DIASTOLE ECONOMIC AND MARKET COMMENT
March 22, 2021

Markets were down last week, which indicates that investors were selling stocks. Bond yields were up last week, which indicates that investors were selling bonds (causing prices to fall and yields to rise.) So where did the proceeds go? I guess they are still in cash. You know who else has a lot of cash? Banks!

Last year when markets went crazy in March and thereabouts, the Federal Reserve answered by creating cash to buy bonds. Lots and lots of bonds. And there’s still extra cash in the system. Deposits to JPMorgan Chase, the U.S.’s biggest bank, rose 35% last year. And the Treasury General Account (TGA) which operates as the government’s checking account, grew from $350 billion a year ago to about $1.3 trillion earlier this month. That money remains on deposit with the Fed.

Normally lots of money in the system means that interest rates will fall, as borrowers are in the catbird seat (cliche #1). And rates did fall over the past year, but have turned now and headed back up. Why? There has been such enormous demand for cheap money that lenders are taking the upper hand again. Mortgage rates have started back up too, although they remain below the historical norm. Housing prices, which soared when loans were inexpensive, may have to come down a little closer to earth now that the cost to carry a home loan is rising.

And maybe most importantly, the U.S. government is spending like a drunken sailor (cliche #2, not even terribly apropos), selling Treasury Bonds to fund the spending (in other words, borrowing the money).  Due to this longstanding penchant, Standard & Poor’s downgraded U.S. debt in 2011 from AAA to AA+. Both Microsoft and Johnson & Johnson are rated more highly than the U.S. government.

So the government needs to borrow a lot of money, and banks need to lend a lot of money, and yet these two forces don’t necessarily cancel each other out.

Bond investors have switched their main concern about the economy from Covid to inflation. That’s why bonds are selling off, because their fixed rates will not compete with anticipated higher rates in the future. At the same time, equity investors are still worried about the pandemic and the notion that stocks have risen too high, so they are selling, too. 

And speaking of too high, famed-investor Cathie Wood, who runs Ark Investment Management,  beat most of her peers last year by going heavy into tech stocks. That’s not working as well this year, but Wood just made a prediction that Tesla shares will quadruple in value within four years, going from a current $625 to $3,000 each. Beware of self-serving investment managers! Her comments caused Tesla stock to rise, making money for whom? Cathie Wood!

Oil prices are in flux as always, with several macro factors influencing them. For instance, last year oil prices fell because we put our cars on blocks and started telecommuting. As we begin to see a need to drive again, oil prices are rising, helped by a production-cut continuation announced by OPEC+ (the 13 OPEC nations plus ten nations who are not OPEC but benefit by acting in congress with it). Normally when supply is cut and demand increases, prices rise. But don’t forget the U.S., which is NOT a part of OPEC. When OPEC does a really good job and prices rise (like from a year ago to now, when prices have tripled to $60 per barrel), the U.S. drillers (and especially frackers) who have shuttered their wells because it was unprofitable to produce, jump back in with both feet (#3) and open up those wells again. And the resultant increase in supply either stalls the price rise or even forces prices down.

Which is why Saudi Aramco, the sovereign oil company of Saudi Arabia, saw profits fall by 44% last year. And yet it maintained dividend payments of $75 billion for the year, and actually remained the world’s most profitable company. Amazing. All citizens of Saudi Arabia receive payments from the government, and the Saudi national debt is about $180-200 billion. Saudi Arabian GDP is at least three times its debt. For comparison, The U.S.’s debt of $28 trillion exceeds its GDP. If it weren’t for the sand and the misogyny, Saudi Arabia might be a nice place to live.

Except that the happiest country on Earth is Finland. Again! Results are based on GDP, life expectancy, generosity, social support, freedom, and corruption. The next four happiest countries are Iceland, Denmark, Switzerland, and the Netherlands. The U.S. ranks 14th.

