Investors have gotten so used to low inflation that it is sometimes hard to imagine seeing it rise. However, Morgan Stanley is warning that inflation is rising across the globe and investors need to keep an eye on it. In Europe, Asia, and the US, inflation has risen from 1.1% to 1.4%, and it is bound to move higher, according to Morgan Stanley’s chief global economist. Interestingly, MS argues that the Euro area and Japan will see a higher rise in inflation than the US.
FINSUM: If inflation rises more strongly in other developed markets than the US, will that lead to even more foreign buying of US bonds because yields in those locations are so much lower? In other words, will there be even more demand for US bonds?
There have been a lot of stories, admittedly in this publication too, that have diminished the threat of the current trade war with China for the US economy. In a very direct sense, that may be true, but there is a lot of misunderstanding about the Chinese economy. Most people think that China is currently slowing because of the trade war with the US, but that is not really the case. The much bigger issue is that the country’s credit boom has run its course and the government is running out of options to boost growth. The credit boom was caused by the government needing to stimulate consumer spending in an effort to spur a domestic consumption economy, but credit has more or less reached it limits, and therefore, so has the economy.
FINSUM: If China has a big contraction/meltdown, it will ripple across all the countries who are part of its ecosystem, including all the EMs in the region, Africa, and then ultimately the big developed economies with which it is now inextricably linked.
A year ago you were a considered a maniac if you didn’t have your portfolio loaded with FAANGs and other tech stocks. What a difference a year makes! Tech stocks are now largely out of favor after a rough year that has underperformed the S&P. There are a lot of fears of regulatory scrutiny and slowing financial performance. The tide has turned so much against the stocks that it is fair to call them a contrarian bet.
FINSUM: It sounds quite ridiculous to call some of the world’s most popular stocks over the last few years “contrarian”, but it seems true at this point. It appears it might be a good time to buy, though regulatory fears may prove legitimate.
It may seem very far out right now, but the 2020 election is looking like it could be a very bad outcome for markets. Democrats are still leading in the polls, which is bad news because pretty much every candidate (perhaps with the exception of Biden) looks like they would be quite bearish for markets. Between higher taxes, more regulations, and government run healthcare, the outlook for markets from most of the leading candidates appears bleak.
FINSUM: When you take even a casual glance at how this election is shaping up, things look rough. You have the most leftist Democratic candidates in memory, and they are leading the polls. We think the polls are off and Trump still has better odds, but there is undoubtedly a very large risk.
We thought it would be good to add a little European flavor to today’s coverage. The Financial Times has written a very insightful piece about the EU and the effect Brexit has had on it. In particular, it cites Donald Tusk, one of the EU’s top policymakers, who says that Brexit has been a “vaccine” against anti-EU parties across the continent. “As Europeans see what Brexit means in practice they also draw conclusions … vaccine against anti-EU propaganda and fake news”.
FINSUM: The EU has seen what Brexit has done to quell any anti-EU sentiment within the Union, which means it will never let off the gas pedal in making Britain’s departure a hellish ordeal.
For many years, emerging markets were a must-have in every investors’ portfolio. The idea was that a large swath of the world was on an inevitable path towards economic parity with the west, and that there was a great deal of money to be made by investing in that growth. For several years, that view held. However, changes over the last decade mean that such a thesis is increasingly in doubt as many of the factors that drove EMs have fallen away. In the words of the Financial Times, “high commodity prices are a fading memory. Trade is stuttering and global supply chains are being disrupted. Far from catching up with the developed world, many supposedly emerging markets are growing more slowly”.
FINSUM: It is not just economic either. Governments have not cleaned up as fast as many had hoped, which means the law and governance aspect of EMs has hardly improved.
Jay Powell, head of the Fed, has been working on a year-long project to overhaul one of the Fed’s most important goals. That goal is full employment. The Fed only has two mandates, stable prices in the economy, and maximum employment. Yet the definition of maximum employment is now up for debate. At the core of the consideration is the idea that having a job is different than having a good job. The difference between the two means the Fed may use a different calculation for measuring employment. That potential change has huge implications, as it would likely lead to looser monetary policy both in the immediate future and further out.
FINSUM: We think there is a big difference between the quality of different jobs in the economy which needs to be accounted for by the Fed. The current way of measuring employment was designed when most jobs were permanent and full-time, but with the rise of the gig economy, measuring methods need to shift to account for the changing nature of the labor market.
It has been forecasted for some time, but now it is finally happening—US banks are hiking dividends. After getting the all clear from regulators after successful stress tests, US banks are beginning to hike their dividends. For instance, Morgan Stanley and Citigroup hiked their dividends by 13%+ recently, with both now yielding 2.5% or over. Bank stocks have been beat up over the last year, with Morgan Stanley down 10%, for instance.
FINSUM: On the one hand, bank stocks looked undervalued and now have attractive yields. On the other, if you think we are headed towards a slowdown, then it is not a good time to buy financial shares.
Astute observers will have noticed that President Trump last week nominated Eugene Scalia to head the DOL following Acosta’s resignation. Even sharper readers will know that likely means the DOL’s newest version of the Fiduciary Rule is likely dead. Scalia was instrumental in the first version of the rule’s defeat last year. He was the lead counsel for SIFMA and the body of trade groups that defeated the rule. With him becoming head of the DOL, it seems highly unlikely the Labor Department would advance the newest version of the regulation.
FINSUM: We think Eugene Scalia is the DOL head that most of the industry has been waiting for. He has a reputation as a fierce anti-regulation warrior, so is hard to imagine him advancing the newest version of the Fiduciary Rule to any degree.
Gold is having a good year, up almost 10% after a very long bear market. But where might it be headed now that the Fed is likely going to start a cutting cycle? The answer is probably significantly higher. The macro backdrop is perfect for gold—geopolitical tensions are high, there are worries over the domestic and global economy, the Fed is going to be cutting (lower rates are better for zero-yielding gold), and the Dollar is likely to weaken, making gold cheaper for overseas buyers.
FINSUM: We agree all the ingredients are there, but if the Fed starts cutting, it may alleviate a lot of worries about the economy and make risk assets look more favorable.
Sometimes we just have to run a story for fun that has no relevance to markets or investing. This is one of them. Evidently, last week a plane flowing over Siberia (Yakutia to be exact) had its cargo hatch break open. When it did, $368m worth of gold bars, silver, and diamonds fell from the sky down onto the frozen landscape. The “drop” happened right near the airport and the company who owned the goods had to get trusted staff to recover the bounty, but not before going through metal detectors before they went home. Now locals think that not all the gold has been recovered and flights to the area are sold out all over Russia as treasure seekers come to the frozen region.
FINSUM: Sorry for the irrelevance of the story, but treasure falling from the sky and oversold flights full of treasure hunters was too much not to share.
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.