(San Francisco)

One of the core tenants of US central banking is being shunned by Jay Powell’s Fed. Former central bank leadership had always taken the approach that tight labor markets posed a serious threat for higher inflation. However, Powell is stepping away from that view. Labor markets remain tight, with unemployment very low and strong job creation consistent. Yet, the Fed has completely stepped off the gas pedal on rate hikes, a position that runs counter to previous approaches.

FINSUM: At least in this cycle, the relationship between labor markets and inflation seems to be thoroughly broken. The reality is that no one can give a great answer as to why, but Powell’s policy nonetheless sticks to the idea that the link is severed.

(New York)

Investors may be worried about a big fall in stock prices, but that is looking less likely than the opposite, at least according to BlackRock. The asset manager’s CEO, Larry Fink, said yesterday that records amount of cash may suddenly flow into the market, driving prices sharply higher. He points out that despite the good year in stocks so far, not a lot of money has been flowing into equities. Fink said dovishness by the Fed has created a shortage of” good assets”, which puts the market further at risk of a melt up.

FINSUM: A melt up could certainly happen, but we wonder what the catalyst would be. Maybe a solid trade deal with China?

(New York)

Most of the industry was hoping that states would back off, or at least slow down, their fiduciary rule efforts after the SEC announced it was working alongside them to craft a more comprehensive Best Interest Rule. The idea is that if the SEC could create a rule satisfactory to states, then it would obviate individual state regulations. However, New Jersey is pressing ahead with its own rule. The state formally put forward a new rule yesterday via the Attorney General Burbir Grewal. The rule is comprehensive and advisors would have serious penalties for not abiding. “Conduct falling short of this fiduciary duty would, under the proposed rule, constitute a dishonest and unethical practice,” says an announcement for the state’s Consumer Affairs Division.

FINSUM: We are still hoping the SEC can make a rule that satisfies states, because the last thing consumers or advisors need is fragmentation.

(New York)

One of the odd things about the recession fears since December is that spreads on junk bonds have not risen. Usually, junk bonds sell-off when there are recession fears, as they are the riskiest credits and likely to suffer the worst downturns. However, the opposite has happened in junk, with spreads to investment grade very tight. In fact, investors are picking up so little extra yield in junk bonds, that in many cases they are not even worth the risk. Spreads are tied for their narrowest since the Financial Crisis at just 60 basis points.

FINSUM: The last time spreads got this tight was last October, right before the market tanked. Warning sign.

(New York)

Something very worrying happened yesterday if you are an investor in bank stocks. Bank of America released what were widely considered to be stellar earnings, yet the stock fell. We don’t just mean stellar in the “oh, they beat estimates” sense, but that the company looks healthy even as some other banks (e.g. Goldman Sachs) look weak. However, the stock fell because the bank indicated that its cost pressures were rising, and coupled with the fact that yields are now lower, means the bank will have higher expenses and lower interest income, putting a squeeze on margins.

FINSUM: This does not seem to be unique to B of A, as the whole industry has the same interest margin and cost pressures.

(Washington)

In what seems slightly odd timing, Goldman Sachs is going on the record about the 2020 election. The bank is saying Donald Trump is likely to win re-election. Goldman says his lead is “narrow” but that his chances are improved by the crowded Democratic field and the success of the economy. What is so interesting about the call is that in runs in contrast to most polls, which Goldman points out, saying “While we believe the majority of market participants expect President Trump to win a second term, we note that prediction markets point in the opposite direction and imply that the Democratic candidate has a 56% probability of winning and the Republican candidate has a 44% chance”.

FINSUM: We have to agree with Goldman. Trump’s base seems to have grown in strength since his initial election, and the politics of the left seem more likely to fragment their base (including into third party candidates) that unite them behind a single leader.

(New York)

The market has been fretting about real estate for over a year now. Numbers in the sector have been in a funk and there is a definite weakening occurring. However, that may prove short-lived as a new factor may slowly push that market back into a sustainable boom cycle. That factor is the grow of $15 per hour minimum wages across the US. Such wages are likely to significantly increase the earning power of millions of Americans, allowing many couples to afford to buy a home. For instance, a couple with one worker at Target and another at Bank of America could afford to buy up to a $300,000 home at the new wage levels.

FINSUM: If the new higher wage rate takes hold, it is likely to unlock a major source of untapped demand for housing.

(New York)

Goldman Sachs investors took it on the chin this week. Earnings numbers just released look pretty grim, especially as compared to some other banks, like JP Morgan, which had good showings. The bank got hit by a triple whammy of lower trading revenues, weaker private equity profits, and lower fees from investment banking, all of which conspired to bring earnings down by 20% in the first quarter. David Solomon, CEO, is promising the company is undertaking a “front to back” performance review of Goldman’s businesses.

FINSUM: This looks particularly poor because JP Morgan was able to achieve the highest ever quarterly profit of a US bank during the same period.

(New York)

Netflix has been hammered recently by news that Disney is launching its own streaming service. The stock saw a major selloff on Friday (4%) because of the threat the Disney move theoretically poses to Netflix’s model. However, the fears seem overblown, providing a buying opportunity of Netflix. Analyst Scott Devitt from Stifel explains, “We see little risk to Netflix growth plans and pricing power against this new offering given Netflix’s most popular price point should remain lower than the Disney bundle while Netflix is on track to materially outspend Disney on content”.

FINSUM: Netflix seems likely to remain both cheaper and offer more content for the foreseeable future, so the fears do seem overdone to us.

(New York)

Asset manager Guggenheim just put out a big call. The money manager’s strategists think that the economy is headed for a recession and markets are headed for huge declines. Their call is more interesting than the usual prognostications though. They point out that while this recession looks likely to be shallow because of a lack of underlying issues in the economy, the losses the market will suffer are likely to be severe. Scott Minerd of Guggenheim points out that “Our work shows that when recessions hit, the severity of the downturn has a relatively minor impact on the magnitude of the associated bear market in stocks”. Instead, it is the loftiness of valuations prior to the downturn that has a greater impact on how markets behave during a recession.

FINSUM: This argument makes total sense to us—there is no big fundamental problem with the economy, so a shallow recession, but equity prices are hefty right now, which means big losses.