The top of the top of the top, deaths and causes, hangryness, the World Cup, M&As, and drivers of returns.
S&P 500: $2,779
10 Year: 2.92
The Market. Friday the 15th has been shaped by renewed fears of a trade war with China. The Trump Administration is set to impose a 25% tariff on $50 billion worth of tariffs on China. This is all because the White House believes China is taking advantage of the United States in regards to IP (intellectual property). 68% of these will come into effect on July 6th, with the remaining to undergo further evaluation and apply at a later date. Furthermore, the White House threatened more tariffs should China retaliate with tariffs of their own…which is exactly what the foreign power proceeded to do. Beijing announced their own $34 billion worth of tariffs which also be taking effect on July 6th. Perhaps of even greater note is the backtracking of the supposed agreements that took place last month when Chinese officials met with U.S. officials. At the time, China agreed to purchase more U.S. goods in an effort to reduce the trade deficit. All that went out the window as of today, and it looks like we are right back where we were over a month ago. Progress! Good thing we can still get our Fourth of July decorations purchases in.
The rich are getting rich faster. Global wealth reached $201.9 trillion last year; 12% gain from 2016. Most of the wealth is held in Asia, but the US holds the largest number of people with more than $100 million.
Time to Go Hiking. This past Wednesday, the Federal Reserve announced the second rate hike of 2018, raising the short term interest rate to 1.75-2%, up 25 basis points (1 BP = .01). In the announcement, Chairman of the Fed Jerome Powell said that economic growth was "rising" and that unemployment was "declining". Basically, Mr. Powell said the economy is doing great. He also reiterated the rational behind rising the rates in layman terms. He said something to the effect of "Raising rates back to more normal levels (they have been low for the past years to allow the economy to fully recover from the economic crisis of 2008) is the best way the Federal Reserve can ensure success for American businesses and households." Since the economy is doing so well, there are likely to be two more rate hikes in 2018, marking 4 for the year.
Not everyone agrees with the Fed's decision here. Many people think that the consistent and planned rate hikes of 2018 are pushing the Treasury Yield Curve dangerously close to inversion, in which long term rates of return are less than short term rates of return. Historically speaking, an inverted yield curve is precursor to a recession. In 2007, we experienced inversion. As of Thursday, June 14th, the spread between the 10-Year Treasury yield and the 2-Year Treasury Yield is 35 basis points. This is eerily similar to the spread that came just before the burst of the dot com bubble at the start of this millennia and the Great Recession.
John Authors of the Financial Times has gifted the world with a brilliant yet simple explanation of this situation, far greater than what I can offer you.
Millions of deaths go unrecorded across the globe every year. Without an accurate measure of deaths and their causes, it is much harder to fight disease. If you do not know the cause of death, how can you prevent it? In Malaysia, a third of deaths are listed as “old age” which is not helping. Recording deaths properly and promptly can alert public officials to early signs of an influenza or other epidemic.
What a week. Here’s a rundown of what happened this week in international politics.
I’m not me when I’m hangry. Your physical state can shape your emotions and cognition. When you’re hungry, your body releases hormones including cortisol and adrenaline, often associated with stress. Hunger can make you feel more tense, unpleasant, and primed for action. When you’re hungry, you may view things in a more negative light than when you’re not hungry. Hunger only becomes relevant in negative situations because hunger itself produces unpleasant feelings.
The World Cup is here! As with any major tournaments there are predictions, betting, wins and losses, and tons of money swirling around. Where there is money, you can be sure to find banks. Many of the largest banks in the world are buying into the fun of predicting the outcome of the World Cup, however unlike individual fantasy brackets these banks are relying on fancy algorithms, AI, and other techniques that are normally used to pick stocks or offer balance to investor’s capital. Goldman Sach’s team decided to use artificial intelligence to try to predict the outcome, with Brazil earning the winning spot over Germany. Apparently Goldman Sach’s has predicted Brazil to win the last three world cups, so let’s hope they don’t use the same AI to predict winning stocks in their portfolios. USB (the Swiss Bank) decided to pursue a route that seems quite promising, considering they have the previous champions and one of the favorites winning again. That is Germany. They made their predictions by simulating over 10,000 tournaments and then count how many times each time won. !0,000 that’s a lot of tournaments. Hopefully they are right. Lastly, ING, the Dutch bank, decided to model teams based on total value. Each player would contribute to the total value based on their current worth in the global soccer economy. Spain came in first with a total value of $1.16 billion and tight on their heels is France with a combined value of $1.03 billion. However, despite these fantastic approaches to predicting the winners, there are those variables that can never be foreseen such as red cards in a final, injuries, lack of confidence, momentum, luck, and so many more factors that we cannot even comprehend. That is what makes sport so incredible to watch, and so risky to bet on. For those that don’t play the odds, it is still fun to sit back with a cold one and enjoy the spectacle!