For the week ending March 19th, the S&P 500 finished at 3,913, the Dow Jones Industrials at 32,627, and the Nasdaq Composite Index at 13,215. The yield on the ten-year Treasury note closed at 1.74%. U.S. crude oil cost $61.42 per barrel, N.Y. gold cost $1,741.40 per ounce, and one Euro was worth $1.1907.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) Business Insider, CNBC, The Wall Street Journal, The New York Times, Barron’s, Bloomberg, The Washington Post, USA Today, CNN, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220 or reply to this email to reach me, Liz Cook.

Tomorrow is National Puppy Day. Adopt a puppy! Except me. I’m a cat person (because I like to have all of my stuff swatted onto the floor).
DIASTOLE ECONOMIC AND MARKET COMMENT
March 29, 2021

I have been aground many times in my life, and usually just the bow of my boat is stuck, since boats generally move in a forward direction. The best way to get free is to climb out of the boat, walk through the shallow water to the bow, and push the boat backward off the sandbank. A rising tide helps. Also a friendly boat with a tow rope. And apparently that’s what’s happening after the Suez-Canal-stuck ship Ever Given was freed early this morning from the bank where her stern had gotten stuck and is now only mired in her bow. But instead of the Captain rolling up his pants and pushing with all of his might, the Egyptians are pulling the ship with tugboats. Smart.

The Ever Given is about as tall (long) as the Empire State Building, and holds 20,000 containers, which as of yet have not been offloaded to make the ship lighter. More than 150 other ships are waiting for their chance to get through the Canal, each of which will pay $500,000 for the privilege, and take on usually two Suez pilots to steer. Given the treachery of transiting the Canal, especially when the wind is blowing, as it was on Tuesday, it’s actually surprising that this has not happened more often.

The Canal is 120 miles long, and 30% of all of the world’s shipping container volume passes through it EVERY DAY - or at least every normal day. While the Ever Given has been stuck, global commerce has lost about $400 million per hour.  PER HOUR! Ships in waiting have been reluctant to take the longer route around the horn of Africa, because it is dangerous, more expensive, and prone to piracy. Maybe I should have led with the pirates.

As Pulitzer-Prize-winner Thomas Friedman says, “The World Is Flat”. So events in the Middle East affect businesses everywhere. As do events in America. As of the weekend, mega hedge fund Archegos Capital has defaulted on margin calls, and is liquidating its positions. Markets in the U.S. and China are down today on the sales pressure, and bank stocks around the world are lower not only because they had loaned money to Archegos, which is now not paying, but also because they had invested in it. Oops.

We are seeing a continuation of the market transition to value outperformance from growth outperformance. Growth stocks did unusually well during the first year of the pandemic as we all hunkered down with our food deliveries and bought everything from Amazon. Now the world is reopening (perhaps a little too early, but still), interest rates are beginning to rise, which hits debt-heavy growth stocks harder, and value is looking better and better. Picture driving to the movies: you’ll need gas, and a cute new outfit, and actual movie theaters.

So, the Russell 1000 Value Index is up more than 10% this year so far, while the Russell 1000 Growth Index is flat. Meanwhile, the Dow Jones Industrial Average (value-heavy) closed at a new high on Friday, as did the Standard & Poor’s 500 (which is broad-based). The Nasdaq Composite Index, which heavily tracks small-to-mid and tech companies is off the high it reached in early February.

A year ago, one bitcoin was worth less than $6,000. Today it is worth $58,000. We will see as days unfold whether bitcoin was a pandemic play or whether its value will continue to rise. In the meantime, Elon Musk has said that Tesla is open now to bitcoin payments, with a caveat. Tesla will not give change! If you pay for a $90,000 Tesla with two bitcoins, you just overpaid! Musk says that Tesla will not exchange the bitcoins that it receives for dollars or any other sovereign currency. Instead it will build its cryptocurrency position. Also note that when you exchange your bitcoin for a car, you have essentially sold it, and therefore owe taxes on the gain you have realized, which may be massive.

In a related story, the Wall Street Journal and the IRS claim that the richest Americans are underreporting their income by more than 20%. Easy ways to cheat the government? Offshore accounts and cryptocurrencies. Don’t do this!

