Markets
(New York)
The fixed income market used to be where you went for safety and steady income. Those days seem long ago, and fixed income is not just as likely as any other asset class to eb the riskiest and most volatile in your portfolio. Between COVID and the Fed, interest rates are extremely low, with yields low and bond price very high, and vulnerable. Some have been comparing the situation to Japan in the 1990s and beyond, but there is a huge difference that makes the US bond market much worse than Japan ever was—inflation. When Japan started its massive zero rate, ultra-low yield period, it was experiencing deflation, which meant there was still a positive real rate. But that is not true in the US today, as yields are actually well below real-world inflation, meaning genuinely negative real interest rates.
FINSUM: There is ultimately going to have to be a reckoning in the bond market, because real returns are not sustainable. That said, it does not seem like the Fed is going to let that happen any time soon.
(New York)
The muni market is doing great, at least on paper that is. Muni bonds have seen an absolutely furious rally over the last few months, which has driven yields to the lowest level since the 1950s. However, many municipalities have huge budget deficits, so the trick is to buy prudently. Eaton Vance published a piece with a state by state analysis of financial health, since the pain of tax revenue losses is not spread evenly. There are multiple ways to look at the info. The states who will see a 20%+ fall in revenue include: Idaho, Wyoming, North Dakota, Oklahoma, Missouri, New York, Alaska, Maine, West Virginia, Louisiana, and New Jersey. The top ten states for creditworthiness (meaning the most creditworthy) according to Eaton Vance are Idaho, Wyoming, South Dakota, Utah, Nebraska, North Dakota, Tennessee, Iowa, Virginia, and Minnesota.
FINSUM: New York and New Jersey are the most alarming ones on this list, since they are seeing big revenue falls and were already in quite poor financial condition. Illinois is obviously troubling too, as it is dead last in creditworthiness and likely to see a 13%+ fall in revenue.
(New York)
Muni bonds have been on a relentless rally. Any advisor is surely aware of this because there is likely a lot of their client’s money in the space. The inflows have been so sharp, and the price action so swift, that average ten-year yields in munis are at 0.7%, the lowest since the 1950s. At the same time, the COVID pandemic has decimated local and state budgets and there is a $1 tn budget deficit. Worse, the federal government has no clear plans in place to help local and state governments, meaning such municipalities may not be bailed out any time soon.
FINSUM: So on the one hand you have soaring prices, and on the other, significantly eroding credit quality. In any normal circumstance this would be seen as a bubble. However, given that Washington does seem likely to offer some aid to local governments, a meltdown will probably be avoided—but not without some volatility along the way.
More...
(Beijing)
If one thing has been clear over the last couple of years, it is that US-China relations are getting worse. It started earlier in Trump’s term and has escalated in a tit-for-tat battle over the last couple years. Some refer to it as a great “uncoupling” while others say it is a new cold war. Whatever you call it, there are a handful of sectors that will do well as the situation unfolds. One such sector is automation and robotics companies. These companies are likely to do very well as US businesses are forced to re-shore manufacturing from China and seek out automation to make the return more economical.
FINSUM: A major decoupling will be a very ugly event. US companies do $500 bn of sales in China each year. The automation play makes sense. Check out the Robotics ETF (ROBO).
(New York)
It took almost ten years, but gold finally just passed its nominal all-time high (set way back in 2011 during the European debt crisis). That is not a good sign for the market. Gold is rising because of increasing worries about a prolonged economic downturn caused by a renewed COVID second wave. Gold hit $1,944 per troy ounce today, cruising past its previous high of $1,921 per ounce. “Gold has finally come on to Main Street as an asset people actually need to have”, says the CEO of Sprott, a precious metals specialist.
FINSUM: Gold has been helped by fears over the economy, and the fact that rates are near zero, which flatters zero-yielding gold.
(New York)
Markets were up big today on news out of China. The day started with Chinese stocks surging on news from the government—Chinese state media told its people that they should load up on stocks. This sent hopes for a recovery soaring around the global and markets rose strongly. Beyond the state’s endorsement, the Chinese economy does seem to be dong well. “In recent weeks the data has looked very positive from China. Its economy is back in motion, and that should lift global equities a bit”, summarized Principal Global Investors chief strategist, Seema Shah.
FINSUM: The state media announcement seems a bit hollow, but since real economic data in China appears to be improving, the overall direction looks positive.