Emotional intelligence. Defined as recognizing, understanding, and managing our own emotions and influencing the emotions of others. Here are 10 qualities that comprise the emotionally intelligent person: empathy, self-awareness, curiosity, analytical mind, belief, needs and wants, passionate, optimistic, adaptability, and desire to help others succeed and the desire to succeed for yourself. Do you have these qualities?
Drivers of returns. The factors that determine just how successful an investment portfolio is in terms of net, inflation-adjusted returns include: security selection (stock picking), costs and expenses, asset allocation, when you start investing and when you start withdrawing for retirement, longevity of your life, and behavior and discipline.
The Alchanati Campbell & Associates Team
Unprepared for retirement, time to prepare for a recession, the G-7 conference, investment takeaways, life hacks, life on Mars, and cryptocurrency.
The Market. With the VIX at a 131 day low, a lot of things that people feared in February when the first correction in two years occurred have abated. Earnings are great, trade wars are not viewed as so bad, and concerns about rising rates isn’t as pronounced. Summertime seasonality, dealer positioning and lower correlations among stocks should keep volatility lower. But there is increased chatter of a recession happening within the next 2 years and there is increased chatter of investors taking profits after this next earnings quarter.
The world is unprepared for retirement. The responsibility for preparing for retirement has shifted from the government and employers to individuals. Retiring at 65 is no longer financially viable for many workers. Many people are not doing enough to protect their long-term health and good health is essential for people’s ability to work longer and enjoy the retirement for which they’ve worked so hard. Many lack the financial literacy required to make sound decisions about their retirement savings and investments.
Time to prepare for the next cycle. Late cycle blooms typically mark the end is near. Volatile and plateauing asset prices precedes bear markets. There is nothing in the economic data to suggest that a global recession is near with global expansion still having more room to run being evidence to support this. Higher inflationary pressures caused by expansionary fiscal policy will eventually cause monetary policymakers to push rates higher and higher. Most responses to monetary tightening are consequences in the form of a recession.
G6 + 1 + Russia? The G7 Summit in Quebec kicked off today as trade tension between the US and its G7 counterparts come to a boiling point. Besides arriving late to the summit, Trump continued to stir controversy in an interview prior to his departure from the White House, saying that, “we have a world to run and in the G7, which used to be the G8, they threw Russia out. They should let Russia come back in”. The G7 kicked out Russia in response to the countries annexation of Ukraine in 2014. Despite this bombshell, trade is still the dominating topic of discussion. In response to new steel and aluminum tariffs imposed by the US, French President Emmanuel Macron said, "a trade war doesn't spare anyone", while Justin Trudeau called Trump's citing of ‘national security’ to defend his tariffs as “laughable". The summit promises to bring more controversy as it continues throughout the weekend. Check in with us next Friday for updated coverage of the G7 summit.
Investment takeaways for this current market. At current yield levels, US Treasuries are not cheap, but provide diversification benefits. Credit spreads start to widen well before equities peak. With credit spreads still tight, investors should focus on shorter maturities. Mortgage-backed securities look more attractive than low-rated corporate bonds which indicates a solid US housing market. Liquidity, diversification, and flexibility will be key to protect portfolios.
Life hacks. Do something newsworthy. Write everyday for years. Read a book, when finished, read another. Trust people and pay them well. Give compounding interest the decades it requires. Email people you admire and ask them out to coffee. Lower your ego and live below your means. Work harder than is expected of you and be nice to people. Deserve to be loved (something I need to work on). Realize the consequences of being unproductive.
Life on Mars. Well, not yet but several of the Curiosity Rover’s new discoveries lead scientists to believe it is more possible than previously thought. NASA’s new reports state that Curiosity has found a variety of organic molecules including carbon fragments that suggest they were part of larger compounds that support the existence of life. The rover also found evidence of a seasonal methane cycle in Mars, which may suggest there are lifeforms underground releasing methane as a waste product. What these two discoveries also show is that it is very possible that Mars once had an environment similar to Earth right before the first signs of life began to emerge. While these discoveries are exciting and may suggest there is or has been life on Mars, NASA continues to stress there is still no evidence that there has been ever been life on Mars. Unfortunately, Curiosity is not equipped to go searching for life as its official mission was to find evidence that Mars at one point could have supported life, which it accomplished at its landing site, a crater named Gale. In 2020 two rovers, one from NASA and one the European space agency, will be sent to Mars with the purpose if finding life. What does this mean for the world of finance? Evidence that Mars could support life could make permanently settling on Mars a real possibility. This would open up trillion dollar industries including space exploration, mining, tourism, terraforming, and just about any other industry you could think of when colonizing a new world.
