Fed minutes released yesterday showed that the Fed was closer to raising rates than many expected, which is lifting expectations that the central bank could hike before the end of the year. Three members wanted to raise rates immediately, but they were held off in a “close call”. The big consideration is the job market and whether it had strengthened enough to push inflation towards the Fed’s 2% goal. However, the other two considerations are harder to measure—the market’s preparedness for a hike, and how the US election might affect the economy. On the first point, the Fed even explicitly discussed the market’s odds that it would hike in September, a point that does not always show up in Fed minutes. The market thinks there is about a 65% chance the Fed will hike by the end of the year, but November looks unlikely because the meeting is the week before the presidential election. But depending on how that goes, it could prove a big hindrance to a hike.
FINSUM: The only election situation in which we think the Fed will still hike this year is a Clinton presidential victory and a Republican congressional victory. Markets would react mutedly or favorably to that, which would not scare off the Fed. In any other scenario, which seems less likely right now, the Fed would likely be derailed.
Source: Wall Street Journal
Fed chief Yellen’s future is in doubt as President Trump may name a different person to lead the Fed later this year. Chief Yellen and all the major central bank chiefs are currently in Jackson Hole, Wyoming for their annual conference, and Yellen is set to make a speech. She is expected to deal with financial stability issues directly, which means her statements could potentially be very disruptive to markets, especially if she signals that the market is overvalued.
FINSUM: We doubt Yellen will do anything to rock the boat given her usually reserved demeanor, but it is certainly not outside the realm of possibility. Perhaps the greatest risk is an accidental misstep that markets take in a different way than she intended.
The SEC has announced an eye-opening revelation—its online EDGAR filing system was hacked in 2016, and the hackers may have used the data to execute trades on non-public information. The hack did not involve any personal information, but the corporate results taken may have allowed the hackers to make “illicit gains” in the stock market. The report on the hacking was unusual and posted by the SEC near 8 pm in the form of an eight-page statement from SEC chief Clayton.
FINSUM: No report yet on the size of the gains, which may have been major. Will we go back to paper filing? (only half kidding)
A distinguished law professor from Texas A&M has put out an article arguing that investors should stop worrying so much about a new crisis erupting on Wall Street and start paying attention to the one brewing in Fintech. William Magnuson contends that Fintech, the young financial technology sector, is where the next crisis will come from. The sector has come to grab a major position in the financial industry and is led from Silicon Valley, not New York. Its structure makes it uniquely exposed to a crisis, says Magnuson. For instance, its younger and less-well-capitalized businesses are more susceptible to quick failures (like Mt Gox in 2014), and its companies have no sense of coming together for the greater good to solve a crisis. Finally, its young technologies are less well-regulated and more opaque (making them harder to monitor).
FINSUM: So we agree that Fintech could be the epicenter of a crisis, but not any time soon. Fintech, even counting Bitcoin, is not integrated into the economy or market enough to cause a crisis. And on top of that, what is the catalyst for a meltdown?
The White House may be in for a very bumpy ride as the Mueller probe is reportedly closing in. Mueller and his team have reportedly told Paul Manafort, President Trump’s former campaign manager, that they plan to indict him. Manafort was wiretapped before and after the election and allegedly encouraged Russia to interfere in the US election on behalf of Trump. Manafort was Trump’s campaign manager for four months, from April to August 2016, but he was fired by Trump for his connection to Viktor Yanukovich, Ukraine’s former leader. The FBI apparently already executed a search warrant on Manafort’s home in July, entering by picking a door lock while he was sleeping.
FINSUM: Manafort sounds like he is in very deep water. The big issue is that he was a close ally of Trump’s, so the probe is going to inevitably try to pull the president into the fray.
Everything was expected to go very smoothly in the British election. The dominant Conservative party, led by Theresa May was expected to cruise to a huge majority in parliament. However, yesterday everything went wrong, as Labour (the left) gained a huge share of parliamentary seats and stripped the Conservatives of their majority. May may be compelled to resign as PM, potentially setting the stage for another election in the near-term. The lack of a majority means there is a “hung parliament”, which will force a coalition government. All of this is leading to doubts over the Brexit negotiations with the EU, and even Brexit itself. On the whole, it seems the coalition government will lead to a significantly “softer” Brexit, where the country might stay in the single market.
FINSUM: This was a shocking development. The Pound dropped on the news, but in the long run it is probably good news for the economy (i.e. a softer Brexit).
The bull run in US stocks is getting long in the tooth by any standard. While stocks are still very strong, valuations are high and fears over a correction or bear market abound. However, the bull market in emerging markets looks like it is just beginning. Bank of America thinks that emerging market stocks may double in the next two years as this current run looks similar to previous ones. EM stocks have risen 60% since early 2016, but many fear the tensions in North Korea could end the run. On the contrary, Bank of America thinks prices will keep moving higher and will only eventually be derailed by recession or overvaluation.
