Category: Finances

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Monday/ 10 years after 2008 (it is still the end of the world as we knew it)

The filing for Chapter 11 bankruptcy protection by financial services firm Lehman Brothers – ten years ago this week (Sept. 15, 2008) – remains the largest bankruptcy filing in U.S. history. Lehman held over US$600 billion in assets. The fall-out from the 2008 crisis reverberates to this day through global politics. It gave us Donald Trump, Brexit, extreme nationalism, the blaming of immigrants for economic misfortunes.

Here is Philip Stephens in a column in the Financial Times newspaper (headquartered in London):
‘Historians will look back on the crisis of 2008 as the moment the world’s most powerful nations surrendered international leadership, and globalisation went into reverse. The rest of the world has understandably concluded it has little to learn from the West. Many thought at the time that the collapse of communism would presage the hegemony of open, liberal democracies. Instead, what really will puzzle the historians is why the ancien régime was so lazily complacent – complicit, rather – in its own demise’.

 

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Thursday/ Apple at $1 trillion .. yay?

Apple Inc. has a market cap of $1 trillion .. wow. Once, there was Exxon, General Electric, IBM and Microsoft, at the top of the heap, but Apple made it to $1 trillion first. (PetroChina briefly hit $1 trillion in 2007 on the Shanghai Stock Exchange, only to plummet to less than $260 billion by the end of 2008. According to Bloomberg, this represents the largest destruction of shareholder wealth in world history).

So we will see what happens. China is a huge market for iPhones, but a risky one. And will Americans be willing to shell out ever more for a new iPhone? Another thought: Maybe – 30 years from now – a company that builds fusion reactors (that produce 100% clean & cheap energy), will be the world’s most valuable.

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Monday/ watch that yield curve

Is there a recession on the way (say, some time next year)? It seems a silly question, with low unemployment, and projected growth of 4.7% here in the second quarter in the United States .. but a reliable indicator called the yield curve has been steadily trending down to zero.  Typically, breaching zero means recessions inevitably follow.

The 2Q projection for economic growth is a whopping 4.7% (year over year), and retail sales are up by almost a percentage point as well, for May.

 

[From NYT article] ‘On Thursday, the gap between two-year and 10-year United States Treasury notes was roughly 0.34 percentage points. It was last at these levels in 2007 when the United States economy was heading into what was arguably the worst recession in almost 80 years’. My own comments: Some economists point out that we are still in a relatively low interest rate environment, and that the yield curve falling below zero might not indicate a recession will follow shortly. Besides, this graph shows that it took TWO years for the recession of ’08 to take hold after the yield curve first fell below zero.
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Monday/ Karl Marx and the zero euro

Karl Marx was born on May 5, 1818, in the southern German town of Trier (at the time Trier was in the Kingdom of Prussia).  To celebrate the bicentennial of his birthday, the town issued a souvenir zero euro bill, that proved to be very popular.  (I am tempted to buy one on E-bay).

I also need to brush up on my understanding of Marxism.  The Wikipedia entry is probably a good start:  Marxism holds that human societies develop through class struggle. In capitalism, this manifests itself in the conflict between the ruling classes (known as the bourgeoisie) that control the means of production and the working classes (known as the proletariat) that enable these means by selling their labor power in return for wages.  .. Marx predicted that, like previous socio-economic systems, capitalism produced internal tensions which would lead to its self-destruction and replacement by a new system: socialism.

Here in the United States socialism is a toxic word, but man! since the 1980s, the forces of capitalism have resulted in a very unequal sharing of prosperity (no real wage increases for middle class worker, and spectacular riches for the one-percenters at the top). Something will have to give.

The ‘Zero Euro’ is a souvenir banknote with authorized printing by the European Central Bank (ECB). The first zero euros were issued in 2015 in France, to promote tourism, and several other countries and cities have followed suit. Karl Marx appears on the one to commemorate the bicentennial of his birth in Germany. The front of the notes are all the same, featuring the Brandenburg Gate, Big Ben, the Eiffel Tower, the Colosseum, Sagrada Familia, Manneken Pis and the Mona Lisa.
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Tuesday/ how now with the Dow?

‘Investors are grumpy, and have nothing to look forward to’ says the New York Times.  The Dow Jones Industrial Average has lost steam since its high point in late January.

