This Wall Street Journal article lends some much needed perspective to the current panic over the ultra-low level of interest rates. The author presents a statement of facts which shows that yields have actually been negative many times in history, including for much of the 20th century. The key to understanding this is to take account of “real interest rates”, or what rates actually are after accounting for inflation. For instance, by this understanding the yield on Treasury bills was negative for 18 out of the 27 years between 1933 and 1959. In the 1940s and again in the 1970s, negative real rates were common. The author’s driving point is that this has happened many times before, just not within the lifetime of most investors, and not while inflation was so low. He thinks returns will continue to be low and people will simply have to save more.
FINSUM: This article lends some good perspective on the current state of the economy, though it is still worrisome that real rates are so low without any inflation.
Source: Wall Street Journal
It might be time to prepare for a downturn in the real estate market. We ran an article a couple of weeks back discussing how US commercial real estate prices were falling and that the market might be headed downward. This article, in the Financial Times, now argues that REITS may be set to tumble. The sector has historically performed very well, and especially well recently, which has pushed its yield to only a ~1.1% premium over the S&P 500 as a whole. With the commercial real estate sector getting more expensive and competitive, this combination will likely mean the REITs are set to fall.
FINSUM: We have mixed views on this. On the one hand, we think that the paltry returns elsewhere might mean that real estate keeps seeing inflows. However, on the other, the sector looks overextended, which naturally leads one to think it will fall.
Source: Financial Times
The long-term health of the US shale industry looks very strong, contrary to what many may think. A new industry report communicates that 60% of the world’s oil reserves that are economically viable at $60 per barrel are in US Shale. US shale wells have done a remarkable job cutting costs 30% to 40%, making them competitive on the global market. The huge amount of US shale reserves combined with the lower costs means the US will likely enjoy a competitive advantage over the next few years, while deep water reserves and other more expensive production (like the North Sea), will lose out. US shale production used to be in the middle of the cost curve but is now on the lower end. More investment is forecasted to flow into the sector.
FINSUM: This is interesting news. It seems good for the US economy, but it is not particularly good news for oil prices overall. The better US shale cuts costs, the more oil production there will be, which means prices will stay low. On the flipside, companies may remain viable.
Source: Financial Times
One of the world’s most prominent fund managers, Jeffrey Gundlach, has gone on the record calling the current level of bond yields a form of “mass psychosis”. “Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money”, said Gundlach. US Treasury bonds suffered big losses recently when yields on the ten-year rose a sharp 15 basis points after poor demand for a new issue. Gundlach also commented that markets may reject the S&P 500’s new high, and that EM debt is a better buy than junk at present.
FINSUM: Bond markets are pricing some very dark days ahead. We do not think the world is going to collapse, but there is a chance things could turn sharply downward, especially because of what could happen in Europe.
Advisers look out! A change to the makeup of the S&P 500 may mean your clients see bigger tax bills. The change has to do with REITs becoming their own sector on the S&P 500. Because REITs are being decoupled from the financial services sector on the S&P 500, many funds may sell their REIT holdings to match the index. In doing so, those holding such funds could see unexpected taxes from the selling of positions. “The average investor has no idea what’s going on, but this is a big shift”, says a commentator in the piece. Investors may also see their exposure to REITs drop significantly, which could be a worry because the sector has historically performed well. REITs account for about 20% of the S&P 500 financial services sector.
FINSUM: This is something to start planning for. Nobody likes unexpected tax bills.
Source: Wall Street Journal
All eyes were on the US jobs report this morning and it turned out to be a whopper. May’s jobs report was terrible, coming in way under expectations, however June’s destroyed them. Analysts were expecting the US to add 180,000 jobs in June, but in reality the US added an eye-popping 287,000. The unemployment rate rose to 4.9% while hourly earnings rose 2.6%, slightly under expectations of 2.7%. Labor force participation also rose, which was responsible for the jump in the unemployment rate.
FINSUM: This is good news, but it has to be strongly tempered by the fact that almost all of the hiring occurred before the Brexit announcement. Tough to say how this might impact the Fed.