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Monthly Recap

February we witnessed the same recurring themes and headlines in the US and abroad. The equity markets posted solid gains as the markets seem to believe that the Fed has got it’s back once again. To recap, here are just some of the noteworthy events and stories from February:

  • Amazon pulls out of NYC due to political backlash
  • The U.S.’s financial burden is growing despite a strong economy. Total public debt climbed to more than $22 trillion as of Feb. 11, according to a Treasury Department report.
  • The US avoided another government shutdown, however, the President then declared national emergency to use funds to build the great wall
  • Bernie Sanders announced his candidacy for the presidency in 2020
  • Trump met with North Korean dictator Kim Jong Un. After a successful day 1, Trump walked out on day 2 abruptly due to Kim’s last minute demands to remove all sanctions against North Korea.
  • Tensions flared between India and Pakistan as the countries traded tit for tat bombings.
  • Deutsche Bank apparently weighed extending Trump’s loans until after a second presidential term since they didn’t want to try and collect on a sitting US president in case there was a default
  • The IRS says average tax refund is down nearly 9% this year. This will no doubt have an impact on middle income families to who rely on their tax refund.
  • NASA says farewell to Mars Discovery which lasted 15 years vs. 90 days that they had predicted

My 2 Cents

This month I contemplated whether the traditional business cycle is dead due to global central bank willingness to continue propping up the world. There was unprecedented liquidity added to the global financial system which we haven’t sucked back out yet. In the US, we started to tighten by rising rates and by selling off the assets on the Fed’s balance sheet. It didn’t take long for the economic data to worsen and Powell to buckle under the pressure and go dovish. Being tough is hard, especially in today’s 24 hour news cycle world.

In mid-December it seemed clear Fed Chairman Jerome Powell had channeled former Fed Chairman Paul Volker’s inner strength. The Fed had been raising interest rates since December 2015, with expectations for two to three more hikes in 2019. Quickly, Powell U-turned and so did the ECB and China. The liquidity spigot is back on and perhaps recession avoided….for now? The rubber-band is being stretched ever further. What will (or can) the Fed do once it snaps when they have no more ammo to use? Perhaps QE4 or 5 with trillions this time?

Charts & Commentary

(In no particular order)

As has been widely publicized, Europe is experiencing a broad slowdown.
In just the last 10 years, the triple-B bond market has exploded from $686 billion to $2.5 trillion—an all-time high. To put that in perspective, 50% of the investment-grade bond market now sits on the lowest rung of the quality ladder. If the market gets hit with a shock event, many of these corporate bonds will become “fallen angels.” That’s a nice way of saying they’ll turn into junk bonds. And when that happens, a wave of bankruptcies will follow.
Looking at just the BBB slice from the above chart. You can see it’s growth since 2009 has exploded.
We are approaching the longest ever expansion in history. This chart doesn’t show cumulative GDP growth during expansions. If it did, it would show that this expansion has the weakest total growth.
What happens when people start to worry when you can pay back debts.
Research by Gluskin Sheff shows that when the 5-2 year treasury yield turns negative, there’s usually a recession that follows.
Most tightening cycles end in recession
We’ve seen this chart for some time now as the credit cycle hits new highs.
US treasury bonds should be considered high yield in the world of negative rates. Hard to imagine this is still reality.
As GDP and inflation estimates for Europe and Germany fall, so does their bond yields.
Coworking space has been on the rise and doesn’t show any sign of stopping. In Austin, a new coworking space called NowSpace plans to add over 1 million square feet of space.

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

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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.
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