Today Caterpillar (construction machinery and equipment company) spooked everyone on a conference call, saying the first quarter ‘may have been the high-water mark for business for the year’.  Apple analysts worry openly about sagging iPhone X sales. Bigger picture, interest rates are going up, and the cloud of trade tariffs still hangs over all of the market as well.

Graph from Bloomberg Businessweek (I added the ‘How Now Brown Cow’/ Down Dow’).   I hope we stay afloat, and will be at or above the 24,000 mark by year-end.  It is useful to look back, and see that we are still far above the 21,000 mark from just a year ago.
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Wednesday/ gone: Chief Economic Advisor

Brett Stephens writes in the NYT that we do not know if Trump’s Chief Economic Advisor Gary Cohn quit ‘out of horror of the president’s protectionist turn, or merely out of the pique of losing a policy argument’ (over the trade tariffs).   What is certain, is that the Trump Administration is looking increasingly unstable and unable to retain key personnel.

The Republicans are finally getting worried that Trump’s economic and trade policies might make trouble. (They were not too worried about the tax cuts massively increasing the deficit). The House sent a letter today, signed by 107 representatives, asking Trump to refrain from implementing broad-based tariff measures that could trigger trade wars with Europe, China, and even Canada.

Will we be OK? It’s been 10 years since 2008’s global financial crisis. During a Reddit ‘Ask Me Anything’ last week, Bill Gates was asked if, in the near future, the U.S. will have another crisis similar to 2008.  ‘Yes’, he said, admitting that the question would be better directed at Warren Buffet. ‘It is hard to say when, but this is a certainty’.

The conclusion of Matt Taibbi’s article called ‘The Great American Bubble Machine’ that appeared in Rolling Stone Magazine in 2009.  The article detailed the excesses and greed from the giant financial firms such as Goldman Sachs, and the lack of government oversight, that led to the 2008 crisis. Here we are in 2018, and I don’t think anything has changed. 
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Monday/ robo-advisors and robo-traders

Well – it was a bit of a bloodbath today in the stock market with the Dow Jones down another 4.6%.   Note to media: Why sensationalize it further by reporting the 1,175 points loss as the ‘biggest ever’ – technically true, but misleading? Percentage-wise it’s only the biggest drop since 2011 for the Dow.

Bloomberg reports that the robo-advisor websites from Betterment and Wealthfront crashed today. (Too much traffic).  Ironically, robo-trading algorithms are suspected as the culprits for accelerating the 900 point loss to 1,600 points (6.2%*) in the afternoon, before the market recovered somewhat to the 1,175 points loss at the close.

*At 7% down for the S&P 500, the trading curb circuit-breakers would have halted trading for 15 minutes.

Hmm .. futures point to 2% more downside on the Dow Jones’s Tuesday opening (this as of 10 pm Eastern Time on Monday night).
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Friday/ the Dow is down 2.5%

Well, the week ended with the US stock market sharply down, spooked (so the experts say) by fears of interest rate hikes by the Fed.  The January jobs report had revealed that hourly wages jumped 2.9% year-over-year.  There might be more pain ahead : the technicians say it’s about 5% further down, to get back to the S&P 500’s long-term trendline.

 

600 points these days only count for about 2.5% (of Dow 26,186). It’s sobering to look back at June 2016 and see the Dow was only at 18,000 then, before dropping 3.4% to 17,400.  And 2008 had three days with over 7% drops on a depressed index in the mid 8000s. Yikes. [Table from CNBC.com]
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Friday/ a stock market melt-up?

Bloomberg Businessweek already calls the run-up of the stock market a ‘melt-up’.

It’s not even mid-January, and the stock market is already up 4% for the year.

Veteran investor Bill Miller said on CNBC this week of the US stock market, that there might be a ‘melt-up’ this year.  Bond investors could soon decide that they are missing out, and start pouring lots of money into equity funds.  This scenario could add another 30% of valuation – this to a stock market that has now gone up for nine years, with no 10% (or more) correction since 2011.  Whoah.  That would be a time for even the most optimistic investor to start to panic.

