Weekly Commentary May 26th, 2015

The Markets

You could have set the events of last week to music.

Should they stay or should they go?

Last week, the Bank of England (BOE), Britain’s central bank, inadvertently sent a memo describing how staffers should handle press inquiries about its confidential research into the possibility of a British exit (Brexit) from the European Union, to the media. Oops.

The possibility of a Brexit is top-of-mind after the re-election of British Prime Minister David Cameron who promised voters a referendum on the issue by the end of 2017. Reuters reported, “Many British business leaders are worried about the possibility of losing access to their main export markets and there are also concerns about the impact on Britain's financial services industry.”

There is no job too immense when you’ve got confidence.

Just before the long holiday weekend, while confirming the Federal Reserve still expects to begin raising its benchmark interest rate during 2015, Chairwoman Janet Yellen’s comments took a philosophical turn:

“Of course, the outlook for the economy, as always, is highly uncertain. I am describing the outlook that I see as most likely, but based on many years of making economic projections, I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so. For many reasons, output and job growth over the next few years could prove to be stronger, and inflation higher, than I expect; correspondingly, employment could grow more slowly, and inflation could remain undesirably low.”

Money, it’s a gas.

When oil prices fell, many people assumed consumers would spend the windfall. For the most part, they didn’t. Barron’s reported earnings for several retailers were lower than expected last week.

All in all, it wasn’t a very exciting week for U.S. stock markets.

changing wages. The federal minimum wage remains at $7.25. However, last week, the Los Angeles city council voted to raise the city’s minimum wage from $9 to $15 an hour. The increase will be implemented gradually between 2015 and 2020. It is hoped higher wages for minimum wage workers will help address cost-of-living issues that affect LA’s poorer residents, according to The Economist.

Did the minimum wage really need to increase by two-thirds? According to the Massachusetts Institute of Technology (MIT) Living Wage Calculator, an individual living in the Los Angeles-Long Beach-Santa Ana area, who was the sole provider for his or her family (1 adult, 2 children) and worked 2,080 hours a year, would need to earn about $29.84 an hour to earn a living wage and $9.00 an hour to live at poverty level. The living wage is different in various parts of the country. For example, the living wage for the same family if they lived in:

·         New York-Northern New Jersey-Long Island area           $35.84

·         Milwaukee-Waukesha-West Allis, WI                     $29.39

·         Portland-Vancouver-Hillsboro, OR                         $27.86

·         Dallas-Fort Worth-Arlington, TX                             $25.02

·         Little Rock-North Little Rock-Conway, AR             $25.58

·         St. Louis, MO                                                              $24.50

·         Fargo, ND                                                                   $24.33

·         Charleston-North Charleston-Summerville, NC     $24.28

Is a higher minimum wage good for business? It depends on the business model employed. One Harvard Business Review blogger opined:

“The smart way to deal with an increase in the minimum wage is to design work in a way that improves employees’ productivity and increases their contribution to profits. All this is possible even in low-wage settings. In fact, some companies are already doing it… When I examined these companies, I saw that they made four choices in how they designed their work. They: (1) offer less, (2) combine standardization with empowerment, (3) cross-train, and (4) operate with slack. These choices transform their heavy investment in employees into great performance by reducing costs, improving employee productivity, and leveraging a fully capable and committed workforce.”

There is some food for thought.

 

Weekly Focus – Think About It

“Everyone thinks of changing the world, but no one thinks of changing himself.

--Leo Tolstoy, Russian novelist

Spring Bounce Back

Many of us are spending our Saturdays out in the yard, helping our lawns bounce back from a tough winter. As the brown patches and bare spots that are reminders of colder days fade, our lawns’ roots are showing underlying strength. It’s heartening to see the new growth and greenery now emerging, just as we saw last spring.