Last week saw the best new unemployment claim figure in a year. 684,000 workers filed for new benefits. It’s a huge amount, but less than was expected, and also less than the pre-pandemic record of 695,000. That’s good news, but there was also some less-than-good news. Consumer spending fell by 1% in February versus January, and personal income was lower by 7%. You’ll remember that January numbers were good because of the stimulus checks that were received.

Have you received a vaccine yet? If yes, then head to Krispy Kreme for your free daily glazed doughnut! Free doughnut every day this year with a vaccine card! But before you head out, you might also plan to buy yourself a Pepsi. Pepsi has teamed up with Just Born Quality Confections (maker of Peeps - do you see where this is going?) to create the new flavor Pepsi x Peeps. That’s right, it’s marshmallow-flavored Pepsi, the “ideal accessory and thirst quencher for springtime”!

For the week ending March 19th, the Standard & Poor’s 500 finished at 3,974, the Dow at 33,072, and the Nasdaq at 13,138. The yield on the ten-year Treasury Note closed at 1.67%, down from 1.7% earlier this month. U.S. crude oil cost $60.97 per barrel, while U.S. average gasoline was costlier by 30% than at this time last year. N.Y. gold cost $1,732.20 per ounce, and one Euro was worth $1.1796.

Elizabeth E. Cook
Partner

News and information presented here were gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) The Wall Street Journal, The New York Times, USA Today, Barron’s, The Economist, Bloomberg, CNBC, CNN, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220 or reply to this email to reach me, Liz Cook

Studies tracking the mystery of American obesity found that Americans’ weight actually dropped during the 1970s, but in the next 20 years Americans gained an average of 20 pounds. And now add in the Covid fifteen, and we’re all just weeble-wobbling around in our lives. What changed in the 1980s? A major public-health emphasis on quitting smoking. Clear correlation is not causation, but it makes sense. I’m not encouraging smoking, of course, but maybe a return to those cute bubble-gum cigarettes? (Thanks to Stephen Helfer’s letter to the WSJ for this insight. Except the part about bubble gum.)
DIASTOLE ECONOMIC AND MARKET COMMENT
April 5, 2021

The U.S. economy added 916,000 jobs in March, vastly exceeding the 675,000 that had been predicted. (Payroll giant ADP reported 517,000 private-sector jobs were created.) Job growth was widespread across sectors, but was led by leisure and hospitality, education, and construction. The official unemployment rate fell from 6.2% to 6%, although some analysts say that the real unemployment rate is closer to 8.7% - since people who drop out of the job market are not counted, and it is hard to calculate the unemployment rate of the self-employed. 14.3 million Americans are still out of work, but new job growth does reflect the gradual reopening of the economy, the increase in fully-vaccinated citizens, and warmer weather.

At the same time (practically) the government released its weekly initial unemployment claims figure for the prior week, which came in at 719,000 versus the 675,000 that had been expected. If you are wondering how the economy can be losing jobs at the same time that it is gaining jobs, you are not alone. One answer is that the figures come from different places. Unemployment claims come from state unemployment offices, while new job creation numbers come from a survey of employers, except for the ADP numbers, which come from payroll data.

The March jobs report was issued on Friday, when the stock markets were closed but the bond markets were open for a limited session. In response to the positive report, the ten-year Treasury note yield rose to 1.72%, as people sold the notes to raise cash, presumably to purchase equities today. Bond prices fall when more people are selling than buying, and the drop in prices causes yields to rise.

Last week President Biden unveiled his infrastructure proposal, called the American Jobs Plan. It comes in at a hefty $2 trillion dollars over eight years, paid for by a proposed minimum tax on U.S. corporations, as well as an increase in the corporate tax rate. We are all familiar with the big name companies that don’t pay taxes, especially Amazon. In 2018, Amazon had income of greater than $11 billion, but paid nothing in federal taxes. And thanks to tax credits and deductions, the company actually received a tax refund of $129 million. There are plenty of other companies that don’t pay taxes, and plenty that pay negative taxes, meaning that they get more money back than they paid in the first place. Energy companies often fall into this category. Duke Energy for instance had a three year effective tax rate (through 2020) of -15.5%. But other companies are also run by smarty-pants: FedEx (tax rate -12.8%), Nike (tax rate -18.0%). It’s hard to argue with a plan that demands these companies pay something. And we do need help. The American Society of Civil Engineers recently graded our infrastructure at C-.

