DIASTOLE ECONOMIC AND MARKET COMMENT
August 16, 2021

The Delta variant, the earthquake in Haiti, the humanitarian disaster in Afghanistan, the United Nation’s latest climate change report - all are dire, but in order to know what they mean to the markets, we have to look at stocks and bonds. 

The Nasdaq Composite Index is at its lowest point in a month, although that seems counterintuitive since Delta is causing schools to close, and people to stay home again, which should benefit the internet stocks that the Nasdaq is full of. The Dow Jones Industrial Average is just off Friday’s record high - do investors think that manufacturing and travel are going to continue to thrive in the face of Delta? And what do we think about the Standard & Poor’s 500, which is tracking along with the Dow? It contains the broadest look at stocks of the three indices, and also hit new highs last week.

Together the stock markets are a leading indicator - traditionally believed to predict how the economy will be behaving six months down the road. Is the economy going to be better than ever next February, despite the bad global news we’re seeing now?

Meanwhile, the yield on the ten-year Treasury Note is sitting around 1.3%, while less than three years ago it was yielding 3.22%. What’s happened since then? You know the litany. The Federal Reserve has been buying Treasury debt and mortgages like they’re not making them any more (reassurance: they ARE still making them). Interest rates are artificially low, which is good for borrowers, both individual and corporate, and certainly good for the government, which borrows more than anyone.

But remember the debt ceiling? It limits government borrowing, which is needed after the government approves spending. Repeat, the debt ceiling does not limit spending; it limits borrowing to make good on spending already approved. The debt ceiling now needs to be suspended again, or raised, in order for the government to pay its past-due bills. Other countries don’t have this nonsense. For them, if the legislature votes to spend money, the raising of the debt ceiling is automatic. Right now the debt ceiling is stuck around $28.5 trillion. And while there is certainly a good argument to be made for limiting future spending, there’s not much we can do about past spending other than honor it. Congress, get to work!

It comes as no surprise that small-business confidence (as measured by the Wall Street Journal) fell in August to its lowest level since March, with only 39% of small-business owners expecting economic conditions to improve over the next year. In March, two-thirds of owners expected improvement. Of course, that was in the middle of vaccine hopefulness and before the Covid Delta variant hit us so hard. Consumer sentiment from the University of Michigan in August showed the lowest reading of the pandemic, and the lowest overall since 2011. Both figures are the results of surveys so take your grain of salt right now.

It turns out that the U.S. is now selling just as much in goods as it did in 2019 (pre-Covid), but with six million fewer workers. Efficiencies of production which were forced on manufacturers by the pandemic may be keepers after all. This is another sign that the ten million jobs now available are not necessarily the same jobs that the nine million who are unemployed lost.

Industrial production in China rose by 6.4% in July versus a year earlier, which was lower than expected, especially versus covid-ravaged 2020. Retail sales also fell short at 8.5%. These results are bothering investors today. Overall, China’s economy is back to pre-Covid levels, but businesses there are facing the same supply-chain issues that plague American companies, as well as newly-imposed Covid restrictions.

Also in Chinese news: China and Russia have teamed up for a series of joint military exercises. They are sharing information about each other’s weapons and strategies, kind of like a Facebook page devoted to world domination. Observers believe that the exercises are mostly a series of photo ops designed to scare everyone else on the planet, and that’s what they’re doing.

Bitcoin has bounced off lows seen a month ago and is now trading around $47,000. Small investors are buying into the cryptocurrency while many institutional investors still see red flags. Bitcoin has no intrinsic value, so it is traded on sentiment, not data. It is currently unregulated, but new SEC Chairman Gary Gensler is broadly indicating that it needs to be regulated and taxed more efficiently. And as smaller investors rush into the breach, the experience level of Bitcoin traders falls. So, sure! Why not buy some!

For the week ending August 13th, the S&P 500 closed at 4,468, the Dow Jones Industrials at 35,515, and the Nasdaq at 14,822. The yield on the ten-year Treasury Note finished at 1.30%. U.S. crude oil fell to $68.03 per barrel on Covid concerns, while President Biden asked OPEC+ to produce more oil. New York gold cost $1,781.50 per ounce. One Euro was worth $1.17.

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, Morningstar, The New York Times, The Wall Street Journal, USA Today, The Washington Post, Barron’s, The Economist, Yahoo Finance, CNN, CNBC, Reuters, and the Associated Press. Please call us at 203.458.5220 if you have questions, or reply to this email to reach me, Liz Cook.

