(New York)

Rates are looking likely to head sharply lower, and the inversion does not seem likely to abate. Since the Fed’s 25 bp cut a few weeks ago, markets and the economy’s outlook have moved sharply lower. This will likely lead to several cuts over the next year. According, what is the best way to play this big change? Two asset classes that fit the bill are gold and dividend stocks/funds. Gold thrives when there are worries about the economy and when rates are falling, so this is a perfect environment for the metal. Throw in the fact that it has been in a bear market for years and you also have valuation on your side. Dividend stocks look likely to do well because they tend to rise as rates fall. Additionally, the sharp drop in long-term yields means a 2% yielding stock looks incredibly more attractive than it did a year ago.

FINSUM: Gold seems to have a lot of momentum and valuation is on its side, but dividend funds seem like a really good bet to us.

(New York)

More data has been just released on the US real estate market, and more disappointment. While the market should be rebounding because of the big fall in mortgage rates, the opposite seems to be happening. New home construction fell by the most in five months in July. Housing starts fell 4% despite lower mortgage rates. The fall came despite expectations for growth, and June numbers were also revised downward. An economist at Zillow summarized the situation this way, saying “Scarce land and high labour costs have plagued builders for much of the year, factors that have been exacerbated by unrelenting uncertainty in the global markets … This week’s flare-up, with bond markets flashing recession warnings, does not provide fertile ground for new housing investment”.

FINSUM: The market seems to be perpetually slowing, but it has not reversed outright despite over a year of weak data. Time has proved that real estate seems a little disconnected from the rest of the economy right now; in other words, it does not seem to be an indicator of much.

(New York)

Every investor seems to be panicking about the yield curve right now, and not without reason. An inverted yield curve has accurately predicted each of the last several recessions. And not only is the yield curve inverted, but yields are shockingly low—the 30-year Treasury yield just went sub-2% for the first time ever. However, that is not what you should be worried about, argues a top economist at the Economic Outlook Group. Instead, you should be watching consumers like a hawk, as they will be the deciding factor as to whether the US heads into a recession. “All eyes should therefore be laser focused on what households are thinking and doing in the coming months--- and not on some tampered yield curve”, says Bernard Baumohl, chief global economist at the Economic Outlook group.

FINSUM: The yield curve is less manipulated than it once was, but we are far from a rate environment one could say was comparable to inversions past. We think this analysis is spot on.

(New York)

Yields are really low, right? No! In fact, they are high. That is how investors may need to start thinking about yields. Everything we thought we knew from the last 50 years might be worthless now. The CIO of Northern Trust explains “I continue to be surprised by my fellow asset management professionals who think that the long-term norm for the 10-year U.S. Treasury should be closer to 4% or even 4.5% … This is just too high when you consider among other facts that there is $15 trillion invested the bond markets globally right now that is carrying a negative interest rate”. He continued “On the day of this discussion the Swiss 10-year is at negative 90 basis points, the German 10-year is trading at negative 56 basis points, and the Japanese 10-year is at minus 20 basis points … So, why would the U.S. 10-year trading at close to 1.5% or 1.75% seem low? It’s in fact unusually high in the global context”.

FINSUM: Maybe super “low” yields are the new normal, and we should think of the US’ yield level as abnormally high right now. It is hard to stomach and has enormous implications, but it may very well be the truth.

(Bangkok)

While many are worried about the domestic economy and whether the US is headed for a recession, those invested in emerging markets should perhaps be even more concerned. One of the fears specialists in the area have is that there is probably about $200 bn of unreported Chinese loans on the books of emerging market borrowers. China is not obligated to report these loans anywhere, so no one is quite sure of the size of the exposure. The risk is that as the economy sours, and these credits debts become distressed, China could impose some severe conditions on borrowers, which could cause emerging markets to seize up.

FINSUM: We could see this becoming an issue, especially because China will be feeling distress itself, which means it is likely to use a heavy hand. Even if nothing comes of this, it will likely weigh on EM asset prices in the near-term because of the uncertainty.