DIASTOLE ECONOMIC AND MARKET COMMENT
May 24,2021

Next Monday is Memorial Day, and there will be no Market Comment. I will be watching my small town’s parade to celebrate veterans. Parades are back!

And I will also be watching bitcoin, because it’s an ongoing cage match that I just can’t quit. More on that later.

Last week, markets were up, down, and flat, but they remain in positive territory for the year-to-date. Inflation concerns were everywhere, but with bond yields fairly stationary, it was much ado about nothing - so far. Is the economy about to heat up? Well, maybe.

Let’s look at historical inflation. The government has been keeping track for more than 100 years (since 1913), and in that time inflation has averaged 3.10%. If we look at inflation decade by decade (which is arbitrary, but useful), we have not seen inflation above that average level since the 1980s when it was 5.82%. (If you remember the 80s, you may also remember that the Fed funds rate spiked to 18% at one point. Yikes!) But we have now had more than three decades of below-average inflation and therefore below-average interest rates. It seems inevitable that inflation will regress to the mean and move higher, although that doesn’t necessarily mean a catastrophic increase. In the 1990s, inflation was right on the historical average at 3.08% and we had a booming economy. In 2020, inflation averaged 1.36% - obviously hit hard by the pandemic. This year, inflation is higher (approximately 2.5% year-to-date), but still below the long-term average.

Expectations of higher rates are being incorporated into investors’ thinking. That’s why we’ve seen a rotation away from tech stocks, which generally borrow more money and pay small-to-no dividends, toward growth stocks, which are less affected by interest rates, and pay higher dividends. Financial companies, which can make more money on loans as rates rise, have especially benefitted. In an environment in which bonds pay more than nothing (as people are now anticipating), many investors will seek yield plus growth when they buy stocks.

Which may be why Michael Burry has now accumulated a short position against Tesla valued at more than half a billion dollars. Burry, famous for betting against mortgage securities before the 2008 financial crisis (and making lots of money doing so) was depicted in the book and movie “The Big Short”.

Tesla stock traded near zero for a very long time and only started making noise in the past few years. Its all-time high price was over $880 per share in January. It now trades under $600. The corresponding fall in Bitcoin price is no coincidence. Tesla holds a large position in Bitcoin, and although the company will no longer accept Bitcoin in exchange for a car (that was quick), Bitcoin continues to affect Tesla stock. 

Bitcoin’s all-time high price of near $64,000 was reached last month, but the price has fallen considerably, based on Tesla’s change of mind about accepting Bitcoin, and also the Chinese government’s repeated comments that it will crack down on financial institutions that accept cryptocurrencies. The Chinese government made a similar move in 2017, closing crypto exchanges that had accounted for the majority of global trade in Bitcoin. Bitcoin is still up about 18% in 2021.

As we discussed last week, though, if Bitcoin is going to fall when fears of inflation are rising, then it’s not an inflation hedge. And if the biggest things moving the Bitcoin market are Elon Musk and Xi Jinping, then does it really have an intrinsic value? It can be spent in some venues, but owners are loath to do so because they’re sure it’s about to rebound. Is it more Tulip Mania? Or musical chairs?

Janet Yellen has proposed a minimum 15% global corporate tax in order to keep corporations from bouncing around the world shopping for the lowest tax rate. Early indications are that France and Germany approve. Of course the countries with the lowest rates aren’t likely to sign on, since they benefit from the current patchwork system. The Biden Administration is also proposing that corporations pay 28% tax in the U.S. - a hike from the current 21%, but still below historical levels. The United Arab Emirates (UAE) currently levies the highest corporate tax in the world (55%) while charging 0% personal income taxes. Ten countries charge no corporate taxes at all: Anguilla, Bahamas, Bahrain, Bermuda, Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands, and Vanuatu. Why would a country charge zero? It will obviously attract corporations, on which it probably assesses fees, and also attracts owners of those companies, who visit and bring tourist revenue. There is still no free lunch.