If Pepsi and Boston Beer had a baby, it would be Mountain Dew Hard. Well, they did, and it’s coming soon (early 2022) to a store near you! Mountain Dew Hard has 5% alcohol, zero calories, and three delicious flavors: original, black cherry, and watermelon. It’s not just that you could use one today, it’s that you’ve needed one everyday for the past two years.
DIASTOLE ECONOMIC AND MARKET COMMENT
August 23, 2021

There will be no Market Comment for the next two weeks because I am taking a wholly undeserved staycation, thereby putting my coworkers into the awkward position of having to cover for me while I lounge on the sofa watching HGTV. See you again on the 13th, and thank you for understanding!

Last week was full of the bad news and more bad news phenomenon that we now call everyday life. There were fatal floods in Tennessee and North Carolina, Hurricane Henri in the northeast, new and expanding wildfires in the west, and a botched evacuation from Afghanistan. Covid hospitalizations are at record highs for all age groups below 50-year-olds, and retail sales for July dropped by more than 1%. It is no surprise that markets also fell.

Bank of America adjusted its forecast for third quarter GDP down from 7% (on an annualized basis) to 4.5%. That seems a little cheaty since we are more than halfway through the third quarter already. I mean, it can hardly be called a prediction at this point.

China is causing trouble still/again, as it cracks down on tech companies. And SEC Chairman Gary Gensler is reminding investors that if you own U.S.-listed Chinese-company stock, you own stock in a shell corporation with a slim connection to the original Chinese company, which might be pulled out from under you at any time.

Minutes from the latest Federal Reserve Board meeting indicate that the officials are now talking to each other about cutting back on the $120 billion in bonds and mortgages that the Fed purchases each month. Of course they are! If you were spending $120 billion a month, wouldn’t you debate the wisdom of continuing? The Fed’s buying of debt instruments pushes prices higher and yields lower, which has been the point all along. So you would think that if the Fed were going to reduce its purchases, yields would start to creep up.

But they didn’t. Yields fell. Which means that either investors don’t believe the Fed, or else they’re worried about other things which is causing THEM to buy bonds (generally considered a safer asset than stocks), driving prices up and yields down. If the economy had a Facebook status, it would be, “it’s complicated”.

But all bond buying is not safety-seeking. We are currently also seeing a rally in junk bonds. This is probably due to investors looking for yield in a low-yield environment, but whatever the cause, first-time junk bond issuers are flooding the market. Junk bonds are rated BB or below, and provide higher yields to compensate for their additional risk. But with so many people purchasing them, the yields are moving lower in the marketplace, obviating the need for the bonds in the first place. Current yields on high-yield (the nice name for junk) bonds are near multi-decade lows.

Oil prices dropped last week as well. Some of that is due to increasing Covid-19 Delta-variant worries that we’ll all end up in lockdown again, and some of it is the natural end of summer driving-vacation season. As demand for gas slides, the price of crude oil usually slides too. OPEC, which is due to meet on September 1st may take efforts to halt the drop in oil prices, which it usually does by reducing supply.

If you want to roam the “metaverse” but don’t know how to get there, you could start by reading Snow Crash by Neal Stephenson, or you could just wait for Facebook and Roblox to build it for you. The metaverse is that place on the internet where you can meet face to face with other people, go to concerts, try on clothes, and drive cool cars. It doesn’t exactly exist yet, but it’s coming; zoom meetings were just step one. Roblox has pioneered the use of an in-game currency and shopping, plus avatars that change clothes and are getting closer and closer to looking just like you, or the image you want to present. Your children are already using apps that let them play with and “know” people from other countries. The world is about to get much smaller. (But, no kidding, read Snow Crash.)

For the week ending August 20th, the Standard & Poor’s 500 finished at 4,441, the Dow Jones Industrials at 35,120, and the Nasdaq Composite Index at 14,714. The yield on the ten-year Treasury Note was lower at 1.26%. U.S. crude oil was also lower at $61.86 per barrel, while N.Y. gold cost $1,782.60 per ounce. One Euro was worth $1.17, while Bitcoin briefly traded above $50,000 for the first time since May.

If you’re wondering why female astronauts don’t get as many missions as male astronauts, it’s not pure misogyny!  It turns out that our atmosphere is constantly bombarded with charged particles, and when astronauts soar above 65,000 kilometers (about 40,300 miles), Earth’s protective magnetic field no longer protects them from radioactivity. Of course the radioactivity creates a cancer risk, and women are at greater danger of developing cancer because they live longer, and are more prone to breast and thyroid cancers. NASA is developing a new standard that would allow all astronauts to be exposed to 600 mSv (a measure of radiation exposure) over a lifetime of missions. This would create a situation in which women might develop more cancer than men, but female astronauts seem eager to sign a waiver and get on with it.
DIASTOLE ECONOMIC AND MARKET COMMENT
September 13, 2021

They say that writing a weekly financial column is like riding a bike: wear a helmet, watch for potholes, and avoid politics. So, after my two weeks of undeserved leisure, I’m back to try this again. Thanks for sticking with me.

