Market Scorecard
The month of August was relatively boring compared moments in the past few months. The Fed’s meeting at Jackson Hole culminated with Janet Yellen and Richard Fischer suggesting there could be one or two rate hikes coming before year end or shortly thereafter. Just one week later, employment for the month of August rose by only 155,000, which missed estimates by a decent margin. The hawkish tone from the Fed will most likely be switched yet again as we saw weak manufacturing and services data. What you may not have heard about Jackson Hole is they held a session on negative nominal interest rates and brought in Marvin Goodfriend as the lead presenter. He is a believer of NIRP (negative interest rate policy) as a monetary tool in crisis. This could have been Yellen’s attempt to learn how to implement NIRP and what better way than from Goodfriend and other central bankers who’ve actually done it.
And what do ya know, negative interest rates had the complete opposite effect than central banks intended. Instead of spurring consumption, people are saving more than ever before. Not sure what Yellen is really interested in unless her plan is to increase savings rates in the US (AKA austerity). Given that debt is just consumption pulled forward, I’m not against a higher savings rate here in US if you’re of the belief that a lot of the debt was used rather unproductively (see July’s update for more data on this).
The Fed is so focused on raising interest rates that they haven’t mentioned that there’s already been a significant(ish) hike that has already occurred in LIBOR (London Interbank Offered Rate). LIBOR is the rate banks charge each other for eurodollars in the London interbank market, not dissimilar to the fed funds rate that U.S. banks charge each other for overnight U.S. deposits. LIBOR is widely used here in the U.S. for floating rate loans. So if LIBOR is rising, the cost of debt is rising for many individuals and corporations. On the other hand, it means banks are earning more on loans they made to individuals and corporations. Throughout 2015, three-month LIBOR was about 0.25% higher than the yield on three-month U.S. Treasury bills. By early August 2016, however, the premium jumped, to 0.50%. Historically, such a move would suggest rising bank credit concerns, but prices on bank-credit default swaps (insurance against a default) remain largely unaffected, suggesting a different explanation. This is where pending U.S. money market reform appears to be having an impact. Effective October 14, 2016, prime institutional money market funds will be required to float their net asset values, rather than fixing them at $1.00 per share. At the same time, all non-government money market funds will be able to impose redemption fees, or liquidity gates, if fund liquidity falls below defined limits. Solutions to these new regulations directly affect bank financing, which in turn force LIBOR higher.
Turning internationally, Eurozone GDP continued to signal stagnation. In line with our view of global growth slowing, GDP across the Eurozone slowed to +.30% vs. +.60% in the prior quarter and +1.6% YoY for Q2 which was flat on a rate of change basis from Q1. Looking at specific country results:
- German GDP accelerated to +1.8% YoY from +1.6%
- Italian GDP came in at +0.7% YoY which was a deceleration from +1.0% in Q1
- Greece GDP contracted to -0.1% YoY from -1.3% in Q1
The Southern Eurozone states continue to deteriorate.
Looking to Asia, Japan’s unemployment hit a low not seen since 1995 at 3%. The way the Fed manages interest rates expectations is based entirely on labor market conditions. But imagine if Japan said that economic conditions are great because employment is low and it’s time to raise rates! What about industrial production, ISM Services, GDP, etc. The Bank of Japan is now a top 5 holder in 81 of the 225 names in the Nikkei Index! They seem to be the biggest buyers of Japanese equities in the world right now. Check out the chart below to see the ballooning amount of asset the Bank of Japan holds via ETF’s.
Check out the charts on China real estate investment growth and China fixed-asset investment. State owned firms have been the only ones investing since the beginning of the year while private firms and the overall amount of investment has been declining.
If I asked you whether you could go back in time to 1981 and pick whatever asset category you wanted to hold until 2016 and you couldn’t change it once you made your mind. How many people would choose US stocks? Small cap stocks? Emerging markets? How many would have chosen the 30 year treasury bond? Or better yet, the 25 year zero coupon bond? Those who put $100 away in the S&P and invested blindly would now have almost $4,228, which is a fantastic return of +12%. But had you picked the 25 year coupon bond and each year that went buy, sold it and purchased another 25 year zero coupon bond to maintain duration, you would now have $27,837, which represents a 17.7% annual return! How many people want to change their answer?
I read a lot of articles and talk to a lot of people who are bearish, but it isn’t showing up in the data. Fairly recent CFTC data show bullish bets are as high as they were in Dec ’14 – Jan ’15.
I don’t want to continue beating a dead horse but we’re very late into this economic cycle. We are 87 months in compared to a mean of 50 and median of 59 months over the last century of cycles. And with the Fed projecting continued policy normalization through 2018, they are implicitly forecasting the longest expansion ever. But how much upside is left in the markets? If central banks continue stretching the system further and further and inject rhetoric and capital at the smallest sign of turbulence, what does the snapback look like when we revert to the mean (or even fundamentals)? Caution is a word we’ve been using for almost a year now and since launching this firm in April of 2015. Since then, the S&P has returned just under 6% if you managed to hold on through the significant volatility. If you were unlucky enough to have invested heavily in small cap US, international or emerging market stocks, you’ve broken even or have lost between -11 & 13% for your troubles. I can’t say it enough that risk management is crucial during times like these. If you’re unsure of your current portfolio, we’re willing to review your investment allocation to ensure it aligns with your goals, risk tolerances and especially today’s markets.
As always, please contact us if you have any questions since it’s our mission to provide as much value as possible to our clients and contacts.
Regards,
Jared Toren
CEO & Founder, Proper Wealth Management
Proper Wealth Management’s (“Proper”) blog is not an offering for any investment. It represents only the opinions of Jared Toren and Proper . Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest. Jared Toren is the CEO of Proper, a Texas based Registered Investment Advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Information contained herein is believed to be accurate, but cannot be guaranteed. This material is based on information that is considered to be reliable, but Proper and its related entities make this information available on an “as is” basis and make no warranties, express or implied regarding the accuracy or completeness of the information contained herein, for any particular purpose. Proper will not be liable to you or anyone else for any loss or injury resulting directly or indirectly from the use of the information contained in this newsletter caused in whole or in part by its negligence in compiling, interpreting, reporting or delivering the content in this newsletter. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. The material contained herein is subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Proper may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. Proper Wealth Management is not responsible for any errors or omissions or for results obtained from the use of this information. Nothing contained in this material is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this material should not be acted upon without obtaining specific legal, tax or investment advice from a licensed professional.
Author: Jared Toren
Jared Toren is CEO and Founder at Proper Wealth Management. Proper was born out of frustration with the inherent conflicts of interest at big brokerage firms influencing advisors to sell products that were not suitable for clients but profitable to the firm along with a consistently mixed message of who’s interest was supposed to be put first; the clients’, the firms’, shareholders or advisors.
At Proper, our clients interests come first. We are compensated the same regardless of which investments we utilize so there’s no incentive for us to sell high commission products. Since we focus on a small number of clients, we are able to truly tailor our advice to each person’s unique circumstances.