For people who are already screaming that this program is too expensive, just wait, there’s more! Within several weeks we are supposed to see the details of a “care economy” package that focuses on education and child care.

Oil prices rose last week - first on the expectation that OPEC+ would limit production at its Thursday meeting, and then, after the results of that meeting, on the surprising news that instead production would increase. Huh? Apparently the idea that the OPEC+ oil-producing nations are expecting demand to wax as Covid (hopefully) wanes is enough to cause people to buy. It also signals the strength of Russia in the consortium, since Russia was pushing for the increased production while Saudi Arabia (long believed to hold the real power in OPEC) was advocating a cut.

And while we’re thinking about the Middle East, news from the Suez Canal Authority is that they will be seeking about one billion dollars in damages from the cargo ship Ever Given after it blocked the canal for 6 days. This covers physical and financial expenses, but does not include the costs borne by all of the other ships that were delayed. The Ever Given (Japanese owned and registered in Panama) is being held in the canal (lengthwise this time) while the Authority completes its investigation. Data recorded on the ship’s black box (who knew?) will tell authorities how much of the accident was caused by wind and sand, and how much by human error.

There are currently about 300 companies working on the development of flying cars. The research costs are high enough that the cars (planes? copters?) are not expected to hit the individual auto market at first, but instead to be deployed as taxis. The Federal Aviation Administration (FAA) is working with 30 firms to certify their plautos (clanes?) for passenger safety, and I, for one, am completely excited to never fly in one. You just know that the next development will be auto-piloting, and I’m not going to get in one unless George Jetson is at the helm.

For the week ending April 1st/2nd, the S&P 500 finished at 4,019, the Dow Jones Industrial Average at 33,153, and the Nasdaq Composite Index at 13,480. The yield on the ten-year Treasury Note closed Thursday at 1.69% and Friday at 1.72%. N.Y. gold cost $1,726.50 per ounce (down 17% since August), U.S. crude oil cost $61.45 per barrel, and one Euro was worth $1.1779. The ever-fluctuating currency that is Bitcoin was worth $58,200.20 yesterday.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including, but not limited to, The New York Times, The Wall Street Journal, The Economist, Business Insider, CNBC, CNN, Barron’s, USA Today, Yahoo Finance, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220 or reply to this email to reach me, Liz Cook.

A recent survey released the list of the highest paying jobs in America. Not surprisingly, the top five spots all went to medical, especially surgical, specialties. This no doubt reflects the life-saving pressure of these jobs, as well as their hefty malpractice insurance costs. Surprisingly not in the top 30 jobs were professions that involve great personal risk, like tightrope walker, gladiator, and Crusader. That hardly seems fair.
DIASTOLE ECONOMIC AND MARKET COMMENT
April 12, 2021

It’s been awhile since we started with Bitcoin, so let’s go there. Bitcoin is hovering around its all-time high price of $61,781.83, reached last month, and several factors are responsible for its amazing growth in value. First, people who own them or “mine” them are now reluctant to sell them, because they’ve got bitcoin fever and have forgotten, or are downplaying, the risk of its price falling. (Bitcoin just six months ago was trading around $10,000 to $11,000 apiece.) But maybe those people are right? Bitcoin is achieving more and more acceptance, even as the coins themselves (digitally, of course) are harder to find, and thus growing more expensive. At current levels, nobody is going to buy a Tesla with Bitcoin, because why exchange an appreciating asset for a depreciating one? (To say nothing of the fact that Tesla won’t give change if you pay in Bitcoin.) Elon Musk’s assurance that Bitcoins received for automobiles (okay, SOMEONE will probably do it) won’t be converted into sovereign currency is just one example of why the price keeps rising. People, and companies, are sitting on the crypto-currency, just waiting for it to be worth more. Meanwhile, asset managers are trying to figure out how to structure Bitcoin ETFs (and how to get SEC approval), while Tesla is not alone among corporations in investing its own money in Bitcoin.

