Monthly Recap

Thank goodness August is over with as there was a tremendous amount of noise. Things seemed to reach a fever pitch this past month with the ever evolving US-China trade war, protests in Hong Kong and interest rates which continued to fall globally. The US stock market started off weak and ended up posting only modest losses for the month which was a win in my book due to all the negative headlines that occurred during the month. To recap, here are some of the noteworthy events and stories from August:

China responded to President Donald Trump’s tariff threat with another escalation of the trade war, letting the yuan tumble to the weakest level in more than a decade and asking state-owned companies to suspend imports of U.S. agricultural products. The President accused China of being a currency manipulator (and labeled so by the Treasury), something he’s repeatedly said. The US and China went back and forth raising tariffs and levying threats against one another. This trade war does not appear anywhere close to a resolution and we should expect this type of relationship and news cycle for the foreseeable future.
Protests and unrest in Hong Kong don’t appear to be nearing an end either. The Hong Kong airport has delayed and canceled flights, sometimes for full days in response to the unrest. It’s unclear how China plans on “resolving” this situation. Let’s hope whatever transpires is done so peacefully and without conflict.
It appears that the mystery surrounding Epstein’s death in solitary confinement has been solved and is officially labeled a suicide. There’s a lot of suspicion and conspiracy theories around his death and some questions will go unanswered. His victims will hopefully still be able to seek justice and obtain monetary awards.
The world’s headlong dash to zero or negative interest rates just passed another milestone: Homebuyers in Denmark effectively are being paid to take out 10-year mortgages. Jyske Bank A/S, Denmark’s third-largest lender, announced in early August a mortgage rate of -0.5%, before fees. Nordea Bank Abp, meanwhile, is offering 30-year mortgages at annual interest of 0.5%, and 20-year loans at zero.
Federal Reserve officials viewed their interest-rate cut last month as insurance against too-low inflation and the risk of a deeper slump in business investment stemming from uncertainty over President Donald Trump’s trade war. Since July, however, it’s unsure whether the Fed will be forced to lower rates further if the trade war escalates and/or if economic data deteriorates further.
The U.K. Parliament will be suspended for almost five weeks ahead of Brexit, as Prime Minister Boris Johnson sets up a showdown with lawmakers who want to block him from taking the U.K. out of the European Union without an agreement. This is another example of uncertainty affecting global markets.
General Electric Co. tumbled the most since 2008 after a prominent financial examiner working with a short seller accused the company of “accounting fraud.” GE Chief Executive Officer Larry Culp called the claims “market manipulation — pure and simple.” Harry Markopolos, who had raised concerns over investment manager Bernie Madoff before his fraud was exposed, said GE will need to increase its insurance reserves immediately by $18.5 billion in cash — plus an additional non-cash charge of $10.5 billion when new accounting rules take effect. GE is also hiding a loss of more than $9 billion on its holdings in Baker Hughes, an oilfield services company, Markopolos said. GE dismissed the claims as “meritless” without providing a point-by-point rebuttal.

My 2 Cents

The fall in long term interest rates during the month of August was incredibly fast and furious. It seemed to accelerate every single day without ceasing.

Below is a screenshot from Bloomberg on August 13th. A few weeks prior I asked myself if we were going to see the 30 year Treasury bond fall below the 3 month T-Bill (yet another yield curve inversion). The second screenshot below was taken the morning of August 28th, just over 2 weeks after the first one. In that short period of time, the 30 year T-Bond fell 19 basis points and dropped 5 basis points below the 3 month T-Bill. The 10 year T-Bond fell below that of the 2 year T-Bond which is a widely followed spread. Clearly the bond market is signaling something is not right.

JP Morgan thinks the 10 year T-Bond could go to zero as money from overseas flows into our markets “high yield bonds” (see chart below on Germany’s bonds all trading at negative yields). As trade tensions escalate, the probability of recession rises. There is also the very real risk that inflation expectations have become unanchored and central banks are gradually becoming powerless. New York Fed president John Williams captured this risk nicely this month by saying that “investors are increasingly viewing these low inflation readings not as an aberration, but rather a new normal”. If, as expected, the Fed begins a rate-cutting cycle at the end of this month, money will be shaken out of money-market funds into bond funds in an effort to lock up a higher yield.

All in all, this (along with many other factors) should make any investor incredibly cautious and careful about how they take risk.

Charts & Commentary

(In no particular order)

Recession probabilities keep creeping up. It seems that the 30% probability line seems to be a good predictor of a recession…and we’ve crossed it.

Things usually look really good before we have a downturn. High consumer confidence and low unemployment.

The entire Swiss yield curve is negative. Would you like a guaranteed negative return for 6 months or 50 years?

Another symptom of quantitative easing and negative yields has hit Germany where their entire yield curve (like the Swiss) is completely negative. It’s hard to rationalize how any of this makes sense. When we look back at this environment in 20 or 30 years, what will be the lesson?

According to this Deutsche Bank report, 25% of all bonds in the world trade at negative interest rates. This chart was released in July and the % of bonds trading at negative yields is now at 30%.

Most A rated firms in Europe can now borrow at near 0% interest rates.

As highlighted and mentioned above, the 30 year treasury yield dropped considerably this year. It started the year around 3% and hit a low of almost 1.90% in August. While it might drift lower over time, it’s my personal opinion that it will hang around these levels for a period.

When the economy is humming and unemployment is low, fiscal deficits are usually low as well (or sometimes positive). This economy is very different as a result of corporate tax law changes and other fiscal stimulus efforts. If we do have a recession (or when), we could easily see double digit deficits.

U.S. manufacturing firms signaled only a fractional improvement in business conditions in July, with the headline PMI dropping to its lowest since September 2009.

Simply put, we have too much retail space per person compared with other large countries. Or, do other countries not have enough?

I hope you enjoyed this months financial markets update. If you have any questions please contact us directly. If you’re interested in a topic that you’d like us to address, please email us so we can include them in future updates.

If you’re interested in starting a dialogue and learning how we can help, please contact us.

Best Regards,

Jared Toren
CEO & Founder

Sources: Edges & Odds, WSJ Daily Shot, 361 Capital, Steve Blumenthal’s On My Radar

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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.