(Washington)

Three of the foremost experts on Financial Crises—proven by their experience in 2008—have just weighed in on the threat of another Crisis. Ben Bernanke, Tim Geithner, and Hank Paulson have just commented in a joint press conference that while the US financial system has better barriers in place to prevent a crisis, its tool kit should one come is considerably weaker than in 2009. The main weaknesses cited were the massive increase in debt the government has experienced since the Crisis, giving it less room to bail out the market; and secondly, the deep political divisions which could more easily block any bipartisan action that may be necessary to save the financial system. Geithner summed it up this way, saying “Better defenses, weaker arsenal”.

FINSUM: This is some very good insight from the most experienced Crisis fighters out there. All their points sound quite reasonable to us.

(New York)

All the focus in the fixed income world is currently centered around whether the yield curve will invert. However, investors should know something—the yield never inverts in municipal bonds. That’s right, the muni yield curve has never inverted. The reason why being that short-term munis are always very rich, with small supply and high demand. However, looking at longer-term yields, munis look like a great buy. While the average ten-year muni yield is only 2.43% versus 2.86% for Treasuries, for any investor in a tax bracket above 15%, buying munis makes more sense.

FINSUM: The current spread between ten-year munis and Treasury bonds makes the former look like a smart purchase right now, especially because the market seems to be in healthy shape.

(New York)

The current fixed income environment is very challenging. The yield curve continues to flatten, and long-term yields have stalled, yet could move higher at any point. One great way to play the situation is through floating rate notes and funds. One floating rate fund that has been very successful is the American Beacon Sound Point Floating Rate Income, which has a 5.7% annualized return over the last five years. This year it has returned 4.5% versus Vanguard Total Bond Market Index’s -0.1%. The fund specializes in floating rate bank loans, so the higher rates go, the more those loans pay.

FINSUM: Floating rate notes and funds seem like a really good approach in the current environment, and this one might be an excellent choice.

(New York)

Most of the indicators that the media is discussing at the moment have to do with a recession (e.g. an inverted yield curve). But today, there is an important one that speaks directly to a bear market—flows in pension funds, insurers, and sovereign wealth funds. There is a combination of factors happening which shows markets have reached the end of this cycle. On the one hand, pension funds and insurers are pulling money out of public markets in order to chase private investments (e.g. real estate and infrastructure). But at the same time, the world’s largest sovereign wealth funds are now pulling out of private market investments because there is too much money chasing too few deals. In other words, valuations have gotten too high everywhere and some of the world’s biggest investors are moving into cash.

FINSUM: When the world’s biggest investors are getting out of both public and private markets, it seems to indicate that the end of the market cycle is near. That said, this bull market has revived itself many times.

(Houston)

The oil market has been doing very well for the last year and a half or so, and has performed especially strongly in 2018, outperforming every major asset class. However, US oil prices fell over 4% yesterday on growing fears of a boost in supply, following a 5% drop last Wednesday. Most of the gains in the market over the last 18 months have been because of coordinated supply cuts by world oil powers. However, while there still are some supply constraint issues on the table (e.g. US sanctions on Iran), the increasing worry is that production may rise more than expected, which would bring prices back down. Further, the US is indicating it may start to use some of its strategic oil reserves in order to avoid another sharp move higher in prices.

FINSUM: To be honest, we have been surprised by how well OPEC has been able to hold the output cut alliance together, so we really should not doubt their ability to continue to do so. That said, we do see at least a plateau coming in prices.