Good article by Jen Skeritt at Bloomberg on the impact of Trump's 31% tariff on Canadian lumber. Skeritt points out that the entire tariff has been passed on to the U.S. consumer through higher prices, and Canadian lumber producers are actually benefiting from the higher prices. The loser in this trade war has clearly been the U.S. home builders and home buyers who are paying the higher prices. The reason this has happened is because U.S. demand for Canadian lumber is strong, making the demand elasticity low. If demand elasticity were high, then Canadian producers would not be able to pass along the cost of the tariff to U.S. consumers. This is so elementary, it is taught in high school economics 101. Sad and discouraging to see our government implementing policy a high school student could see will fail ex ante. Read the full article here.
9/25/2017 0 Comments
IHS Markit analyst, Chris Williamson, takes an optimistic view of the economy, calling it 'resilient' during a month of hurricane disruptions. He believes the economy is growing at a rate just over 2% in 3Q. Although 2% growth is probably enough to be supportive of equity markets, I am more cautious given the recent and significant downgrade of growth estimates from the 3% area to the 2%. If the slowing growth is solely due to hurricane effects, then growth should bounce back relatively quickly toward the previous 3%. If there are other reasons for the slowdown, the Fed tightening for example, then the slowing of growth should be viewed with potential for further deterioration toward the 1% area which would be negative to the equity market in general. Read the full IHS Markit research here.
Here's a positive article from Yale on coal consumption in the U.K.. As you can see from the chart, coal consumption in the U.K. has fallen out of bed over the past 2 years to represent less than 2% of power production. I hope the U.S. and China follow the U.K.'s led away from coal. The U.S. power production was 32% coal last year. Read the full article here.
Korean exports are the first trade data reported each month by any nation. The data provide an early look at how the economy is performing in the first 20 days of September. The strong Korean export data point to a continuation of synchronized global growth. Read the full article here.
Weak data today takes a big bite out of NY Fed's 3Q GDP Nowcast estimate. The weakness was mainly coming from Hurricane impacted production data. The utility, mining and manufacturing components were all lower. The problem is that if the Hurricane weakness is temporary, then you would expect 4Q GDP expectations to increase on the snap back. Unfortunately, this is not the case.
As you can see, the 4Q estimate dropped precipitously as well.
I would agree with the assessment that the Fed is going on hold in regards to rate hikes until next year. The reason being stubbornly low inflation. With the economy at or near full employment, the Fed is wondering why inflation remains well below their 2% target. The July reading on the core PCE was 1.4%. Until the Fed has a better explanation for the persistently low inflation, I think the Fed will let the economy run above trend growth into next year. August core CPI did come in above consensus today at 1.7%, the first upside inflation surprise since February.
Correlations are currently low, and the below linked article from topdowncharts.com argues this is a short-term bearish indicator. I tend to disagree with this point of view. I believe that high correlations are an indication a market is sick and low correlations indicate a healthy market. The proper function of capital markets is to allocate resources to more productive enterprises. A low correlation between securities indicates the market is executing that function. Read the full article here.
Good article on the decrease in outstanding equity along with the increase in outstanding debt of American corporations. This makes sense given low interest rates and attractive investment opportunities. Time will tell how this ends, but my feeling is this leveraging of corporate balance sheets will continue, as long as rates remain low and the underlying business are not deteriorating. Read the full article here.
Whole Foods is actually cheaper than most grocery stores in Manhattan. Maybe it's just my neighborhood. Food was already very cheap in the U.S. compared to most other places to begin with. Whole Foods only had 8.8% EBITDA margins, comparable to Amazon's 8.4%. Things could get much tougher for food retailers over the next few years, and consumers stand to benefit.
Goldman Sachs is sticking with equities over credit and credit over treasuries. Global economic and earnings growth has synchronized. There are elevated risks which must be monitored and some dry powder is recommended to take advantage of any market pullback. Read full outlook here.
Interesting paper on IPO market from University of Florida professor Jay R. Ritter available here.
Read full article here.
Full article published on advisorperspectives.com available here.
Nice breakdown on the Dow's ytd performance here.
Interesting article on school spending / quality available here.
4. Saves time
5. Avoids dodgy financial advisors
Full story here.
"Severe droughts in the heart of America's breadbasket are now so bad that some farmers are choosing not to even try to bring their wheat to harvest."