Similarly, the U.S. economy is bouncing back after a largely weather-driven first quarter decline, just as it did a year ago. The April 2015 Employment Situation report showed enough strength to suggest the economy is gaining traction, with growth in “good old American know-how” jobs continuing. Encouragingly, wage growth in this important segment has also been above average. We continue to watch wages in all sectors, as more bounce is needed to ensure broad-based wage growth.

The most recent report on new claims for unemployment fell to its lowest level since 2000, and the four-week average for these claims is at a 15-year low. These healthy results are another indication that temporary factors affecting the economy in the first quarter are fading, keeping the Federal Reserve on track to potentially raise rates in the latter part of 2015.

There is continued confidence in the strength of the consumer, with consistent consumption patterns that we’ve seen before (in the early stage of the recovery from the Great Recession), i.e., consumers spending some, saving some, and paying down some debt. It was encouraging that March sales rebounded and were revised up, despite April retail sales disappointing many. Second quarter core retail sales are now running 2% ahead of the first quarter—a big improvement from the 0.5% first quarter gain. And again, temporary factors affecting first quarter retail sales have subsided.

These recent economic reports do not change the expectation that U.S gross domestic product (GDP) will grow 3%-plus over the remainder of 2015, consistent with growth rates during the previous business cycle. Looking ahead, consumer spending gains continue to look supportive of GDP growth in the coming months.

Spring is a time for renewal and a time for landscapes and lawns to bounce back. In our eyes, the U.S. economy is also bouncing back after a weak first quarter, and based on the many indicators we follow, it continues to have solid roots. To be sure, more is needed, and in the weeks ahead we will be watching the consumer, jobs, wages, and other key economic indicators for evidence this bounce back is occurring.

Weekly Commentary May 18th, 2015

The Markets

The U.S. Treasury market is a bit like a lake in the midst of a drought. All the action – fish, frogs, crawdads, and such – that was once hidden in the depths has become a lot more visible as the water shallows.

For decades, traders and investors have turned to U.S. government debt – Treasury bills and bonds – because the market was so deep that hefty trades could be placed without triggering significant price changes, Bloomberg explained. That’s one reason U.S. Treasuries have long been sought as a safe haven in tumultuous times.

Recently, however, the U.S. Treasury market has become more responsive to trades. The yield on 10-year Treasuries rose above 2.3 percent last Tuesday for the first time in months before closing lower on Friday. Some theorize yields are being pushed higher as investors try to stay ahead of Federal Reserve activity or changing inflation expectations, but others say the issue is liquidity.

Liquidity is the ease with which traders can buy and sell bonds. In a highly liquid market, bonds can be bought and sold easily. In a less liquid market, trading becomes more challenging. Bloomberg contends the U.S. Treasury has become less liquid because of financial regulations that were adopted after 2008 to reduce risk taking. The regulations have made bond dealers less willing to hold inventory and facilitate trades. Liquidity also was affected by the Fed, which bought lots of government bonds in its effort to stimulate the economy.

Bloomberg said, “How much depth has the market lost? A year ago, you could trade about $280 million of Treasuries without causing prices to move, according to JPMorgan Chase & Co. Now, it’s $80 million.”

Treasury market volatility had little affect on U.S. stock markets, which finished the week higher.

*US treasuries may be considered “safe haven investments but do carry some degree of risk including interest rate, credit and market risk. 

 

 

Debt, debt, debt, debt… the world’s debt is 286 percent of its Gdp, according to The Economist. GDP stands for gross domestic product, which is the value of all goods and services produced in a country or region.

 

So, the world owes almost three times the value of what it produces. For the most part, governments have incurred the debt as they’ve tried to help their countries recover from the financial crisis and subsequent recession. A 2015 McKinsey and Company report explained it like this:

 

“Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points. That poses new risks to financial stability and may undermine global economic growth.”

 

McKinsey’s findings show some types of debt grew more slowly from 2007-2014 as compared to 2000-2007. Increases in household debt and financial debt growth rates (8.5 percent to 2.8 percent and 9.4 percent to 2.9 percent, respectively) slowed sharply.

