Insights

Unbeknown to most in the public, a group of eight economists from the nonprofit National Bureau of Economic Research is the official arbiter of US business cycles.  Given its opaque deliberations and indeterminate meeting dates, it’s not surprising that both Main Street and Wall Street have resorted to a whole host of data to predict such cycles in a timelier manner.

The release of notably weaker-than-expected July jobs report this past Friday has ignited some buzz on one such indicator—the Sahm rule.  Triggered in every recession since 1970, the rule holds that a recession is almost always already underway, if the three-month average unemployment rate is 0.5% higher than the lowest point in the preceding 12 months.  The Rubicon was crossed for the first time since 2/2020 when Covid began.

How significant is this event?

In deciphering the strength of any economy, a panoply of indicators is required to make a more accurate assessment.  Currently, the Sahm rule’s warning of a slowdown in the economy is unmistakable. That said, one would do well to avoid overstating its stand-alone value at present, when: 1) the sample size is relatively small (only 8 recessions since 1970), heightening the risk of correlation-causation fallacy; and 2) the distortions from the unprecedented Covid-related fiscal and monetary stimuli totaling at least $10T, or 40% of annual US GDP, have yet to be fully understood.

Juxtaposed against this potential flirtation with recession, the Fed once again finds itself in an unenviable position.  While inflationary measures have been trending lower, they are not near the central bank’s stated goal of 2%.  Notwithstanding, the Street is now anticipating at least one full percentage point in rate cuts between now and year-end, as fears of economic deceleration grip investors.

While the term “curated” has been used so frequently as to become hackneyed, the idea that any investment portfolio should be tailored remains perpetual and immune to fads.  How’s your portfolio positioned in this macro environment?

A Cautionary Tale of Counterparty Risks

Over the past 15 years, the increasing ubiquitousness of financial technology (“fintech”) —  including mobile payments, digital currencies, blockchain, and peer-to-peer lending, just to name a few — has heralded a new era of how people manage their money.  Such innovations, spearheaded by non-bank entities, have afforded consumers convenience, efficiency, accessibility, and choice.  Against this backdrop of an ever-evolving landscape, brick-and-mortar institutions and government regulators alike have been busy playing catch-up, as walls around the traditional financial and banking system become progressively deconstructed.

Notwithstanding the aforementioned benefits wrought by fintech, the recent collapse of Synapse, a little-known middleware firm whose services allowed other businesses to embed banking services into their own offering, illustrates the fragility of the fintech ecosystem.  While the extent of the bankruptcy’s cascading impact remains to be fully revealed, a recent report suggested that more than100,000 fintech customers, with $265 million in deposits, have been locked out of their accounts since mid-May.  Furthermore, consumers should be aware that when opening an account with a non-bank entity, such deposits may not be protected by the FDIC coverage.

Do you know your counterparty risks when placing your hard-earned dollars?

“The past is strewn with the ruins of the empires of tyranny, and each is a monument not merely to our blunders but to our capacity to overcome them.  That’s why I remain an optimist, though I am also a realist, about the barriers before us.”

— Dr. Martin Luther King, Jr. 1968

WuRevue Week Ending 5/14/2021

Top News:

05/10: Continuing the selloff trend since late April after hitting its historical high, NASDAQ dragged stocks lower.  Gasoline futures ended higher, after a ransomware hacking group breached the largest pipeline system in the US.

05/11: Concerns over inflation took center stage as China’s Producer Price Index showed an annual increase of 6.8%, fueling fears that higher costs may prompt tightening by central banks. Against this backdrop, investor sentiment has turned more guarded, despite assurances from Fed officials that there would be no imminent tapering of monetary stimulus (here, here).

05/12: The core US CPI rocketed to a 26-year high of 3% in April, fueling debate on whether cost increases are indeed as transitory as the Fed argues.  In response, the 10-year Treasury yield settled higher at 1.7%, spurring selling in major US stock benchmarks by at least 2%.

05/13: Yet another measure of inflation, the PPI, registered the biggest annual increase in its core rate since 2014.  After yesterday’s swoon, however, investors were in a glass-is-half-full mood, choosing to focus on the more positive initial jobless claims report and buying on the dip instead. 

05/14: Investors tried clawing back losses seen earlier in the week, despite softer than expected data in retail sales and consumer sentiment, which assuaged some inflationary concerns.

Heard on the Street:

“I can’t find any period in history where monetary and fiscal policy were this out of step with the economic circumstances, not one… If they want to do all this and risk our reserve currency status, risk an asset bubble blowing up, so be it. But I think we ought to at least have a conversation about it.”

— Stanley Druckenmiller of Duquesne Family Office said in a CNBC interview on 5/11/2021

“The Fed has their pedal to the metal trying to restore the pre-Covid labor market.  While the Fed can’t afford to appear uncertain, their dogmatic confidence that inflation won’t become problematic is equally suspect… Fragility will strike again, as valuations and positioning look stretched.”