Crypto replacing the USD. Over the past two years, cryptocurrency has seen an incredible explosion in popularity and value. This explosion has led many to discuss the possibility of cryptocurrency replacing the US dollar (fiat money). Undertaking the replacement of such a widely used currency will be no easy feat considering the interconnectedness of the globalized economy. The US dollar is the most widely used currency in the world and more of it is used outside the United States than within, so any replacement would have to be adopted worldwide. However, upon digging deeper, it becomes clear that the replacement of the US dollar throughout the world is not necessarily the biggest problem. What will be the toughest thing to disband is our web of debt and IOUs that pervades all of our institutions. Cryptocurrency was created to rid the debt standard and create a currency that could not be tampered with. If it were to become the currency of choice, banks and governments would have to change the way they use money and this becomes hard when looking at the massive debt that the United States and many other countries currently hold. If debt were to remain a factor while using cryptocurrencies, it would be much more regulated and secure. The use of smart contracts would force repayments automatically and keep track of who owes who. While this looks like a negative outlook for the replacement of the dollar, there are advantages to the implementation of cryptocurrency. One of the largest is the decentralization of money, which is a fantastic way of both combating the devaluation of money and creating a cheap expedient way of transacting with parties across the world. Because cryptocurrencies have a finite number of coins or tokens the intrinsic value of each coin increases as population increases. Lastly, the decentralization allows ordinary people to hold the power of their money, instead of institutions determining the value of money and earning interest on the money we allow them to use. Every person would have the power to be their own lender and the risk would be minimal with the use of smart contracts, as mentioned earlier. Since there are positives and negatives for this new technology, replacement will come when the benefit outweighs the downside.
Suicide rate extremely high, oye. The beloved Anthony Bourdain, a man of great culture, has passed away this June 8th, 2018. At the age of 61, Bourdain committed suicide by hanging in France. He is survived by his 11-year old daughter, Ariane. Our condolences to her and all of Anthony's loved ones. This news is following the passing Kate Spade, monumental fashion figure, on June 5th, 2018. The cause death was suicide. With both of these high profile tragedies, along with recent deaths such as Robin Williams, we thought it appropriate to discuss this escalating issue.
From 1999-2016, suicide rates have increased dramatically in nearly every state. 25 of the states saw increases greater than 30%, and only Nevada saw a decrease (-1%). While mental illness is obviously one of the huge factors in a person having suicidal thoughts, there also lays another, seemingly unrelated aspect. The economy. Put simply, money creates stress. People experience stress if, for example, they are unable to pay their rent. They could stress that they can't afford to send their children to school. The unfortunate dimension of this is that, often times, the stress is everlasting. In this day and age, it is increasingly difficult to move up in the world without some advanced education degree. Its certainly possible, just more difficult. People that don’t have a degree and are working jobs to make their bills don't have as many options to move up in the ladder. Thus, that feeling of "Oh my goodness, money is going to be tight this month" could be a continuous feeling. When that happens, people may feel like there is only one relief. To examine this, the infamous recession can be looked at. Prior to 2008, suicide rates in the county were rising about .12 deaths per 100,000 persons. When the recession began in 2008, that ".12" turned into a ".51". That 400+% increase is far to great to be coincidental. I'm no statistician, but I am confident that there is a causality here. Now, people like Bourdain, Spade, and Williams prove (on the surface) that money isn't the true factor in suicides, at least for wealthier people. This brings me to the last point: Money isn't everything, and never put it above the things that really matter to you.
The Alchanati Campbell and Associates Team
What's up Tariffs?
Tariffs, the jobs report, psychology and discipline, the tax rate, saving versus investing, and college versus a job right out of high school.
The Market. Stocks rallied and bonds fell after the latest jobs data release. S&P 500 closed this week in the green, .24% 5-day yield to 2,734.62. Dow closed this week in the red, -.49% 5-day yield to 24,635.21. Nasdaq closed this week in the green, 1.62% 5-day yield to 7,554.33. Crude oil dropped -.51% this week to $65.71 per barrel. Gold dropped -.31% this week to $1,297.90. And the EUR/USD is at 1.16, just in time for holiday in Europe.
