Economy
The US economy continues to confound today, as new data shows that hiring once again surged in July, with 255,000 new jobs created in July versus expectations of just 180,000. The big gains follow very strong June numbers which were revised higher to 292,000. Hourly wages are increasing at a 2.6% annual clip and the unemployment rate held steady at 4.9%. The data comes following a dismal GDP report which showed the US was growing only around 1%, marking the third straight quarter of poor growth.
FINSUM: The market has been feeling “on again off again” about the Fed, and with these strong numbers it is now seeming more likely that a Fed hike in the near term might be possible.
Source: Reuters
For at least a few months the correlation between stocks and oil seemed to have been broken. However, as oil has recently moved sharply lower, briefly touching the $39 range, that correlation may be rising again. The oil market is currently plagued by a new kind of glut—refined products. It is key to remember that refineries, which turn oil into products like gasoline, are the only buyers of crude oil, and currently, they are cutting back. The market is presently seeing a huge glut of gasoline which has slowed down refinery buying, weakening the prospects for crude oil.
FINSUM: If oil continues to move lower, it could start to once again drag stocks down with it, though hopefully investors are sharp enough to realize that the issues are not necessarily representative of a doomed global economy.
Source: Wall Street Journal
A former president of the Federal Reserve Bank of Minneapolis has published an article arguing that the US government can and should do more to stimulate the US economy. The article is comprised of three key suggestions to boost growth. The first is that the US should undertake a lot more infrastructure spending and start an initiative to rebuild the country’s crumbling roads and bridges. Secondly, the government should eliminate the employer portion of the social security tax in order to stimulate more hiring and create the competition for workers necessary to drive up wages. Thirdly, and most interestingly, the government should give $10,000 to every household over the next decade; the spending of which would stimulate the economy.
FINSUM: These are very good suggestions and we are in support of all of them, with the obvious caveat that the money giveaway would need to be very well planned.
Source: Bloomberg
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Gold has long been a store of wealth in uncertain times, but new research from Harvard says investors have got it all wrong. The research says that gold actually moves independently of whatever is going in the economy, so it is actually not a good hedge. If gold were a good hedge its value would jump during recessions and whenever consumption fell. However, looking at data from 1836-2011, the researchers found no correlation. Additionally, gold proved to not be the stable investment many think of it as, as prices for the metal swung around almost as much as stock prices. This is made worse by the fact that during the sample period, gold only averaged a 1.1% per year gain.
FINSUM: The thing this research misses is that investors don’t only buy gold as a hedge against market movements, they buy it as a hedge in case our fiat currency system entirely collapses, in which case it is a more reasonable investment.
Source: Wall Street Journal
The whole market is getting increasingly bearish on crude, and even Wall Street analysts are joining in. Investment banking research analysts now see oil below $50 for this year, and only rising to $60 at the end of 2017, a sharp turn around from some of the bullish sentiment we saw just a few months ago. In fact, it is the first time banks have cut their outlook in four months. US crude officially entered a bear market earlier this week when it dipped below $40. One of the big reasons for the recent price declines has been the huge glut of gasoline that has built up around the globe.
FINSUM: We are not hugely bearish on oil, but we do think it will probably continue to fall slowly until a new catalyst changes the picture.
Source: Wall Street Journal
There has been a lot off bearishness on oil lately, including from this publication. However, in one of the few bullish pieces recently, Citi has said it expects oil to rise. The banks says that supply disruptions in Nigeria are set to persist, and that oil prices around $40 are set to spur demand. The article goes into some nitty gritty arguments regarding supply, calling the projected increase in Libyan output a “headfake”. It also says other supply may fall or be disrupted as well. Citi summarized its view this way, saying “Oil prices for the remainder of second-half 2016 have a number of hurdles to overcome, most notably the tempered outlook for refinery runs as a result of weak margins, which will further weigh on prompt crude demand and the sizeable excess of oil in storage … But oil at $40 a barrel is likely to spur investor, commercial and physical demand”.
FINSUM: This was one of the most bearish “bull” statements ever. We do not actually take this as much of a long-term positive.
Source: Bloomberg