 

Other types of debt grew faster. Corporate debt grew at a slightly faster pace during the period (5.7 percent to 5.9 percent), while government debt grew rapidly (5.8 percent to 9.3 percent). Higher government spending was welcomed in the depths of the recession when it served as a counter-balance to low spending in the private sector.

 

Now, however, government debt levels are becoming a concern. McKinsey reported government debt has risen to such high levels in six countries – Spain, Japan, Portugal, France, Italy, and the United Kingdom – that unusual measures may be needed to reduce debt.

 

The most obvious way to decrease debt is to trim annual spending – also known as reducing the fiscal deficit – but that could be counterproductive since it often inhibits economic growth, and encouraging growth was the point of taking on debt in the first place. McKinsey recommends alternatives such as “extensive asset sales, one-time taxes on wealth, and more efficient debt-restructuring.”

 

 

Weekly Focus – Think About It

“Culture makes people understand each other better. And if they understand each other better in their soul, it is easier to overcome the economic and political barriers. But first they have to understand that their neighbour is, in the end, just like them, with the same problems, the same questions.”

--Paulo Coelho, Brazilian novelist

 

Weekly Commentary May 12th, 2015

The Markets

Government bonds have gone wild!

Sure, you might expect high-yield bonds to act unpredictably from time to time. That’s why they’re high-yield bonds. They don’t receive investment-grade ratings – BBB through AAA – from leading credit rating agencies because they’re not considered to be as creditworthy as investment grade bonds and carry a high degree of risk.

U.S. Treasuries are a different story. They are backed by the full faith and credit of the U.S. government which can raise taxes to cover its debts. Treasuries are considered by many to be one of the safest investments around. As a result, they’re usually pretty stable and stodgy.

That wasn’t the case last week, though. The U.S. Treasury chased after its cousin, the Bund, which is issued by the German government. The Bund has been on a tear recently. Experts cited by Bloomberg.com reported a shift in sentiment and fundamentals may have triggered European bond behavior that “helped wipe $436 billion off the global fixed-income market in the past week.”

The performance of German bonds reverberated around the world, according to Bloomberg.com, affecting U.S., French, Spanish, Japanese, Australian, Polish, and Italian government bond performance. Bond prices fell as yields rose higher. Barron’s reported:

“Seasoned observers must have been shaking their heads. Not only do high-grade government bonds not normally gyrate more than a few basis points in a day, those swings typically don’t move across oceans like tsunamis.”

Since February, U.S. Treasury yields have risen from a low of 1.67 percent without any significant change in fundamentals, according to Barron’s. It could be that U.S. markets think the Federal Reserve rate hike will occur sooner rather than later. Last week, Chairwoman Janet Yellen voiced the opinion that stock market valuations were, generally, pretty high. That could indicate the Fed is ready to act.

Be prepared for a volatile ride until the uncertainty driving markets begins to settle.

reading the unemployment tea leaves. Americans have long relied on unemployment statistics to provide insights to our country’s economic health. The Richmond Federal Reserve defined full employment as “the level of employment at which virtually anyone who wants to work can find employment at the prevailing wage.” Interestingly, full employment is not zero unemployment because jobs are being created and eliminated constantly.

Many analysts have been asking what full employment is today, in part, because the Federal Reserve has said it will begin raising short-term interest rates when the economy is nearing full employment (and inflation is about two percent). It may turn out to be a trick question. The Economist wrote:

“Although the number of jobless Americans has fallen, the share of the working-age population in the labor force has also dropped considerably, from 66 percent before the financial crisis to less than 63 percent now. Temporary factors have affected the statistics, but much of the change has been driven by structural factors such as retirement of the baby-boomer generation and rising college enrollment. These developments may explain why, as the unemployment rate has fallen from 10 percent in 2009 to 5.4 percent today, the Fed’s target long-run unemployment rate has also declined, from 6 percent in 2013 to just 5.2 percent at present.”

