Eq: Total Market
In response to falling global oil prices, Mexico has had to redraft its annual budget, revising its 2015 budget to plan for oil prices of just $79/barrel, instead of the $82/barrel it had assumed previously. World oil prices have fallen sharply in recent months due to a glut of supply and slowing global demand. Oil exports account for one third of Mexican GDP, and the country is in the midst of a broad “opening” of its industry, in which foreign oil companies will be allowed to operate in Mexico for the first time in over 60 years. A senior Mexican congressional source commented on oil that “the oil price at $81 is unsustainable”, potentially spelling trouble for the country’s budget. For every $1 drop in the oil price, Mexico loses $300m of revenue. As of yesterday, Mexico’s main crude stream, Maya, was selling for $75.12 per barrel.
FINSUM: This story just goes to show how the falling price of oil will heavily impact government budgets across the globe, with many winners and losers. How the commodities decline will affect specific markets may be a big determinant of stock performance in 2015, so this is a major theme to keep in mind.
America has seen a rising trend over the few years that is raising the eyebrows of economists and investment advisors alike. Despite heavy penalties and the imposition of income taxes, many US residents are using their retirement 401(k) accounts more like checking accounts and withdrawing cash routinely. According to Fidelity, 35% of all Americans, and 41% of those aged under 39, took out part or all of the money in their retirement accounts when changing jobs in 2013. There is little data on the phenomenon, but it is known that withdrawals face a 10% fee and have income taxes charged on them. As yet, most of those withdrawing money say it is to cover large piles of debt they have incurred over the last few years, as many say it is hard to envision paying off loans for decades when they have large piles of cash just sitting in 401(k) accounts. Another aspect to the phenomenon is that many employers are forcing those who move jobs to withdraw all their money as they do not want the difficulty of tracking down people once they have moved on.
FINSUM: This is a fascinating article which communicates a disturbing trend. This shows how difficult a time many American families are having to make ends meet, and bodes poorly for the health of retirement accounts moving forward.
For six years American companies have fearfully hoarded cash on their balance sheets. Trillions of dollars in cash became locked away, taken out of the economy as companies became fearful to invest in new business lines. Many have seen this as a major reason that the US economy has largely remained in the doldrums since the Financial Crisis. However, just this quarter, new data has emerged which shows that there has been a net outflow of cash from corporate balance sheets, and a survey of corporate treasurers shows that this is likely to keep falling. This may be a good sign that corporations are more comfortable spending money, but according to industry experts, nearly all of it is being spent on acquisitions and share buybacks, both of which funnel money back into shareholders’ bank accounts and do little to improve employment or investment.
FINSUM: So companies are finally beginning to spend, but unlike when they invest in factories, machines, and employment, these expenditures will likely bring no benefits to the wider economy, only to their share prices. Hopefully, this sign is indicative of things to come.
In what seems a reaction to the Financial Crisis, young adults, between 20-35 are increasingly living in apartments and rented housing instead of buying their own homes. The trend is much more complicated than simply young people not being economically well-off enough to buy a home, it is highly driven by both extremely tight credit conditions, and very importantly, their feelings towards buying a home. Many say they have chosen to not buy a home because of the fear a mortgage puts on them. The idea of being stuck in a loan from which they cannot immediately escape feels very threatening to young US adults, as the economic instability brought on by the Financial Crisis makes a generation who came of age during recession wary of long-term commitments. Developers and private equity firms are responding by building large apartment blocks instead of single family homes, and some say this is one of the greatest changes to hit the American housing market for decades, as stand-alone home shave long dominated the American housing landscape. The new blocks are highly luxurious, with built-in speak services, and pre-installed building apps to track deliveries and repair requests.
FINSUM: This has very interesting implications for the US housing market as it could signal that condominiums and apartments will see price gains and more development while stand-alone housing, especially at the middle and lower ends, falls back.
The Dollar has risen meteorically over the last few months, and after several years of remaining relatively weak, many are wondering what the implications of this change may be. The first question to answer is why the Dollar has grown stronger. The simple answer is that the US is growing strongly and markets expect the Fed to tighten interest rates soonest of any major world government, thus offering potentially higher returns. However, this has very important implications for the US and world economy, and betrays an unspoken policy plan from the Federal Reserve. Firstly, a stronger Dollar will make imported goods cheaper for American consumers, but it will also negatively affect major exporting businesses, like Boeing, who are trying to compete against several overseas manufacturers. In allowing this to happen, Washington policymakers are showing just how far gone are the days of the “currency wars’, when governments were said to be intentionally debasing their currencies in the hopes of driving an export-led expansion. In letting the Dollar appreciate against many world currencies, policymakers are ultimately showing their belief that a weaker Euro and Yen will strengthen those economies, and in the end, offer more benefit to the US than the short-term detriment of a stronger Dollar.
FINSUM: This is a great analysis piece of what is going on in the foreign exchange markets and how it will affect the real economy. A stronger Dollar is short-term bearish for a number of major exporters, but hopefully, the US’ economists have guessed correctly and the country will ultimately gain.
The New York Times has published an in-depth article looking at the global wage slowdown, with a particular eye on understanding the fundamentals of the US market. The piece firstly establishes that year on year wage contraction is now worthy of being discussed as a trend, rather than a short-term issue, as average American families now earn less than they did 15 years ago, the first time this has happened since the Great Depression. President Obama has called this issue one of major challenges for the US and world, but believes that the next decade will hold much more benefit for the middle and lowers classes than the last decade has. Median income for American workers has dropped, while the top 10% to top 0.1% has grown strongly. The problem has puzzled economists and this article has no clear answers. However, they do highlight how the struggles of American families have caused numerous partisan allegiance changes as people have become frustrated with the direction of the country and sclerotic government. Perhaps worsening the issue is the fact that healthcare costs and energy costs have actually flat-lined lately, meaning people are so short of cash even in an environment where they should probably have more disposable income.
FINSUM: Mainstream economists and theorists are overcomplicating the “mystery” of the wage slowdown. The fact is, over the last six years there have been many more people unemployed, on average, than over the last half century, and it has thus been an employers’ market. Companies were able to dictate wages because labour needed work so badly, and just like that, you have the great wage slowdown. It is no coincidence corporate profits are at all-time highs. As output grows and unemployment shrinks, hopefully the trend will reverse itself.