What's up Market Stability, Volatility, and Manipulation?

Dear Reader,

The Market. Fed cut another 25 basis points. The newest projections estimate that Social Security will be insolvent in 2034 and Medicare in 2026. 20% of Americans are illiterate. Lacking knowledge on a topic makes it difficult to read and learn about. Coal and nuclear energy are being displaced by natural gas, wind, hydropower, and solar energy (shown in the graph below). Chronic absence has a huge impact on a student’s education and the four school conditions for learning include physical and emotional health and safety, sense of belonging and support, academic challenge and engagement, and social and emotional competence. Most people have 100 10 minute blocks of living time each day. You have to think about everything you spend your time doing in the context of its worth in blocks. A human isn’t simply a perfect survival creature—it’s also just the right element of a perfect survival tribe. More than half (53%) of U.S. CFOs believe that the U.S. will be in recession by the third quarter of 2020 and 67% believe that a recession will have begun by the end of 2020.
​
The value of financial advice. Does professional advice contribute to investor value? Vanguard did a study to test advisor value in their Personal Advisor Service to see if professional advice increased a customer’s portfolio value, financial value, and emotional value. Portfolio value comes from building a well-diversified portfolio that generates better after-tax risk-adjusted returns net of all fees, that matches with the client’s goals and risk tolerance. Financial value comes from the achievement of the client’s benchmarks or goals like education funding, retirement funding, and growth of wealth. Emotional value comes from the advisor-client relationship and the trust and confidence involved. From their study, after clients were advised, three distinct changes happened: risk-levels were adjusted, high cash reserves were invested in fixed income securities, and home bias was eliminated. Professional financial advice helped clients make more and have a higher probability of meeting their retirement goals.  

"The Art of Worldly Wisdom" by Baltasar Gracian. It is the fool's misfortune to fail in obtaining the position, the employment, the neighborhood, and the circle of friends that suit him. Silence is the holy of holies of worldly wisdom. Knowledge and courage are the elements of greatness. The wise man would rather see men needing him than thanking him. More is to be got from dependence than from courtesy. Keep the imagination under control. He cannot make himself understood who does not himself easily understand. All fools come to grief from want of thought. To be occupied in what does not concern you is worse than doing nothing. 

Insolvency. Insolvency is the state of being unable to pay the money owed. Cash flow insolvency involves a lack of liquidity to pay debts as they fall due and balance sheet insolvency involves having more liabilities than assets. Insolvency is a concern for sovereign entities. When governments become insolvent, they are in default. Their debt becomes refinanced by further borrowing or by issuing more currency which results in higher inflation. Most people think that governments cannot become insolvent simply because they can issue(print) more of their own currency and continue to pay the interest on their debts. When currency is printed, it has no value until it enters the economy. When it enters the economy, it adds to the sovereign debt. A country becomes insolvent when more than 25% of tax receipts are required to service existing debt. The US has a fiscal gap (the present value of all its spending including servicing its official debt less all its future taxes) of $202 trillion.

Great market commentary: https://www.peakprosperity.com/america-the-insolvent/

The repo rate. A repurchase agreement (similar to a collateralized loan like corporate bonds) is a form of short-term borrowing (inexpensive financing for security holders), mainly in government securities. It is the sale of securities for cash with a commitment to repurchase them at a specified price at a future date. The repo market is a key US borrowing market that recently saw a massive surge. The US has three overnight Treasury repo rates: Secured Overnight Financing Rate (a broad measure of the cost of borrowing cash overnight by Treasury securities), Broad General Collateral Rate (a measure of overnight Treasury general collateral repos), and Tri-Party General Collateral Rate (a measure of rates on overnight, specific-counterparty tri-party general collateral repos secured by Treasury securities). All of these rates rose around 79% on Monday. These rates serve as benchmarks for market participants to use in financial contracts. With higher repo rates, cash leaving the funding space and more cash being added to the repo market, Treasury’s cash balance will increase and the number of bank reserves in the system will deplete. The fear in the surge of the repo rate and the reason why the Fed had to add billions into that market is because of the threat of borrowing costs rising for consumers and corporations.

Free trade. Trade used to be a zero-sum game. Mercantilism was a 16th-century belief where a country’s best interest was to maintain a trade surplus. But when trade is free, it allows nations to prosper and grow without restrictions or barriers. Free trade refers to a situation where a government does not attempt to influence trade through quotas or duties that its citizens can buy from another country or what they can produce and sell to another country. International trade allows a country to specialize in the manufacturing of products that they can produce most efficiently and then export and allows a country to import products that can be produced more efficiently in other countries. The world market can only support a limited number of firms in some industries. Countries that are open to trade have higher growth rates than countries that close their economies to trade. Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for the goods produced by other countries. Free trade, on paper, should be a positive-sum game. But you need to factor in politics, the fight for power, currency manipulation, the constant changes in trade policy, the increase in transportation costs, global warming and irregular weather patterns, corruption and civil war in emerging markets, and labor laws and regulations.

Oil. Oil has been a hot topic over this last week. With it, we have gotten a lot of events, massive volatility, and a few exaggerations. From the media, it seems that there was a massive drone attack on Saudi Arabian oil fields, specifically Aramco, perpetrated by Iran. This attack was reported by Saudi Arabia to have wiped out 50% of the facilities processing power, which is the largest producer and distributor of crude oil in the world. It was then reported that Trump could go on the offensive and declare war with Iran in retaliation. This sent crude prices skyrocketing upwards of 15% on Monday. In reality, it seems that although there was a drone attack carried out against Aramco, and 50% of production was cut off, in less than a day 50% was back up and running, and there was no definitive proof regarding who carried out the attack. This leaves a deficit of 25% of total production capacity, which Saudi Arabia states will be back online by the end of September. More so, the infrastructure which was in place was outdated, and the new infrastructure which will be implemented should increase processing capacity overall. Oil prices have since fallen, but still holding above the previous levels. To the other point, among common misconceptions, Trump is firmly against declaring war, which played a role in why Bolton was removed from the Whitehouse.

How the Fed is feeling. The labor market remains strong, economic activity has been rising at a moderate rate, job gains have been strong, unemployment has remained low, household spending is strong, but, business fixed investment and exports have weakened. Below are the economic projects from the Federal Reserve board members. The Feds cut rates again this week by 25 basis points. In order for rate cuts to stimulate the economy and avoid a downturn, they need to work through one of two channels: spurring credit growth or easing financial conditions. Here is a report done by Meb Faber on how to prepare and protect yourself for the next downturn (Note that this paper was written in 2017).


Keep Climbing,


The Alchanati Campbell and Associates Team