Last week markets were down after months of repeated record new highs. The Dow Jones Industrial Average fell by 2.2%, while the Standard & Poor’s 500 dropped 1.7%, and the Nasdaq Composite Index was 1.6% lower. The major precipitating factors were the ongoing rise in Delta-variant Covid infections, plus shockingly bad new employment numbers.

So, starting with Covid…. Currently unvaccinated people are eleven times more likely to die from Covid-19 than vaccinated people, and as of Labor Day, the U.S. had 300 times more Covid infections than last Labor Day. Hospitalizations are up 158% over last year at this time. Current evaluations of the available vaccines indicate that the Moderna shot is 95% effective at preventing hospitalizations, the Pfizer-BioNTech shot is 80% effective, and Johnson & Johnson is 60% effective. We expect to see booster-shot rollouts begin later this month or early next, and there are credible rumors that a vaccine for 5-11 year olds may be available in the same time frame. Currently about half of eligible Americans are fully vaccinated and another 20% or so have received their first shot. 

Investors who have been anticipating the end of Covid and the full reopening of the economy have been disappointed that neither has happened yet. Some travel and restaurant stocks are sliding as a result. Fears of the new Lambda and Mu variants are on the horizon; early reports are that these variants now exist in all 50 states, and are susceptible to the current vaccines. But what happens when a new variant develops that is not susceptible?

The bad-jobs numbers are also Covid related. For the month of August, analysts expected new-job creation of 600,000 to 725,000, but only 235,000 people were hired. Currently, the U.S. has about 11 million jobs available, and nine million people looking for work. Problem solved! But no. The jobs that are available are not the jobs for which the unemployed are looking. Many are in retail, restaurants, child care, or housekeeping - the very kinds of jobs that most expose workers to Covid risk. Child care continues to be a problem. Not only is there a shortage of caregivers, but the absence of child care prevents parents from taking jobs.

It remains to be seen if the new school year will free up parents to go back to work, or will see schools have to close again due to infections. In the south, this is already happening. Complicating things for the unemployed is the expiration of extra pandemic jobless benefits. A few states are continuing to pay the benefits, but not most.

All of these factors are a drag on stock markets, but so is the looming debt-ceiling crisis. Treasury Secretary Janet Yellen has already warned the government that it will run out of money some time in October, as it is already scrimping in some areas to make payments in others. It is of critical importance to remember that the debt ceiling (which was reached on August 1st) limits the amount of money that the government can spend on debts incurred in the past. In other words, the government went on a credit-card spending spree, and now won’t pay its bills. The debt ceiling must be raised (as has happened 78 times since 1960) or suspended (as it was during the Trump Administration) in order for the government to issue more Treasury bills so that the current administration can pay the debts of the past one.

Defaulting on federal debt would be disastrous for the credit rating of the U.S., and for the ability of the government to stay open.

We have seen a lot of evidence of climate change recently, from hurricanes, to wildfires, to earthquakes, to floods. We are almost jaded to the inevitable news that this year will be hotter than last year. Like the weather, we talk about it, but don’t do anything about it. Until now! In Iceland, they have just brought online a new facility that pulls carbon dioxide out of the atmosphere and, through a series of processes, turns it into stone in deep underground caverns. Wow! The factory (?) is called Orca (which sounds like the word energy in Icelandic), and can process up to 4,000 metric tons of CO2 each year. In addition to making stone, the CO2 can also be used to carbonate drinks and feed plants. Energy companies can mix it with hydrogen to make fuel. By 2050, we will need to be drawing about a million metric tons out of the atmosphere to achieve carbon-neutral goals - so this small facility is just a beginning, but the company which built it is planning to size-up its design and start building more. Of course, it is expensive to operate, but so is putting out fires.

For the week ending September 10th, the S&P closed at 4,458, the Dow at 34,607, and the Nasdaq at 15,115. The yield on the ten-year Treasury Note finished at 1.33%. U.S. crude oil cost $69.71 per barrel, N.Y. gold cost $1,788.20 per ounce, and one Euro was worth $1.18.

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 (thank you for the Iceland story!), the New York Times, the Wall Street Journal, Yahoo Finance, Bloomberg, Kiplinger, Barron’s, The Economist, Business Insider, Reuters, The Associated Press, CNN, and CNBC. If you have questions, please call us at 203.458.5220 or reply to this email to reach me, Liz Cook.

