In what sounds like a classic case of “buy the rumor, sell the news”, a major Wall Street figure is arguing that as soon as the US and China reach a trade deal, the big rally in risk assets will be over. The former CEO of Cantor Fitzgerald, Shawn Matthews, argues that “Right now, it’s a risk-on mentality -- you want to be long riskier assets until you get a deal with China … When that happens you certainly want to be looking to scale back”. One of Matthews’ worries is that bond markets are following suit, signaling to him that this is a false rally. “If it was truly a risk-on world and people believed it and it was an extended trade, then you would see the 10-year start to back up. That’s a clear sign there’s some concern about what’s going on out there”, said Matthews.
FINSUM: This is quite an interesting take on the whole situation. We are going to hold off on giving our full view until we have had more time to digest, but we thought this angle was definitely worth sharing.
Is the US headed for a major slowdown? That is the big question, especially as the economic clouds darken around the globe. The rest of the world, from Europe to China, is slowing, but the US continues to hum along nicely. So are we the last ship that is going to sink, or will the US manage to defy the tides and keep growing strongly? Looking to markets, yields around the world have fallen (including a dramatic increase in negative yielding European bonds), showing that investors are growing more bearish about the economic outlook.
FINSUM: With the Fed paused, we do not see an imminent recession by any means. We do, however, feel the US economy and markets lack a strong narrative at the moment, which makes us slightly nervous.
Investors may not be thinking about it much, but that does not mean the US deficit is not continuing at massive levels. This year will see another $1 tn shortfall in the US budget, a fact that the US Treasury will have to make up for by issuing lots of debt. This will be the second straight year of $1 tn Treasury issuance. So far the market has been happy to absorb the extra debt, and as such, the Treasury is planning to maintain a similar schedule of issuance this year.
FINSUM: The market seems to be a long way from having its fill of Treasuries, but at some point yields will move higher simply as a force of extra supply.
Advisors need to be worried about 2020 because some major changes may be on the way. Some of the most prominent Democrats, including presidential candidates are putting forth incredibly progressive proposals which call for heavy tax hikes. For instance, Elizabeth Warren, who will be running for president in 2020, is calling for a wealth tax of 2-3% on those with over $50m of assets. Economists say such a measure would raise almost $3 tn over a decade. Democratic party darling Rep. Alexandria Ocasio-Ortez (D-N.Y.) has put forward a plan calling for up to 70% tax rates on the wealthiest Americans.
FINSUM: In our view, the specific plans are not as important at the moment as the overall direction of the Democratic party and its candidates. While this is very divisive policy, it is a reflection of how polarizing national politics have become. It is also notable because this kind of major plan is the type of platform that can really drive Democratic policy going forward. This may become a rallying cry for the party.
Real estate has been weak for several months now. Even back in the summer when the economy and markets appeared to be humming along, real estate was one of the sore spots for investors and the Fed. Well, the state of the market is becoming more apparent as new numbers from November show that existing home sales feel 7% from last year. The drop is the largest year over year fall since May 2011. Sales have declined in every month in 2018 bar one.
FINSUM: The worsening real estate market is a bit of a conundrum given the state of the labor market. Leading indicator?