(New York)

Barron’s has just interviewed a prominent economist—Stephanie Pomboy—and she has some very interesting opinions about the economy. Rather than seeing the economy’s recent growth as a good performance, she analyzes the data to show that this pickup in growth is actually the last gasp of American consumers before a big recession. Digging into corporate spending data, she shows how the US consumer has been stretched by everyday expenses even as discretionary spending is weak. Consumers have had to pay for extra everyday costs, such as on food and energy, from savings or credit. Now that the savings rate is starting to rise, Pomboy thinks we are headed for a recession.

FINSUM: This is an entirely different way to read the tape, but may not be that far off the truth.

(Washington)

There are a lot of articles saying that the DOL’s fiduciary rule is on its last legs (and we aren’t sad about it). However, the reality is that despite the ruling, the DOL’s infamous rule lives on. Even if it does not stay in its current form (which seems likely), the fiduciary focus the rule brought to the industry is going nowhere, and the coming SEC rule will likely take what the DOL did to even greater lengths (but hopefully more convincingly). As an example of how the spirit of the rules lives on, here is a comment from the CEO of the Investment Adviser’s Association, who says “Now, are you really going to send a letter to your clients saying, never mind I'm not going to act in your best interest? No. No, it's too late. So some of this is not going to change in real life”.

FINSUM: Fiduciary duty is here to stay but the “fiduciary rule” is not. We think that could be a win for all parties.

(Washington)

Markets have been on edge for weeks, and it appears with good reason. President Trump is reportedly putting the finishing touches on a major trade tariff package that is directed at China (to the tune of $50 bn). The focus of the tariffs are on metals. In response, China is planning its own set of tariffs on US agricultural exports, especially from Farm Belt states.

FINSUM: So the US is negotiating exemptions with top allies, but is starting a trade war with China a good idea? The politically difficult aspect for Trump is that China’s retaliation against US agricultural exports will hurt the states that helped elect the president.

(Seattle)

There have been numerous articles covering it over the last few months, and it has caused some excitement and alarm in the market. The story? Amazon is going into healthcare. The hype started to build when Amazon received licenses to be a pharmaceuticals distributor. Now, Barron’s has published a piece explaining why Amazon sees an opportunity. The Internet of Things is supposed to transform the pharmaceutical and healthcare business and Amazon wants to be a part of that, especially now that it has the explicit goal of trying to lower healthcare costs in the US.

FINSUM: We think the high-minded goal of lowering healthcare costs needs to be thought of separately than Amazon’s interest in drug distribution. The fact is, the company sees a solid-margin business it can eat up with its logistics prowess.

(Atlanta)

There is a very particular kind of housing problem currently affecting the US—a serious shortage of homes at the lower end of the cost spectrum. Not only is inventory thin, but the housing stock available for first time buyers is in poor condition and prices are rising quickly (10% in the last year). The average starter home on the market is 9 years older than it was in 2012 and is 2% smaller. That price growth is outpacing other categories.

FINSUM: So the big worry we have is that with all the price appreciation happening, prices are more primed to fall considerably as rates hit a tipping point where they start to curtail mortgage borrowing.

(New York)

Those looking for signs of what will happen to the US economy would be wise to keep an eye on mortgage issuance. While the supply of homes is notoriously tight, many are worried that higher rates might doom the mortgage market. Well, despite several hikes in 2017, the year ended up being a very strong one for commercial mortgage issuance. Total commercial mortgage debt rose by $200 bn in the year to hit $3.18 tn total. It was the strongest year of mortgage debt growth since 2007.

FINSUM: This is one of the stats where you are not sure whether to be nervous or hopeful. On the one hand, it is good that issuance wasn’t dented by rate hikes, but on the other, the stats seem almost worryingly positive.

(New York)

Goldman Sachs is in the middle of beefing up its wealth management business. It is adding advisors and trying to boost AUM. The division is very small compared to competitors, but its advisors have very high average revenue ($4.5m vs $1.1m at Morgan Stanley). Now, it is also boosting its securities-based lending offering. Through a program called GS Select, the firm aggregates other wealth managers and makes loans of between $75k to $25m to their clients, all backed by the securities held in the portfolio of the borrower. The program was just joined by LPL, which is now one of 40 firms participating in GS Select.

FINSUM: Aggregating other wealth managers to provide lending sounds very profitable. Evidently GS is also allowing much smaller managers onto the platform.

(Washington)
Advisors should breath a sigh of relief today. Following the fiduciary rule’s resounding court defeat last week, the DOL has done what the industry has been hoping it would—accept the decision. Following the ruling, the DOL now says it will not enforce the fiduciary rule in any way. A DOL agency spokesman said clearly “Pending further review, the [Labor Department] will not be enforcing the 2016 fiduciary rule”. The DOL will also very likely not challenge the court’s ruling.

FINSUM: Given that this is an entirely new DOL versus the one that drafted the rule under Obama, their behavior makes total sense. The way is finally nearly cleared for a new rule.

(New York)

The old fears are rising anew, and not without reason. With volatility now back in a big way, fears are once again stirring about the reliability of ETFs. In previous market flare ups there have been some major ETF losses. The ETF industry is worth $4 tn and has never been through a bear market at its current size. The biggest fears are in fixed income ETFs, where the “liquidity mismatch” is greatest between the tradable ETFs and the illiquid underlying bonds.

FINSUM: With rates and yields set to rise, there could be some volatility in fixed income, which means there could be some big issues in fixed income ETFs, especially in the most illiquid areas.

(New York)

While the acquisition of Whole Foods by Amazon put a great deal of fear into other grocers and investors, things have quieted down since then. Now, the fears appear to be warranted as Amazon’s plan is becoming apparent. Amazon will offer Whole Foods groceries online at the same prices as in store, with free delivery for Prime Now members. The strategy will make it very hard for other grocers, like Kroger, to compete, as Amazon will likely lose money on every transaction. Kroger, and Walmart, are both launching their own delivery programs, but both will cost between $11.95 and $9.95, making them less competitive for short shopping trips.

FINSUM: Walmart can afford to lose money to grab market share, as can Amazon, but Kroger and other small grocers may be very vulnerable.