Fidelity has just announced that it is introducing investing accounts just for teenagers. The offer is open to 13-to-17 year-olds whose parent or guardian also invests at Fidelity. There will be a mobile app and ways to save and deposit funds, use a debit card, and invest in U.S. equities, plus Fidelity mutual funds and ETFs. Parents/guardians will be able to monitor the accounts and shut them down if necessary, and the teens will NOT be able to trade options or borrow money. This is obviously a brilliant marketing move, making future investors current investors and locking in their parents to boot! Fidelity currently manages $10.3 trillion.

For the week ending May 21st, the Standard & Poor’s 500 closed at 4,155, the Dow Jones Industrials at 34,207, and the Nasdaq Composite Index at 13,470. The yield on the ten-year Treasury Note finished at 1.63%. U.S. crude cost $63.58 per barrel, N.Y. gold cost $1,876.70 per ounce, and one Euro was worth $1.2181.

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 Wall Street Journal, The New York Times, The Washington Post, USA Today, Bloomberg, CNN, CNBC, Insider, Forbes, Reuters and The Associated Press. If you have questions, please call Diastole at 203.458.5220 or reply to this email to reach me, Liz Cook.

Martha Stewart is fighting the New York Post for “fake news” after it reported that she has 16 peacocks on her farm. Turns out she actually has 21, and she swears they are not stinky, not too loud, and very friendly.
DIASTOLE ECONOMIC AND MARKET COMMENT
June 7, 2021

Last week was a big yawn in the markets while many people were on vacation. The Dow Jones Industrials and the Standard & Poor’s 500 have been trading in a narrow range for the past couple of months - still within about 1% of the record highs they reached in March. The Nasdaq Composite is not faring quite as well but is still up 7.5% year to date. The Nasdaq tracks more high-tech companies, and so has not benefitted from the recent market move that favors value companies over growth firms.

But on Friday, the jobs report for May came in with 559,000 new jobs created - which was less than economists had predicted. On top of the very disappointing April figure, this reassured investors that things are not so overheated that the Federal Reserve will need to raise interest rates. Classic bad-news-is-good-news.

Fears of inflation were somewhat allayed by the jobs numbers, so the yield on the ten-year Treasury Note settled down to 1.56%. Yields fall when prices rise, meaning that funds were flowing into bonds last week. When inflation concerns are paramount, investors sell fixed-rate bonds knowing that they will lose value if rates rise.

U.S. crude oil is trading near $70 per barrel, up 40% this year as we all drive more and fly more. And if this sounds like inflation at work, it’s really not. Crude oil prices are certainly recovering, but remember that they went negative about 14 months ago. Prices now are about back to where we saw them in 2018, and well below the record high of 2008 when oil prices just about reached $150.

The pandemic disrupted demand for many products, and also disrupted the means of getting many products to market. So as we face supply chain shortages on everything from metals, to crops, to semiconductors, lumber, plastic, and cardboard, we have to note that prices are rising due to short supply and not necessarily excess demand (although hoarding of raw materials is now a thing in manufacturing). Is that different than inflation? No, not really. Inflation is just the condition of rising prices, no matter why it is happening.

While inflation is bad for fixed-rates, it can be good for companies that don’t have excess debt because they may be able to charge more for their products and services. And, of course, rising interest rates are favorable to lenders and not borrowers.

If you’re worried about inflation reaching 3%, as Janet Yellen says is acceptable, you might not want to visit Turkey, whose inflation rate just fell from April’s 17.1% to 16.6%. Yay? President Erdogan resolutely refuses to believe that high interest rates will curb inflation, and keeps firing Treasury Ministers who want to raise rates. Nonetheless, Turkey’s central bank is keeping rates at 19%, and is determined to keep interest rates above the inflation rate. No telling if Erdogan is going to try to fire them, too. Five years ago the Turkish lira was worth $0.34. Today it’s worth $0.12.