FINSUM:Emerging markets did not have nearly the gains that US stocks had over the last five years or so and now might be their time to break out.
Investors should be worried about US real estate. That is the conclusion of new data analyzing the US housing market. This worries are particularly high at the top end of the market, where a mountain of new luxury apartment inventory is about to hit the market at a time when vacancy rates are already rising. As a result of the glut, banks have been tightening credit lines to developers, and previously planned projects are stalled. Rental inflation also appears to have peaked, all of which has weighed on residential REITs.
FINSUM: This article paints a pretty bleak picture of US real estate, but on the flip side, the low end of the market seems like it will stay strong as first-time Millennial buyers keep things buoyant.
Source: Wall Street Journal
The Fed shocked markets yesterday, sending Treasury yields spiking. Interestingly, the surprise was not about the Fed’s decision to unwind its balance sheet, but rather the path of interest rates. Against all expectations, the Fed said it planned to hike in December. The comments came after months of anxiety over weak US inflation. The implication of the statements is that the Fed appears to have abandoned its long-held approach of being “data dependent”.
FINSUM: Yellen has always maintained the Fed would respond to economic data for its decision-making, but in this last meeting they seem to have completely abandoned that approach. That should lower investors’ confidence in predicting Fed moves.
One of the world’s largest fund providers just went on the record warning investors about the stock market. Vanguard says it is surprised by how well the economy has been performing this year, but that such performance does not make it more hopeful for stocks. The fund provider says investors should expect “muted returns” for the next decade. According to Nathan Zahm, a senior investment strategist at Vanguard “what we caution investors on, particularly given that landscape and given the very strong run we’ve had, is that forward-looking returns are now quite muted.” Valuations are a big part of the company’s worries about returns, said Zahm.
FINSUM: This is about as close as you will ever get to a major fund manager saying stocks are ready for a fall. Vanguard obviously has a lot of insight into the market, but we don’t necessarily agree that returns will be poor for a decade. That just seems way too long for any kind of accurate forecasting.
The DOL rule is the nightmare of many financial advisors. Described as “Byzantine”, it is confusing, litigious, full of loopholes, and generally speaking, a hassle. Most advisors seem to hope the SEC will draft up its own rule and come up with something better. Charles Goldman, a senior wealth management figure and CEO of AssetMark, says that the solution for the SEC may very well be to simply extend the Investment Advisors Act of 1940 to every individual providing paid advice. Its is a simple rule which protects clients by obligating advisors to disclose conflicts of interest and put their client’s interests ahead of their own. The SEC already has the administrative arm in place to enforce the rule, unlike the DOL, which relies on lawyers and courts.
FINSUM: A disclosure-based rule governing all types of accounts would be vastly superior, in our opinion, to the current rule. Hopefully the SEC moves in this direction.
The oil market is currently caught between two competing views. On one side are those who think that oil will continue its century long boom and bust cycle, feeling that is bound to rise again. Others think that cycle has finally been broken and that oil will stay low and range bound for a long time. The argument of the latter is that shale oil has finally made the market competitive, meaning that supply can efficiently rise with demand, keeping prices stable, something that has never really happened in the oil business.
FINSUM: We think the debate over the competitiveness of supply is secondary to what we view as a false assumption of demand growth. Total oil demand peaked over a decade ago in the US and Europe. Emerging markets will likely follow the same pattern, so why is the world expecting big demand growth (especially with renewables growing quickly)?
One of the bright spots in the post-Crisis era has been the collectibles market. Everything from antique cars to high end art has surged in value since the Crisis, making collectibles one of the better returning asset classes. However, at least for the art market, that appears to have changed, as 2016 saw sales shrink 11% to their lowest point since the recession. 2016’s poor performance follows a down year in 2015 as well, when sales slipped 7%. The combined losses have now wiped out all the gains seen in 2013 and 2014. 2016 was particularly poor for auction houses.
FINSUM: Hard to say exactly what slowed the sector down as it had been doing so well. One interesting factor—the declines directly coincide with the bear market in oil.
The new Apple iPhone X has gotten a lot of hype in media. Aside from all its new features, which are admittedly extensive, its ~50% price hike to $1,000 has received a great deal of attention. That price hike is testing a long-held economic principle which says that as prices for a good rise, demand falls. However, for the last 100 years there has been a view that rising prices could raise demand for certain goods because they amounted to “conspicuous consumption”, or saw their demand rise as prices did because owning them signaled wealth and status.
FINSUM: Apple’s new iPhone X, with a lofty $1,000 price tag, may just prove conspicuous consumption true.