(New York)

Well it didn’t look like it would be a great year for bonuses, but 2017 bonus data is just in and it was a good year for the industry. Bonuses were up a whopping 17% this year and nearly eclipsed their pre-Crisis levels for the first time. The big bonuses largely reflected the growth of the leveraged loan market, which boosted fees across the industry. The New York state comptroller makes a good point about the data, saying “The large increase in profitability over the past two years demonstrates that the industry can prosper with the regulations and consumer protections adopted after the financial crisis”.

FINSUM: With bonuses getting to near pre-Crisis levels, it seems to be another sign that things are getting toppy.

(New York)

Despite the fact that the DOL says it will no longer enforce the fiduciary rule in any capacity, those in the industry say that firms should not abandon their fiduciary rule compliance. The reason why is that despite all the momentum against the rule, it is still not officially gone. That means the DOL could change course and decide to enforce the rule at any time, giving no comfort about getting rid of fiduciary rule compliance for firms.

FINSUM: So our view is that the whole fiduciary rule playing field is more uncertain after this court ruling. The SEC could still be dissuaded from proposing a new rule, and the current rule could still hold up in court, with both possibilities completely changing the picture.

(New York)

The Dow has not been doing so well lately. Last week it dropped to its lowest level of the year, declining further than in its worst bout of volatility in February. The reasons why are becoming harder to explain with every day of losses. While isolated flare ups used to be explained away, the situation is growing more complicated for investors. A growing risk of tech regulation, a looming trade war, higher interest rates—all are weighing on stocks. That makes the markets much more complicated and hazardous for investors, and it has become commensurately harder to make good decisions.

FINSUM: The market seems to be in a very treacherous period. Its failure to regain momentum after the fall in February seems ominous to us, and we do not see a clear end in sight.

(New York)

Goldman Sachs has been working hard to build up its advisor business. While the firm already has very strong revenue per advisor, it is trying to build up its advisor base and boost its securities lending business. However, it has a problem—many of it advisors are jumping ship. Goldman used to be a place where advisors stuck around for years, but in the last 12 months no less than five big, high quality teams have left the firm. Two have gone to other wirehouses, three became independent. Those in the industry say more are likely to leave.

FINSUM: It looks like Goldman is experiencing the same issues as everyone else.

(San Francisco)

Facebook has been going through a lot of turmoil lately. CEO Mark Zuckerberg is under fire, and the company is currently embattled over data leaks, especially related the Cambridge Analytica debacle. A majority of Facebook users now say they don’t trust Facebook with their data. Because of all this turmoil, however, Facebook’s shares now look like a bargain, says Barron’s. Three year ago the company’s p/e ratio traded at a 140% premium to the S&P 500. Now it down to just 30%, even though its revenues are growing 5x as fast as the market and its profit margins are 3x average. Barron’s argues that if you view Facebook as a “sin stock”, more like a cigarette company than a tech titan, then its return profile could prove very strong.

FINSUM: A lot of sin stocks, such as tobacco companies, have done very well despite public scorn. We think this current bout of anger will likely blow over and the company will return to delivering excellent earnings.

(Washington)

While all the current political anxiety seems to be centered around the midterm elections and what future that may hold for Republicans, the real trouble could be for Trump in 2020, says Bloomberg. According to economists, all signs are pointing to a recession in 2020. While the current tax cuts and fiscal stimulus will insulate the economy this year and next, “Fading fiscal stimulus, higher and rising interest rates, and cresting world demand could leave the economy vulnerable to a contraction -- just in time for the presidential campaign”, says Bloomberg.

FINSUM: A recession starting in the year of reelection would not be good for an incumbent president, and the timelines do seem to make sense.

(New York)

The mortgage market has been doing quite well for a number of years. A steady stream of home buying and refinancings because of ultra low mortgage rates has kept things flowing. However, with rates rising, the refinancing part of the business is weakening for lenders. In 2017, 37% of all mortgage origination was from refinancings, down from 72% in 2012. Accordingly, the overall mortgage market fell by a whopping 12% in 2017. In order to combat the fall, lenders are pushing home equity lines of credit and adjustable rate mortgages.

FINSUM: This is a huge part of the mortgage market that is falling away. This will mean lower earnings for lenders. One wonders when the rising rates will start to curtail purchases. It seems inevitable.

(Washington)

Investors get ready, because it looks like the next recession is on the horizon and the Fed is set to start it. And we are not talking about a distant horizon. The Fed has now made its goal a task that has been nearly impossible historically. That is to boost the unemployment rate without causing a recession. The odds of failure are very high and the Fed has never successfully achieved it in its history. The reason the Fed wants to boost unemployment is that labor markets are very tight, which will produce unacceptably high inflation. Accordingly the Fed must intentionally walk up the unemployment rate to keep things in check. The tool it will use is gradual rate rises to slow down growth and boost unemployment.

FINSUM: We think the Fed is probably going to fail in this exercise, either by being too dovish and letting inflation get too high, or by being overly hawkish. Either way we do not see a good outcome. This cycle might have just crested.

(Washington)

One of the big questions in the wealth management industry right now is what is next for the fiduciary rule. The rule has just suffered its first major court defeat and looks like it is down for the count. Yet, advocates are still trying to rally for it and arcane bureaucratic procedures mean outsiders have a hard time understanding how the rule can officially go away. While the DOL does not look likely to appeal the court ruling, another defendant could theoretically step in. Additionally, some argue that since it was the 5th circuit court which delivered the ruling, that its decision only vacates the rule in its region (Texas, Louisiana, and Mississippi). Some also think the DOL may drop out of working on the fiduciary rule altogether, leaving the whole thing for the SEC to manage.

FINSUM: So despite the positive ruling for those opposed to the rule, the path forward is still very uncertain. However, the likelihood of the rule ever coming into full force seems very low and the DOL says it will no longer enforce it.

(Beijing)

President Trump is set to unveil a package of trade tariffs on $60 bn worth of Chinese goods. Unsurprisingly, the Chinese are preparing their retaliation, focused on US agricultural exports. However, the very interesting part is the retaliatory package will only be on $3 bn of US imports to China, much smaller than the US package. The new Chinese tariffs will be on items ranging from fruit to pork to recycled metals. One US adviser commented “All the products on the list are small potatoes, and the real important ones are U.S. farm products like soybeans and sorghum”.

FINSUM: So why is the Chinese measure so much smaller? In our view it means that they are either afraid to seriously anger the US, or that they need our imports much more than we realize. Interesting development.