Cicadas are enjoying their brief freedom in 15 Eastern and Midwestern states. The FDA wants to remind you that the insects are genetically related to shrimp and lobsters and that you SHOULD NOT EAT THEM if you are allergic to seafood. Or if you are allergic to anything. Or under any circumstances. The bugs will start to die off by the end of June and will reemerge in 17 years.

Congratulations to me for getting this far without talking about Bitcoin. But here it is. A Canadian electric-vehicle company (Daymak) is now planning an electric car that will mine cryptocurrencies while it charges. The car is named Spiritus, is expected to debut in 2023, and despite having only three wheels, will reach a top speed of 130, and go 0 to 60 in 1.8 seconds. (Just a promise, but still….) Oh, and Elon Musk tweeted something about something and cryptocurrencies fell in value.

China’s population is only slightly higher in its newest (2020) census report than in its last full census ten years earlier. So the government is expanding its two-child policy (instituted five years ago to replace the one-child policy) to a three-child policy. But the country is facing all of the same problems that developing nations are facing globally: working parents, stagnant wages, and pandemic uncertainty. To say nothing of decades of educating people that having one child is best for the country. Of course, a majority of those one-children were boys (because of selective abortion), who have grown up to find that it’s really really hard to find a wife. The government is very worried about pension payments to its aging population.

For the week ending June 4th, the S&P closed at 4,229, the Dow at 34,756, and the Nasdaq at 13,814. The yield on the ten-year Treasury Note finished at 1.56%, as mentioned earlier. New York gold cost $1,889.80 per ounce, U.S. crude cost $69.62 per barrel, and one Euro was worth $1.2167.

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, Barron’s, Insider, Yahoo Finance, Bloomberg, USA Today, The Economist, 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.

If you’re feeling a breeze in your hair, it might be the comet that just flew past Earth. It was over 600 feet in diameter and came as close as 4.6 million miles to us. Was it big enough to exterminate dinosaurs, i.e. cicadas? We’ll never know.
DIASTOLE ECONOMIC AND MARKET COMMENT
June 14, 2021

Happy Flag Day! Today we celebrate the adoption of the American flag by the Second Continental Congress in 1777. Please sing “You’re a Grand Old Flag” now. I’ll wait.

And while you were singing, prices rose, just a little. For years we have had low inflation and low interest rates, and now things are looking somewhat inflationary. Gas costs are rising because oil producing nations cut production during the pandemic when hardly anyone went hardly anywhere, and now there is sudden demand and it’s not that easy to crank up the spigot overnight. Likewise lumber, steel, furniture, you name it. The cost of materials is going up as shipping is slow to return to normal and there are backlogs of all kinds of things like semiconductors and whatever you need to make whatever you make. Anecdotally, pool chemicals now cost WAY more than they used to because people all bought pools during lockdown. (Not me, but everyone else.) 

A shortage of materials combined with a new greater demand for stuff is a perfect storm for inflation. Used and new cars are hard to find and hard to afford, new furniture is on backorder for months, meat costs more because so many processing plants are operating at reduced capacity and the grain used to feed the animals also costs more. Airfare and clothes are costing more as demand soars.

And talking heads are debating whether we are facing inflation or transitory inflation. Which is silly, because both are inflation, it’s just that transitory inflation will resolve itself sooner (?). The thinking about transitory inflation is that within a year or two all of these supply-chain issues will be sorted out, and demand will just return to where it was before we all went into hiding, and life will be wonderful. Which may, in fact, happen. But in the meantime, we have inflation. 

But not everyone thinks inflation is happening. For instance, investors are buying long bonds, driving prices up and yields down. Inflation erodes the value of bonds, so if you think inflation is coming, you would usually sell long bonds and buy short ones, or variable ones. But the yield on the ten-year Treasury Note has fallen in recent days and is now under 1.50%. The yield on the thirty-year Treasury is about 2.15% - quite a bit higher than last year when it was 1.41%, but not high historically.