— BofA Global Research, as quoted by MarketWatch on 5/12/2021

Longer Game:

The recent breach of Colonial Pipeline’s cybersecurity epitomized the vulnerabilities of critical infrastructure in the US.  Understandably, protection against cyber threats has been deemed a national security issue.  However, privacy concerns are looming, as illustrated by one recent case where the FBI was granted the authority to access computers, without their owners’ knowledge or consent, and to delete software.

Bonus:

April’s outsized CPI figure rekindled a percolating debate over whether inflationary pressure is temporary. While high when compared to data from the past 30 years, one month doesn’t make a trend in data series.  It bears close monitoring, nevertheless, because interest rate moves will rule market sentiment– just like the dominance of the One Ring in Tolkien’s classic!

WuRevue Week Ending 5/7/2021

Top News:

05/03: Secretary Yellen denied inflation to be an issue, saying “we have the tools to address it.”  Two measures of US manufacturing (here, here) painted a mixed picture in April, amid escalating concerns over supply chain disruptions.  Meanwhile, the world’s second most populous nation remains mired in new Covid infections, with nearly 7 million cases reported in April alone.

05/04: Reflective of a jittery stock market, particularly amongst tech names, Yellen sent investors into a tizzy when she  acknowledged that, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.”  Consequently, investors rotated into more cyclical names seen as better positioned for further economic reopening.

05/05: More notable as a directional harbinger, a private employment index showed healthy gains recently.  Furthermore, investors cheered the robust expansion of US service-oriented businesses in April.  However, investors are reading the tea leaves on the Fed’s thinking as various officials expounded on the Bank’s monetary trajectory (here, here & here).  In a symbolic move for now, the US has reversed course by supporting a WTO proposal to waive intellectual property rights over vaccines.  Separately, the EU is re-examining economic ties with China, a reflection of recent heightened tensions.

05/06: US enjoyed healthy productivity gains, while labor costs remained in check during the first quarter.  As yet another positive, the initial jobless claims figure set another pandemic low.  Meanwhile, the Bank of England kept its monetary policy unchanged, as expected.  In Asia, relations between two key trading partners became further strained, after China suspended indefinitely high-level economic dialogue with Australia.

05/07: April nonfarm payrolls were noticeably lighter than expected, while the unemployment rate ticked up to 6.1%.  In response, the 10-year Treasury yield dipped to as low as 1.48%, as the Street discounted inflationary fears.

Heard on the Street:

“Listen, every client call I’m on… is talking about overheating… the Fed is right about most of these costs are transitory… The longer that policy stays this easy, as long as the liquidity in the system is excessive, then you run the risk that you overheat or you run the risk that … the exit from this policy may have to be a bit more aggressive.”

— Rick Rieder, CIO of BlackRock’s global fixed income, as quoted by CNBC on 5/04/2021

“Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year… The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.”

— Lael Brainard, Fed Governor commenting on the semiannual Financial Stability Report on 5/06/2021

Longer Game:

Characterizing government deficit as a “Ponzi gamble,” one academic believes two key variables that would allow such an endless rollover of debt  — low interest rates and fast economic growth — are now “uncertain,” given a much changed competitive landscape and the size of the nation’s projected debt.

As consumers of Big Tech products, we all experience the last line from the song “Hotel California”– “You can check out any time you like, but you can never leave.” The ongoing EPIC vs. Apple lawsuit is more than a quibble over the share of the pie; it can be an example of antitrust being exercised to guard against monopolistic abuses.

Bonus:

Concerned over sooner than anticipated rate hikes prompted by an overheating economy, a Bank of America survey showed hedge funds were “extreme” sellers of stocks, especially in sectors which had benefited from lockdowns. 

In lieu of empty slogans and self-congratulatory confetti in recognition of this annual celebratory event, I’d like to invite you to a series of in-depth discussions, jump-started by a coalition of partners known as Quiet Before.

The panelists speak to Asian American history, ways to broaden the AAPI community’s visibility, as well as build solidarity with like-minded supporters  

Not surprisingly, this issue is dear to me, and of particular pertinence, given the dearth of diversity in the asset management field.  Indeed, according to a 2017 study,  only 1.1% of asset management firms are diverse-owned, as measured by assets under management.

History may be mutable according to the lens of a historian.  In meantime, it is incumbent upon each of us to seek a more just society, more reflective of all its parts.

P.S. My cousin, Alice, a graphics design maven with her own shop drove the creative direction of Quiet Before!

WuRevue Week Ending 4/30/2021

Top News:

04/26: Ahead of a week that was packed with earnings, the Fed meeting, release of key economic data, and Biden’s “American Families Plan,” investors proved cautiously optimistic, bidding up the S&P 500 to a record intraday high.  Durable goods orders rose in March in a welcomed reversal of trend from February.  Dr. Fauci appeared confident that the US should see a “turning around of the dynamics” in Covid infections in a few weeks.

04/27: Investors refrained from making major bets before the Fed’s meeting Wednesday. Indeed, indices finished largely unchanged, despite a sharp rise in one consumer confidence gauge in April.  Elsewhere, two major housing barometers (here, here) showed outsized increases in median home prices.