On Friday, the Labor Department announced the unemployment rate was 5.4 percent. However, there is some skepticism about whether the American labor market really is close to full capacity. Experts cited by The Economist suggest a stronger jobs market might coax more people into the workplace. By their estimates, America’s true unemployment rate is about 6.6 percent.

The Economist suggested labor market slack is one reason average hourly earnings have remained sluggish. Many thought low oil prices would push consumer spending higher. They did not. It looks like bad weather and stagnant wages may be behind lethargic economic growth.

 

Weekly Focus – Think About It

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.”

--Steve Jobs, Co-founder, CEO, and Chairman of Apple Inc.

Weekly Commentary May 4th, 2015

The Markets

Stock markets tipped into the red last week.

Major indices in the United States and elsewhere dipped lower as U.S. economic growth came in below expectations. The Commerce Department reported gross domestic product (GDP) grew by 0.2 percent annualized during the first quarter. Growth was hindered by the strength of the U.S. dollar, which made exports less attractive, and cold winter weather. U.S. market performance also reflected last week’s earnings news for technology stocks which wasn’t quite as rosy as the previous week’s.

Markets across much of Asia lost value last week, too. China was a notable exception. The Shanghai Composite gained more than 1 percent during the period. It was a truly remarkable performance as China is in the midst of its worst earnings season since the global financial crisis. Bloomberg reported:

“…2014 profits missed estimates by the most in six years and analysts cut their outlooks at the fastest pace since 2009...Yet, it’s mainland individuals who account for at least 80 percent of trades, and they’re still buying shares at a record pace in anticipation of further government stimulus. That helps explain why the highest price-to-earnings ratios in five years have failed to slow the Shanghai Composite’s advance.”

China’s economic growth has also slowed. During the first quarter, its GDP grew by 7 percent. That’s a much better showing than the United States but not so great when benchmarked against previous growth in China. In fact, it was China’s slowest growth since 2009.

The Economist commented, “…the question for China is not whether growth will rebound to anything like the double-digit pace of the past. Instead, it is whether its slowdown will be a gradual descent – a little bumpy at times but free from crisis – or a sudden, dangerous lurch lower.”

when do you have a duchenne smile? According to Martin Seligman, professor of psychology at the University of Pennsylvania and author of Authentic Happiness, the Duchenne is a genuine smile, typically accompanied by eye crinkling, and it demonstrates real happiness. The alternative, the Pan American, is a counterfeit smile. It may be the one we employ in exasperating customer service situations. The point is: When we are truly happy, our smiles are genuine.

Researchers in the field of positive psychology and happiness have spent quite a bit of time trying to determine whether money makes us happy. There has been no decisive answer to date, although some studies’ findings offer abundant food for thought.

·         More money means greater happiness. “…rich individuals are more satisfied with their lives than poorer individuals, and we find that richer countries have significantly higher levels of life satisfaction.”

--Betsey Stevenson and Justin Wolfers of University of Pennsylvania

·         A dearth of money can cause emotional pain. “More money does not necessarily buy more happiness, but less money is associated with emotional pain.”

--Daniel Kahneman and Angus Deaton of Princeton University

·         Experience offers a better value for your dollar. “People generally believe that making money and obtaining material possessions will improve their lives... However, materialism has repeatedly been shown to be detrimental to well-being…Investing discretionary resources into life experiences, rather than buying material possessions, makes people happier.”

--Ryan Howell et al, San Francisco State and University of Southern California

·         Anticipation makes experience all the sweeter. “Four studies demonstrate that people derive more happiness from the anticipation of experiential purchases and that waiting for an experience tends to be more pleasurable and exciting than waiting to receive a material good.”

--Amit Kumar et al, Cornell University

The relationship between emotional well-being and financial well-being is complex and worth exploring. How does money affect your life? Does it make you happy? Could it make you happier? 

 

Weekly Focus – Think About It

“Look up at the stars and not down at your feet. Try to make sense of what you see and wonder about what makes the universe exist. Be curious.”

--Stephen Hawking, English theoretical physicist