And all of this Bitcoin hoopla is predicated on the idea that there will be a finite number of Bitcoins created. There are currently about 18,700,000 Bitcoins in existence, with six new ones created every ten minutes. When the total of 21,000,000 is reached, there will be no more new coins created. Traditionally, a scarce commodity which is in demand attracts higher and higher prices. But will Bitcoin actually stop mining more? Who knows? We aren’t even sure who invented it in the first place!

Maybe I should have started with this, but the Standard & Poor’s 500 and the Dow Jones Industrial Average both reached record highs last week, The Nasdaq Composite Index was higher, but about 1.5% off its record. The rotation from growth stocks (think tech) to value stocks (think boring - just kidding! think old-school) continues. With growth stocks having achieved amazing returns last year, there is some worry that earnings and profits this year won’t support the soaring valuations. Also, value stocks, which sell at a lower price-to-earnings multiple (P/E) are poised to profit from the waning of covid, as people return to buying more and more gasoline, and maybe tractors.

Federal Reserve Chairman Jerome Powell agrees with the International Monetary Fund that we should see 6% growth in the U.S. and globally in 2021. That comes after a 3.3% negative return last year. But Powell bases his prediction on the idea that Americans will continue to wear their masks, socially distance, etc. Will that be the case?

New variants of the virus are popping up, and some of them are outsmarting our vaccines. In addition, China has just announced that its vaccines “don’t have very high protection rates”. Ouch. And China is exporting its vaccines around the world. Will we actually eradicate Covid, or is it going to linger? Already scientists are working on developing a second or third shot to add to the vaccinations that people are already receiving. The boosters will hopefully help restrain the Covid variations that are happening everywhere.

Initial jobless claims were higher than expected last week at 744,000. This is a terrible number when compared to pre-pandemic levels, but a great number when compared to the millions who made claims in March and April of 2020. It also points out the problem with a K-shaped recovery, in which some people benefit hugely and other people are left out of the bonanza. Lower-paid workers, the self-employed, and gig workers are more likely to lose their jobs while they wait for their affected industries to recover. But the top 1% is doing quite nicely, thank you. The Forbes’ billionaire list for 2020 includes 660 new billionaires, with a total of 2,755 billionaires on the list. Those few individuals are now worth more than $13 trillion combined.

So they are probably not the ones who are taking margin loans against their equity portfolios. (Just kidding, if they can arbitrage a low loan rate against a higher-returning investment, they’re probably doing it.) But someone is taking margin loans. The value of all margin loans in the U.S. is now $814 billion, up 49% over the same time last year. Those people are betting that markets will go up.

At the same time, loans of stock to people who want to sell short have reached a record one trillion dollars worth. Those people are betting that the markets will go down.

Meanwhile, the Wharton School’s Jeremy Siegel is predicting that markets will rise an overall 30% this year, while the Fed is being accommodative and keeping interest rates low, but will correct by 20% when the Fed finally moves to tighten the money supply with higher rates - not before next year, if then.

As always, hindsight will be 20/20.

For the week ending April 9th, the S&P 500 closed at 4,128, the Dow at 33,800, and the Nasdaq at 13,900. The yield on the ten-year Treasury Note finished at 1.67%. U.S. crude oil cost $59.32 per barrel, N.Y. gold cost $1,743.30 per ounce, and one Euro was worth $1.1902.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) The Washington Post, The New York Times, The Wall Street Journal, USA Today, Barron’s, Bloomberg, Business Insider, Yahoo Finance, The Economist, CNN. CNBC, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220 or reply to this email to reach me, Liz Cook.

Scientists discovered muons (they’re kind of like heavy and unstable electrons) in 1936. But they have remained a mystery. Until now! Okay, they’re still kind of a mystery, but apparently one that doesn’t respond to gravity the way it should. So, maybe there’s another force in the universe that is acting on muons? And is it also acting on all of us? Maybe making us eat too much Dairy Queen during Covid? Asking for a friend.