry Kudlow cautioned that he “wouldn’t expect any grand deal” to result from the visit.

The week’s economic data offered mixed signals. Tuesday brought news that existing home sales fell more than expected in June, while a gauge of factory activity in the mid-Atlantic region tumbled unexpectedly, reversing a recent pattern of upside surprises in regional manufacturing reports. Indeed, IHS Markit’s survey of overall manufacturing activity, which was released Wednesday, moved down to 50, the border between expansion and contraction.

On the other hand, June durable goods orders excluding transportation (and, thus, most of the impact of Boeing’s 737 MAX problems) rose much more than expected. Weekly jobless claims also fell back sharply and hit a three-month low. On Friday, the Commerce Department reported that gross domestic product had grown at an annualized pace of 2.1 percent in the second quarter, a touch more than consensus expectations.

The week’s data did little to change consensus expectations for a quarter-point rate cut following the Federal Reserve’s July 30–31 meeting. The yield on the benchmark 10-year U.S. Treasury note rose modestly and closed last week at 2.08 percent.

Stock markets in Europe were generally higher, buoyed by positive earnings reports and hints from the European Central Bank that more monetary stimulus is on the way. In Asia, stocks also mostly advanced as traders looked forward to the trade talks between China and the U.S.

From the headlines…

The change we have seen since December is incredible. As Christmas trees were being decorated, the overarching market narrative quickly shifted from “global synchronized recovery” to “global synchronized slowdown.” Friday’s GDP report showed the growth of the U.S. economy slowing to 2.1 percent in Q2, a significant slowdown from the first quarter’s 3.1 percent growth rate, but still better than the 1.9 percent economists had expected. That number is spot on the 2.1 percent average growth rate since June 2009 and is consistent with average GDP growth during President Obama’s two terms.

The IMF reduced its global growth expectations for the third time this year, pointing squarely to the U.S.-China trade war that has thrown a wet blanket on cross-border trade and investment, sending manufacturing into a recession in the U.S. and in an increasing number of countries around the globe. Dimmer expectations for global growth have led S&P 500 companies to cut their profit forecasts, pushing the estimated earnings-growth rate for the year to 1.7 percent, down from expectations of 3 percent in late March, according to FactSet. Emerging markets, responsible for most of the world’s growth, also are beginning to slow notably, data from the Institute of International Finance shows. Meanwhile, China’s industrial sector has lost 5 million jobs in the last year, 1.8 million–1.9 million jobs because of the trade war with the U.S., according to a leading Chinese investment bank estimate, and the Chinese government announced that growth there fell to its slowest pace in almost three decades.

The economy had two glaring weak spots in an otherwise solid second quarter. Exports and business investment both declined from the first quarter, and their annual growth rates have been decelerating since the second quarter of 2018. That’s roughly when the U.S. got its maximum boost from President Trump’s tax cut and accelerating global economy – and when year-over-year GDP growth peaked at 3.2 percent, a three-year high. The tax cut is now in the past and exports are sinking as trade tensions rise and the world slows. Global monetary easing could arrest the slump, but 2 percent growth may be the best the U.S. can hope for.

Check out this S&P 500 earnings scorecard.

White House and congressional officials struck an agreement to raise the debt ceiling, averting a fiscal crisis but adding billions more in debt to an already gaping federal deficit. The agreement — for more than $2.7 trillion in spending over two years, with a nearly $50 billion rise next fiscal year — must still pass Congress (the House passed it; the Senate takes it up this week) and be signed by the president. It would suspend the debt ceiling until July 31, 2021 and will add another $1.7 trillion to the federal deficit over ten years, a deficit that was already the largest ever. Much higher governmental debt and deficits – spending without restraint – seems to be a state of affairs both parties can agree on.

The Fed’s new predisposition toward easing seems to be weakening the dollar and un-inverting the yield curve. Federal-funds futures now show traders pricing in a roughly 89 percent chance of at least one more rate cut this year after next week and nearly 55 percent odds of at least two more. Pretty much everybody expects a rate cut next week.

The logic of negative yielding bonds.

The European Central Bank signaled it is preparing to cut short-term interest rates for the first time since early 2016 and possibly restart its giant bond-buying program. However, recent Princeton University research suggests there comes a point at which lowering interest rates actually makes things worse, and “depresses rather than stimulates the economy.”

Will central banks begin buying stocks to stimulate their economies?

Boris Johnson, Great Britain’s new prime minister, will try anew to get a Brexit deal done. Johnson says the UK will leave the EU on or before October 31 with or without a deal.

Private equity replication.

The poor performance of university endowments continues and has now persisted for a decade.

Economic “givens” that may be wrong.

Static retirement withdrawal assumptions are a dangerous game.

Americans often don’t plan for long-term-care services and underestimate their cost.

If demographics are destiny, the stock market is cheap.

new survey of 9,100 retail investors in 25 countries from investment bank Natixis finds that many need a “reality check.” The survey showed retail investors are especially (insanely) confident in their return expectations, with long-term return expectations of 10.9 percent (above inflation).

Trading while driving– what could go wrong?