The trade war is back on! However, there is a hitch this time. Instead of going head to head with China, our Commander in Chief is imposing tariffs on steel and aluminum to Canada, Mexico, and the EU at 25% and 10% respectively. As expected, each nation and the EU have issued statements of retaliation. Canada has vowed to match the tariffs dollar for dollar on all sorts of goods ranging from lawn mowers to toilet paper, Mexico will slap tariffs on cheese, pork, and blue jeans to name a few, and the EU will impose tariffs on Harley Davidson motorcycles and Kentucky Bourbon. Put together, each of these nations account for over half of our imported steel and aluminum. What does this mean going forward? This could have a wide ranging effect on the overall economy. Although these tariffs will be helpful to the steel and aluminum companies, it is far more detrimental to those who use these metals, which far outnumber producers. For example, the API (American Petroleum Institute) is worried about the potential weakening of our national security. Oil companies use specialized steel in many of their operations and the tariffs would make domestic oil more expensive and this comes at a time when the price on foreign oil is at a major high. Additionally, industrial behemoths Boeing (BA.N) and Caterpillar (CAT.N) stocks are down 2.3% and 1.7% respectively. EU trade commissioner Cecilia Malmström has described the US tariffs as illegal under the WTO rules and described the agenda as “pure protectionism”. If the WTO finds the Trump tariffs to be illegal, the G7 counterparts will be allowed to impose billions in retaliation levies. The US Aluminum Association also disapproves of the new tariffs, claiming that the Trump tariffs are “potentially alienating allies and disrupting supply chains that more than 97 percent of U.S. aluminum industry jobs rely upon”. Only time will tell if the Trump Administrations macro-economic solutions will prove advantageous for consumers and industry, however, for the time being, this escalation of “America First” is undoubtedly putting a strain on international and industry friendships.
Lowest point in half a century. With more people coming into the labor market and with employers taking more from the unemployment pool, the unemployment rate dropped to 3.8% this month, a 48-year low (The economy added 233,000 jobs in May). African American unemployment fell to a record low and the gap between white and African American unemployment narrowed.
Trading psychology and discipline. The ability to understand a company’s fundamentals and the ability ti determine the direction of a stock’s trend are key skills for a trader, but neither are as important as the ability to contain emotion and exercise discipline. Discipline will help with sticking to preplanned trading strategies and knowing when to take a loss or a profit. Quantifying fear will help with isolating and identifying feelings that can threaten your profit potential. Knowing how to deal with greed (“pigs get slaughtered”) will help you make rational decisions (not hanging on to winning positions for too long). Lastly, having rules and plans like creating a profit target, setting up a stop-loss order, and laying out guidelines on your risk-reward tolerance will help with mastering your psychological component to trading.
The tax rate. The Gaffer Curve shows the relationship between tax rates and the amount of tax revenue collected by the government (tax rate 0%, the government will earn no revenue and if the tax rate is 100%, the government will get all of the revenue). The less an activity is taxed, the more of it is generated and as taxes increase from low levels, tax revenue collected by the government also increases. But as tax rates hit a certain point peak, it would cause people not to work as hard or not at all. So what is the proper tax rate and what is better: the “trickle down” strategy (tax breaks and benefits for corporations and the wealthy will trickle down to everyone else) or the “tax-and-spend” strategy?
Saving versus Return. There are two engines of growth in an investment portfolio: the rate of return generated by the portfolio and contributions made by the investor. Which has the greater impact? The answer is based on your age… Older investors should place a bigger emphasis on saving more than building aggressive portfolios with a higher risk of loss. Younger investors should focus on starting early, contributing regularly, and investing more aggressively.
Millennials are investing less. Younger Americans are still fearful of investing their money in stocks and only 37% of adults younger than 35 have money in the stock market. Lack of faith, an uncertain administration, and market volatility is the blame for this.
“Price is what you pay, value is what you get.” Starting valuation matters much less over much longer time frames. Investors should always be conscious of starting valuation when pacing bets. Dividend Discount Model (calculates the true value of a firm based on dividend payed), Discount Cash Flow Model (using a firm’s discounted future cash flows to value the business), and the Comparables Model (comparing the stock’s price multiples to a benchmark to determine if the stock is undervalued or overvalued) are good starting valuation methods to use.
College versus A job right out of high school. 40% of teenagers don’t enter college immediately and some don’t even graduate from high school. Teenagers have two options: either go the college route and get a degree and then get a job or skip college and go right for the job. Which one is better? Option 1 is great because of the education aspect, but it comes with hefty student loan debts and the uncertainty of not even being able to get a job out of college. Option 2 saves money and time, but it will not allow you to be institutionally educated and you have the possibility of being stuck with your minimum wage job (because you do not have a degree) if you can find a job.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.