04/28: While acknowledging inflation has risen, the Fed downplayed its risks by keeping the Bank’s loose monetary policy and supportive language intact in its latest meeting.  In response, however, the market’s trading remained range-bound, consistent with its recent trend of consolidation.  Investors also focused on Biden’s $1.8T “American Families Plan,” set to be the focus of his first address to a joint session of Congress.

04/29: Owing to governmental support and the ongoing vaccine rollout, US GDP jumped at an annual rate of 6.4% in the first quarter, anchored by a 10.7% increase in consumer spending.  A separate report from the Labor Department showed first-time jobless claims marked another pandemic-era low.

04/30: Supported by massive government transfers, personal income and spending surpassed expectations and showed record gains in March.  Meanwhile, another consumer sentiment showed a record high since the pandemic’s onset.  Yet investors cheered little, concerned about the momentum’s sustainability, especially in an environment where market valuations already appear full.  Across the Atlantic, the Continent fell into a recession as the euro area’s GDP shrank for a second consecutive quarter by 0.4%.

Heard on the Street:

“While it is appropriate for the Fed to not comment on fiscal policy, it is entirely appropriate for monetary policy to take significant fiscal policy shifts into account in calibrating the stance of monetary policy, but the Fed is not doing this.  Monetary policy looks set to be too easy for too long.”

— John Ryding, chief economic advisor at Brean Capital, as quoted by CNBC on 4/27/2021

“Whilst I still think given where we are, given the ongoing support for markets from monetary policy, equities will probably stay up and may continue to drift higher, but I just think you need to exercise a degree of caution, be a little more selective about where you are putting your money.”

— David Marchant, CIO of Canada Life Asset Management told CNBC on 4/29/2021

Longer Game:

Space– the final frontier! That familiar StarTrek refrain is playing out as China, the EU, Russia and the US jostle (here, here) for primacy.  As a reflection of this heightened interest, “pure-play” ETFs have now been introduced to the investing public.

Bonus:

Anticipating no rate hike from the Fed until December 2022, a recent survey of market watchers also showed that 2/3 of respondents believe asset purchases are no longer needed in order to support either the markets or the economy. 

WuRevue Week Ending 4/23/2021

Top News:

04/19: Taking a respite from recent saber-rattling and heightened rhetoric, US and China sought common ground on climate change.  Separately, one central bank official of China acknowledged bitcoins as “investment alternatives,” representing a notable departure from its past stance.  Japan’s exports enjoyed stronger-than-expected growth in March, driven by demand recovery in Western Europe and Asia. 

04/20: Despite no obvious selling catalyst, US equities declined, as a pattern of consolidation of recent record gains took hold. Meanwhile, the GOP is reportedly coalescing around a $600B-$800B infrastructure deal, far short of the $2T envisioned by Biden.

04/21: The US administration reached its self-declared goal of 200MM vaccinations in its first 100 days.  In a war of words, congressional Democrats have roundly rejected GOP’s counteroffer on infrastructure spending.

04/22: Initial jobless claims declined to the lowest level since early March 2020, continuing a recent trend of relative improvement.  As further fodder for market bulls, a gauge of leading economic indicators portends further recovery momentum.  Meanwhile, existing home sales fell in March as tight inventory pushed median home prices to a historic high.  Such largely positive economic data notwithstanding, US stocks ostensibly succumbed to profit-taking pressure, after reports surfaced of the administration’s plan to raise capital gains tax on the wealthy.  Across the Atlantic, the ECB stood pat in its monetary policy, as expected by the market.

04/23: A survey of purchasing managers showed continued strength in the US economic recovery in April.  Eurozone economic activity also expanded in April, buoyed primarily by manufacturing, which has proved less susceptible to containment measures.  In Asia, India is battling worrisome levels of new Covid cases amid a disappointing vaccine drive.

Heard on the Street:

“We just hit a major milestone with 50% vaccinations in the United States, and that number is only going to get better in the United States and in Europe, which is a couple of months behind. So there’s really more room to run in this rally, but it’s probably going to come more from value and cyclical sectors than from the tech trade, which is more of last year’s.”

— Mike Labella, Franklin Templeton senior portfolio manager, as quoted by CNBC on 4/21/2021

“The cement of reality that is the earnings season is of no great help to a market trading on hope. Hope in the form of a cyclical recovery and a longer-term world where too many unicorns jostle for far too few slots.  This is the essence of a liquidity-fed rally and as the U.S. economy gains traction, the debate on tapering should restart anew and with it higher US Treasury yields hitting growth.”

— Sebastien Galy, senior macro strategist at Nordea, as quoted by Barron’s on 4/21/2021

Longer Game:

Recent moves by the US suggest multilateralism is back in vogue in Washington.  A sustained framework of international engagement, particularly with allies, will be needed as the US confronts China and Russia, two frenemies bound by a shared distrust of America’s dominance.

Bonus:

Americans are taking to the road once again, a sign of confidence in the ongoing recovery.  Indeed, according to the US Energy Information Administration, gasoline demand is back to over 90% of pre-pandemic level.