Read full article here.
WSJ article on wage pressures found here.
1. You Apply for Social Security Benefits Too Early
2. You Fail to Take a More Conservative Investment Approach
3. You Spend the Way you Used To Spend
4. You Miscalculate Your Required Minimum Distributions
5. Not Taking Health Care Expenses into Account
Full article available here.
The DOL Fiduciary Rule still remains uncertain although part of the regulation went into effect earlier this month. Most of the debate about the DOL Fiduciary Rule is ridiculous. Who would be against a common sense rule that requires advisors put client interests first? Any advisor not doing this shouldn't be an advisor to begin with. From a client point of view, it is non-sensical to argue against the DOL Fiduciary Rule. Who wants an advisor putting commissions above the client? Would a doctor remain in business if he did not put his patients' interests above his own? The truth about the DOL fiduciary rule: it's long overdue and it should do more to protect investors. It only covers retirement accounts of individuals, not taxable or institutional accounts, and it should do more to protect investors from fees.
John C. Bogle, founder of both The Vanguard Group and the first index mutual fund, wrote on this topic in the Financial Analyst Journal. The article, titled "Balancing Professional Values and Business Values", can be accessed here. The article is written for financial professionals, but I think it is a valuable read for clients as well. It is tough to come up an argument against his points.
The argument against the DOL Fiduciary Rule is the required record keeping. Since client account records and information are already collected and stored by advisors, this argument doesn't hold much water. A more interesting question is how did we get to the current status quote of selling products to generate commissions rather than putting clients first? Why is anyone (accept brokers themselves) defending a commission-based relationship? A transaction based model has never been in the clients best interest, yet much of the financial advisory industry still works on commission. There seems to be a growing shift toward a percentage fee on AUM model which is a step in the right direction. The short answer to how we got here is 'profits'. Brokers make more money from transactions then from fees on AUM, and that is a real shame on the industry. Now the industry has to move away from the commission-based distribution model. This may hurt broker profits in the short-term, but it is clearly in the best interest of clients. The DOL Fiduciary Rule is long overdue and more is needed to straighten out the unnecessary conflicts built into the current advisor/client relationship. For example, 12b-1 fees are sales fees which some mutual funds pay to advisors who sell those funds to clients. Clients may not even be aware of these fees which they are paying to their advisor because they are buried in the mutual fund expense ratio. These 12b-1 fees should be done away with as well as mutual fund loads. Both are fees investors should not pay... it's just common sense.
In 2015, Geoff Colvin, Senior Editor at Large with Fortune Magazine, published Humans Are Underrated: What High Achievers Know That Brilliant Machines Never Will. The book describes a new economy and the displacement of human jobs by computer software. The most interesting parts of the book were about what skills will be highly valued in the future economy. Colvin emphasizes the human-to-human interactions of empathy, story-telling, and team-building as examples of skills not likely to be automated. Why are schools so focused on teaching kids STEM, science technology engineering and math, not empathy, story-telling, and team-building? The transition from the knowledge-based economy to the human-connections economy will allow workers to focus on human interactions and relationship building. The book is an interesting read, but the sweeping conclusions are a bit idealistic and utopian. When I first read it, I wanted to run out and become a therapist. I can empathize, I thought. But future jobs will likely require both knowledge in STEM and skills in human interaction. It's not one or the other, but rather a need for both. Colvin makes it sounds like empathy, story-telling, and team-building will get you the next fortune 500 CEO job. It's a combination of knowledge-skills and soft-skills. The engineer who can empathize and the lawyer who is a story-teller. Of course, we all want a doctor with a good bedside manner, that's not a new idea. Colvin concludes healing and diagnostic skills will be automated, and the only thing the doctor will be left to do is feel for you, but I think this is an over-simplification. He touches upon team-building and the value of colocation, and highlights the fact that women typically score higher in the soft-skills area. Colvin brings all these human qualities together to underscore the importance of human connections. The broad conclusion on how the economy will function in the future is a bit of a stretch in my opinion. But his argument is completely compelling. Are empathy, story-telling and team-building important? Yes, for sure, but is social worker pay going to jump above software engineer pay anytime soon? I doubt it. It's a thought-provoking, well-written book and worth a read.
You can read a review by Tyler Cowen at the Washington Post here. A short adaptation of the novel is printed here.
Michael Grove, CFA