What investors think is going to happen is not necessarily going to come to pass, but the stock markets are a leading indicator, meaning that what they do now predicts the situation in the economy six months down the road. And the markets are near record highs (again). So will the economy be sailing in six months? Let’s watch and see.

First-time unemployment claims dropped slightly last week for the sixth week in a row. And people quitting their jobs rose to four million in April, as workers believe they can find better work. Labor shortages everywhere are creating upward pressure on wages, which adds to inflation fears for those who already have them, and apparently does nothing for those who don’t.

This week’s Bitcoin story is not just that Elon Musk tweeted something and Bitcoin responded, although of course that happened. It’s that the FBI managed to recapture much of the Bitcoin ransom that the Colonial Pipeline paid to Russian hackers, worrying Bitcoin owners that cryptocurrencies are a little too exposed. It turns out that all of that transparent blockchain is also transparent to oversight. Colonial notified the FBI that it was paying the ransom, gave the FBI the account number they paid to, and the FBI watched the Bitcoin move around to other accounts and seized the money from one of the ending destinations. They said that they had the private key for that address, although of course they didn’t say how they got it. So, if Bitcoin is traceable and seizable, does that make it less useful? Also, El Salvador voted to make Bitcoin legal tender, and President Nayib Bukele announced that mining would be done with geothermal energy from El Salvador’s active volcanoes. Problem solved!

Boeing is delighting in the newly revived market for its 737 MAX jets. Last year it had 100 of the jets stranded on the tarmac because the buyers had backed out or gone belly up. But as demand for aircraft has increased, Boeing managed to sell all but 10 of the stockpiled 737s. Meanwhile, American Airlines is planning to invest $25 million in Vertical Aerospace Group which is developing flying taxis that will take off and land vertically, fly at speeds up to 200 m.p.h., and have a range of more than 100 miles. American thinks these taxis would be perfect for getting people to and from airports. Vertical Aerospace is planning to go public with a SPAC (special purpose acquisition company) in a deal that values the combined company at over $2 billion. There are several other air-taxi companies that are currently in a race to produce aircraft and are going public with SPACs. United Airlines is backing one, and Boeing is also investing in the potential of flying taxis. For those of us who grew up watching the Jetsons, all I can say is, it’s about time.

For the week ending June 11th, the Standard & Poor’s 500 closed at 4,247, the Dow Jones Industrials at 34,479, and the Nasdaq Composite Index at 14,069. The yield on the ten-year Treasury finished at 1.47%. U.S. crude oil cost $70.91 per barrel, N.Y. gold cost $1,877.40 per ounce, and one Euro was worth $1.2111.

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 Washington Post, USA Today, The Economist, Bloomberg, Barron’s, Yahoo Finance, Business Insider, 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.

Saturday, June 19th, is Juneteenth, a holiday which celebrates the end of slavery. Please Google it for more information, and plan to light a sparkler or ten.

The French, who gifted us with our Statue of Liberty, are sending us another, which is an exact replica of the original, but only nine feet tall. It will be erected on Ellis Island, directly across from Lady Liberty, on July first, and will then be moved to Washington D.C. to stand in front of the French Ambassador’s Residence. It is a token of friendship from the French, who helped us gain our independence from Great Britain, and who now want to say that they still love us, just 1/16th as much.
DIASTOLE ECONOMIC AND MARKET COMMENT
June 21, 2021

Inflation, inflation, inflation. It’s all anyone can talk about. Except Prime Days at Amazon (today and tomorrow) and the fact that Amazon’s hourly workers have 150% annual turnover. And of course the discovery that a new species of giant rhino existed 31 million years ago in Asia that was the size of eight elephants and is the largest species of mammal ever discovered. But aside from that, inflation. Except of course that someone paid $28 million to join Jeff Bezos on his upcoming ten-minute-long rocket ride. Oh, and that tens of thousands of people have signed a petition that Jeff Bezos should not be allowed back from space. But other than that, you know, inflation.