There is a home in Los Angeles (technically Bel Air) that was expected to list for sale for $500 million, but instead, the owners have now defaulted on $165 million in loans. The mansion has 105,000 square feet, with a master suite of 4,000 square feet, a bowling alley, a 50-seat theater, a moat, and a bunch of other crazy luxurious features. Mortgage rates are still near record lows. Any takers?
DIASTOLE ECONOMIC AND MARKET COMMENT
September 20, 2021

Let’s start with the bad news. Markets were lower last week, and are continuing that trend this morning. Investors are worried that the bull market has been rallying for too long without a correction, the Federal Reserve is meeting this week and may decide to cut back on the quantity of bonds and mortgages it buys (which keeps interest rates low), Congress may enact some tax hikes, August’s new-job numbers were truly disappointing, Covid continues to  ravage the world, and the Standard and Poor’s 500 closed below its 50-day moving average.

That last is the most frightening for some analysts. The moving average is a technical level, above which stocks are seen to be performing well, and below which they lose emotional support.

Adding to general concerns are stories about the China Evergrande Group, China’s second largest property developer. Evergrande, which recently added investments in electric cars and insurance to its portfolio of $355 billion in real estate assets, announced that it will be unable to pay the interest payments on its property loans (which total $350 billion) beginning today. $84 million of bond interest is payable on Thursday of this week and is currently in jeopardy. Picture the banks that hold the mortgages NOT receiving their payments on time, and picture that the non-payments are huge. This could cause banks to fail. But then remember that we are talking about China, and that the government will probably NOT let market forces prevail. Still, Evergrande is casting a shadow on the world economy.

Treasury Secretary Janet Yellen issued another warning to lawmakers yesterday. In a Wall Street Journal op-ed piece she begged Congress to raise or suspend the federal debt ceiling, without which, she said, the U.S. might face its first-ever default, compounding the economic damage caused by the pandemic. You’ll remember that the debt ceiling limits what Congress can borrow to pay bills it has already incurred.

We occasionally discuss labor participation rates in relation to job numbers. For instance, the labor participation rate for men is currently 67.7%. That means that two-thirds of men between 16 and 64 are currently working or looking for work. Which leaves fully one third not. In October of 1949, labor participation for men peaked at 87.4% - and it’s been dropping ever since. Analysts of this trend blame several factors, including unemployment insurance (adopted at the federal level in 1935), early retirement, illegal work or working for cash, and living off family members or off-the-grid. When you think about it, it’s actually kind of disturbing that so many men are not participating in the economy. Meanwhile the labor participation rate for women (August) is 56.2%. Also disturbing, but more easily explained, especially during the pandemic when childcare became scarce.

Early returns in Russia’s parliamentary elections showed that President Vladimir Putin’s United Russia Party had won almost half the vote with 85% of ballots counted. The Communist Party is so far taking second, with about 20%. Independent election observers reported election rigging, including ballot-box stuffing and intimidation of observers. We are shocked. Shocked, I tell you!

There was actually some good news last week: American consumer spending came in higher than expected. Since 2/3 of our economic activity is consumer-driven, that was a good sign that not everything is crumbling. June/July/August combined numbers were 15% higher than the same period in 2020. For August alone, retail sales rose 0.7%, after July numbers showed a decline.

Are you worried about inflation? Depending on whom you ask, either inflation is here, or it is not, or it is here but transitory, or inflation schminflation. General prices rose 5.3% in August versus August of 2020, which is perhaps not a good measure, while food prices are 8% higher over the past two years.  Supply chain disruptions continue to contribute a good deal to price hikes, but we are also seeing home prices moderate (from truly crazy to just a little unhinged).

For the week ending September 17th, the S&P 500 finished at 4,432, the Dow Jones Industrials at 34,584, and the Nasdaq Composite Index at 15,043. The yield on the ten-year Treasury Note closed at 1.37%, although it is lower today as money moves from stocks to bonds. U.S. crude oil cost $71.82 per barrel, N.Y. gold cost $1,753.90 per ounce, and one Euro was worth $1.17.

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 Economist, Barron’s, Yahoo Finance, Bloomberg, The Wall Street Journal, The New York Times, The Washington Post, USA Today, 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.

There is too much wacky news to deal with this week - so a couple of highlights:
First, cows are being toilet trained in Germany, so that their urine does not break down into nitrous oxide and worsen global warming.
Second, scientists think it would be a good idea to resurrect woolly mammoths, by combining mammoth DNA with elephant DNA and producing an animal that would help change frozen tundra into grassland. What could go wrong?
And lastly, if you are wearing a straw hat today, TAKE IT OFF! The fifteenth was the last day to wear your straw hat this season. In 1922, men wearing their straw hats past September 15th was the cause of an eight-day riot in New York City.