Bill Miller pointed to the U.S. 10 Year Treasury Note, and said if the rate breaks through 2.6%, and heads towards 3%, that bond investors could start bailing out of bond funds and cause a stock market melt-up. (An increasing bond yield means existing bond holders will get a lower return when selling their existing bond investment).
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Monday/ money questions (in Germany)

The Frankfurt Allgemeine newspaper that I brought back from my trip, has a 6-page supplement with 40 questions about money (in Germany, and for 2018).
Below are short answers to the questions, that I roughly translated to English.
1. Can saving be fun? Yes. Start early in life and save consistently. It is fun to see one’s money grow.
2. Should I spend my money before inflation comes and everything becomes more expensive? Yes. On the whole, and for durable items, it’s a good time to be a consumer.
3. When will there again be interest paid on savings accounts? The bitter answer is: it will still be a number of years. 
4. Is it wise to buy Bitcoin? Probably not. It is very risky. 
5. What kind of insurance does everyone need? Germans are fearful. Still, insure for ruinous events only, such as one’s home and the life for the bread- winner. (My note: Germans have universal healthcare).
6. Is it a good idea to buy (German) government bonds? No, not worth it in these times. 

Continue reading “Monday/ money questions (in Germany)”

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Friday/ unpacking

I unpacked my bags today, and started going through my mountain of junk mail.

It’s bitterly cold on the East Coast (Boston at -6 °F/ -21°C), and frozen iguanas are falling out of the trees in Florida.  Zoologists say they will ‘thaw’ again and come back to life.  Here is Seattle it was a balmy 49°F/ 9°C today, with rain.

Top: My porcelain mugs and creamer survived in my luggage without breaking.  It’s for my coffee in the morning, and from porcelain manufacturer Rosenthal’s factory in Selb in Bavaria, that dates back to 1879.  I love the colors and the simple design.  Bottom: I took advantage of my stop at Heathrow to get my grubby hands on the shiny new 12-sided one-pound coin, as well as the new £10 polymer note with its cool holographs. The first note printed was reportedly given to the Queen, the second note to Prince Philip, the third to Theresa May (Prime Minister), and the fourth to Philip Hammond (Chancellor of the Exchequer).
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Thursday/ Black Monday, 30 yrs later

Thursday marked the anniversary of the US Stock Market crash of 1987, called Black Monday. The Dow Jones Index fell by 22.6% in one day, a record decline that stands to this day.  The impact was felt worldwide. ‘It is a sobering experience’ said my dad at the time.  In South Africa, the Johannesburg Stock Exchange Index would slump by 38% in the month that followed.

Under current rules, if the broader S&P 500 index falls more than 7.0% before 3:25 p.m. New York time, trading is paused for 15 minutes. If the decline continues once trading resumes, and it is still before 3:25 p.m., the market is again paused at 13% down. If the decline happens after 3:25 p.m, trading continues. But if the decline reaches 20%, trading is suspended for the session, regardless of the time of day. Still, said the traders on the floor of the New York Stock Exchange today: the forces in the market driven by fear are very powerful, and even the circuit breakers may not prevent the market from going down significantly in a very short time.

Check out the two graphs. The left one is a comparison of the S&P 500 values in 1987 (yellow) and in 2017 (blue). Looks awfully much the same, no? Actually, no. One should use percentages on the index, and not points. The run-up in the market from the start of 1985 through the 1987 peak, was more than 100%. Over an equivalent time period today (the start of 2015 through the 2017 peak), the S&P 500 is up by 24%.
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Monday/ US stock market correction: sooner, or later?

It has to be a matter of ‘when’, and not of ‘if’, when it comes to a 10% or 20% correction in the US equities market. Yale University economics professor Robert Shiller has an index called the CAPE: Cyclically Adjusted Price Earnings ratio (it takes inflation into account). The index has only been higher before the 1929 crash, and before the 2000 dot-com bubble. It is now over 30, and – if history repeats itself- it has to go back to the trend value of 16-something.  Sooner, or later.  We just do not know when.

Graph compiled from Robert Shiller’s CAPE index data. Look at what happened after 2000 – the index went from 45 to 23. Then after the 2008 Financial Crisis, it went to 15.

Update Tue: the Dow Jones Industrial Average briefly crossed 23,000 for the first time on Tuesday.  There is already speculation that 25,000 is possible by June 2018.  (Agreed. But let’s add: 20,000 is also perfectly possible).

Screen shot at the close of the trading day Tuesday, from CNBC business channel. (Called the ‘stock market cheerleader channel’ by some analysts).