Here are some of the data that support the idea that inflation is already here:

The Federal Reserve now predicts that inflation will hit 3.4% this year, and is anticipating two rate hikes in 2023. It kept current interest rates unchanged at its Open Market Committee meeting last week.
Consumer prices rose 5% in May versus May of 2020 - the fastest growth in 13 years.
Clothing and accessory sales were 200% higher in May than a year earlier.
The value of the dollar rose more than 2% last week.
Oil prices have reached $71 per barrel, the highest level in two years.
The May Producer Price Index (PPI) rose 6.6% year over year. The PPI measures final sales prices for manufactured goods.
Despite generally falling stock prices, bank stocks were higher on the news from the Fed, indicating that they anticipate profitably rising interest rates.

And here are some of the data that counter the inflation narrative:

May retail sales overall fell 1.3% from April.
Initial jobless claims last week were higher at 412,000, versus 360,000 anticipated.
Bitcoin has fallen to about $32,500 - half of its recent high value.
Lumber prices, which soared last year, have fallen 40% in the past month from May highs.

So, overall, inflation is winning. But it’s still hard to predict, because of course some of the current demand for goods and services was pent up during the past year, and once supply chain issues work themselves out, demand will not necessarily exceed pre-pandemic levels. Expectations of inflation have fallen since the Fed announcement, as investors have decided that the Fed is on top of the situation. Current inflationary expectations are about where they were in 2018.

Lots of people are also worried about the Biden Administration’s proposals for tax hikes. As it currently stands, we don’t believe the changes will be enacted, but those odds change if the Senate filibuster is repealed. However, it is also possible that if repealing the filibuster becomes a possibility, a bipartisan tax change will be agreed upon to forego that happening.

The Buffett Indicator hit 133% recently. The Indicator compares market capitalization of all U.S. stocks to the size of our Gross Domestic Product (GDP). GDP encompasses all goods and services produced in the country. If the value of all stocks combined exceeds the value of annual GDP (i.e. a reading above 100%), Buffett considers this a signal that stocks are overvalued. But at 133%, is Buffett selling? In the first quarter of this year, yes. Berkshire Hathaway sold more than it bought. Berkshire is currently sitting on a mountain of cash ($145 billion), waiting for opportunities to buy.

Recent market losses may have enticed Mr. Buffett. After all, the Dow Jones Industrial Average fell 3.5% just last week, ending, at least temporarily, the dominance of value stocks over growth stocks this year. The Standard & Poor’s 500 lost 1.9%, and the Nasdaq Composite Index dropped 0.2%

If you thought the giant rhinoceros was interesting, you should be aware that a new giant dinosaur species was discovered in Australia. The Australotitan cooperensis is estimated to have weighed 70 tons, and measured close to 100 feet in length. Luckily it was a plant eater, but also, it lived 92-to-96 million years ago, so your garden was never in danger.

For the week ending June 18th, the S&P finished at 4,166, the Dow at 33,290, and the Nasdaq at 14,030. The yield on the ten-year Treasury Note slid slightly to 1.45%. U.S. crude cost $71.64 per barrel, N.Y. gold cost $1,767.90 per ounce, and one Euro was worth $1.1864, down about $0.03 from last week.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be accurate, including, but not limited to, The Wall Street Journal, Barron’s, The New York Times, The Washington Post, USA Today, CNN, CNBC, Business Insider, Yahoo Finance, Bloomberg, The Economist, Kiplinger, 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.

While we’ve all been aware of the monstrous heat wave and drought out West, it has just been brought to my attention (sorry, duh) that water shortages in lakes and reservoirs endanger electricity production since hydroelectric power is in common usage in that region. For instance, Lake Powell is projected to receive only 25% of its usual rainfall and runoff this year. Lake Powell feeds Lake Mead, where Hoover Dam is situated. The dam is currently generating 25% less electricity than usual, and that power is slated to go to Arizona (19%), Nevada (23%), and the rest to Southern California. It could be a very hot and dry summer.