Markets
(New York)
For many months there has been a great deal of fear about the threat of BBB bonds falling into the “junk” category. The whole fear is based on the idea that as the economy slows, this huge group of companies would get downgraded and there would be forced divestiture, sending bond prices strongly lower. However, the opposite has happened. Over the last few months, BBB bonds done nothing but strengthen. In fact, the spread between BBBs and Treasuries just hit a 52-week low, showing investors renewed faith in what is the largest segment of corporate bonds.
FINSUM: Unsurprisingly, the price growth has led to a bunch of new issuance. It is important to remember that though prices have risen, the risk of a recession and downgrades is still very much there.
(Washington)
The Fed finally paused. Investors were worried about it, but it happened as many expected. The Fed decided to lower rates another 25 bp yesterday, but said that for the time being, it would stop worrying about the possible trade war. Analysts interpret Powell’s statements as indicating that the Fed wants to wait to see weakness in the US consumer before undertaking any more rate cuts.
FINSUM: Some are perplexed by this pause because none of the three main things the Fed is worried about have actually improved.
(Los Angeles)
For many years Pimco was the undisputed leader in bonds. While that reputation may now be arguable given Bill Gross’ departure, Pimco is still undoubtedly highly respected. Therefore, their warning this week is worrying. The firm says it is shunning corporate bonds because of the big risk of a quick fall in prices. The firm’s CIO, Dan Ivascyn, says “The credit sector has been well behaved but if people begin to really fear recession, we can see underperformance quickly … this is the sector most prone to overshooting on the downside”. Pimco is also worried about Treasuries as they see no further room for a rally and instead are favoring agency MBS.
FINSUM: Total debt has grown hugely and a lot of it is of borderline credit quality, so a real downturn in economic expectations could lead to a lot of selling and downgrades. We tend to agree with Pimco here.
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(New York)
Probably the world’s most famous hedge fund manager, Ray Dalio, who runs the largest hedge fund in the world, has just made an interesting comment about equities. Dalio, who runs Bridgewater, says that he does not see a big bust coming in equities, just a “great sag”. Speaking about corporate debt levels and the risk of a blow up in fixed income, Dalio says “Those extremities we are reaching are not such that it is likely to have a debt crisis. But you have reached the limits of that so it creates a big sag versus a big bust”.
FINSUM: We think this is a pretty nuanced view. A big meltdown similar to 2008 does not seem likely, but a long-term growth overhang from too much debt does seem a distinct possibility.
(Beijing)
China’s newest GDP data has just come in and it is shockingly weak. Third quarter GDP growth was the lowest in has been since the early 1990s and appears to show the sting of US tariffs. Growth was just 6%, a major sign of the weakening state of the global economy. That is the same level of growth as in the late 1980s, though China’s economy is now far larger. Those paying attention will know that China’s economy grew at around 7-8% per year since the Crisis.
FINSUM: So this is an admitted 6%. Beijing keeps very tight control of its economic data, so it is not inconceivable that the real number is actually lower.
(New York)
A lot of demographers think there is going to be a coming baby boom, as Millennials finally have children. There is some disagreement over this as many think the boom is already a bust, but the reality is that there is likely to be a lot of babies born the next few years as Millennials make a last push to have children. The parents are likely to be older, which means more disposable income, and more spending. Therefore, buying into baby-oriented stocks seems like a good idea. Take a look at Carter’s, Bed Bath & Beyond (which has a baby unit), and Children’s Place.
FINSUM: We think there will be a baby rush over the next five years as Millennials try to have kids before aging out. That presents an opportunity for the baby sector.