DIASTOLE ECONOMIC AND MARKET COMMENT
April 23, 2018

First a word about taxes.  If we can divorce our thinking from how much we hate them, and what a hassle they are, and how even after we file we have to start thinking about next year, then they’re pretty interesting.  In theory.

Which is also kind of true about interest rates.  They’re especially interesting now, as rates are rising, the yield curve is flattening, and banks are being deregulated.  What do I mean?  Well, the difference between short-term yields and long-term yields is getting smaller.  A ten-year Treasury Note is currently paying almost-but-not-quite 3% to buyers (lenders).  The two-year Bill is paying 2.4%.  Which would you rather own when rates are rising?  It is tempting to say you’d rather have the higher rate, but that requires that you tie up your funds for EIGHT YEARS LONGER.  Is it worth it?

Banks are enjoying the rising interest rates because it means that they can make more interest when they loan money.  And banks, newly liberated from recent restrictions, are loaning more money to less-qualified borrowers.  Does this sound familiar?  It should!  Shades of 2008-2009.

10% of all loans made by Goldman Sachs’s online lender Marcus are subprime.  In California, you can now buy a one million dollar home with no money down.  As interest rates rise, and these homes fall under water, what is going to happen?  Look back ten years and you will remember the horrible cycle of foreclosures and bank failures followed by some financial institutions going belly-up while others needed bail-outs.

And meanwhile, the U.S. savings rate, as a percentage of disposable income, has fallen from 11% during the financial crisis in 2012 to 3% in February.  As I said, interesting - in theory.

The Chinese, who are on the receiving end of trade-war threats from our President, have recently upped their buying of U.S. Treasuries.  This maybe means that they are trying to reduce trade tensions with the U.S., or it maybe means that they are increasing the leverage they have over the U.S. in any kind of negotiation.  China owns about $1.2 trillion in our debt, while Japan comes in second at  about $1.06 trillion.  Our need for foreign investors to buy our Treasury bonds to finance our budget deficits creates all kinds of complications.  For instance, we have to be pretty careful about how we deal with North Korea while so indebted to China, which is North Korea’s main trading partner and our biggest lender.  And likewise with Japan, which lies within range of North Korea’s missile launches and to whom we owe more than a trillion dollars.

One way to reduce foreign government involvement in our country is to stop their hacking of our social media and electoral systems (we’re looking at you, Vladimir), but another way is to balance our budget and reduce our need for international lenders.  Just saying.

The International Monetary Fund (IMF) has issued a warning about global indebtedness.  The world’s combined public and private debt has now reached $164 trillion, which is greater than levels during the Great Recession.  This is 225% of worldwide gross domestic product (GDP).  The IMF had a special warning for the U.S., whose recent tax cuts and spending bill are going to cause increased public borrowing, through the issuing of more sovereign debt.

In other, less strident, news: scientists at the University of Portsmouth in the U.K. have announced that they have discovered and then improved a bacterial enzyme that can digest the plastic used to make disposable drink bottles.  The problems with those bottles are many-fold.  Recycling them weakens their chemical bonds so that they cannot be reformed into new drink bottles.  Also, most people don’t actually recycle them.  So they end up in the ocean and never-quite-fully degrade.  The new enzyme will eat the plastic and then poop out the original underlying chemicals so that the bottles can be recreated.  If you don’t mind enzyme poop (which I don’t) this is a wonderful discovery.  Of the approximately eight billion tons of  plastic produced since the 1950s, only 9% has been recycled.

The tragic Southwest Airline accident last week, in which one of the plane’s jet engines exploded, driving shrapnel through a window and killing one passenger, has resulted in many Southwest and other planes being grounded for new engine inspections.  But little reported in the news is the amazing bravery of one passenger who, after the woman sitting closest to the breach was pulled back into the cabin by other passengers, stood with his back against the broken window, thereby helping to equalize the cabin pressure and saving other lives.  The temperature outside the airplane at the time of the emergency could have been less than negative 60 degrees fahrenheit.

And speaking of cold, during the Cold War Germany sent 3,400 tons of gold bullion (now worth $187 billion) to central bank treasuries in New York, London, and Paris, fearing a Soviet invasion.  Now it is repatriating the gold, and, in the interest of transparency, putting some of it on display.  How much?  Well, eight gold bars, it seems.  Hardly reassuring.  And speaking of that, how long has it been since anyone saw the U.S. gold stores at Fort Knox other than Treasury Secretery Steven Mnuchin and his lovely bride?  Conspiracy rumors abound that our gold is long spent, or is partially in a New York bank vault, or isn’t as much as the government claims in any case.  How could we verify the truth?  I, for one, volunteer to inspect Fort Knox.  Wearing pockets.  Very deep pockets.

Feeling sad because your own thumbprint doesn’t open your own iPhone?  Don’t!  Florida police recently tried to open the phone of Linus Phillips, who was killed by a police officer, with the dead man’s finger, and it didn’t work.  Too much sunscreen?  Or just too cold?  We recommend adding a second finger to your fingerprint verification system to up the odds of its working.

Funerals are changing as relatives wish to celebrate the deceased’s life rather than commemorate his death.  Funeral homes are now operating party venues with open bars and humorous slide shows.  Studies show that 60% of older Americans would consider a “green” burial, in which there is no embalming, no underground vault, and a biodegradable casket.  There is growing backlash against funeral homes that are not changing with the times.  For instance, many states do not legally require embalming, but funeral directors may not say that as they try to sell you an expensive package while you are not up for comparison shopping.

Jeff Bezos of Amazon has made public that Amazon Prime has more than 100 million subscribers around the world.  Given that each of those subscribers probably represents  one household, it may soon be easier to identify who ISN’T a Prime member.  (Full disclosure: I alone keep Amazon afloat with my shopping.  The rest of you are just icing on the cake.)

For the week ending April 20th, the Standard & Poor’s 500 closed at 2,670, the Dow Jones Industrials at 24,462, and the Nasdaq Composite at 7,146.  The yield on the ten-year Treasury Note was 2.96%.  Crude oil was higher at $68.26 per barrel, while gold was down slightly at $1,336.70 per ounce.  One Euro cost $1.2280.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The New York Times, The Wall Street Journal, Barron’s, Bloomberg, The Economist, businessinsider.com, Reuters, and the Associated Press.  If you have any questions about what you’ve read, please call us at 203.458.5220 or reply to this email.  Thank you!
DIASTOLE ECONOMIC AND MARKET COMMENT
April 30, 2018

Among the many memorable photo ops that occurred last week, perhaps the most remarkable was the sight of Kim Jung Un of North Korea and President Moon Jae-in of South Korea holding hands and jumping over the border of their two at-war countries.  Of course, our President picking dandruff off the French President, Emmanuel Macron, comes in a close second.  Or maybe in second place should be the photo of the empty spot on the White House’s South Lawn where Trump and Macron planted a gift tree, which has already been removed.  In any case, it was a week for style over substance.

The markets moved up and down but overall barely changed.  Interest rates on the ten-year Treasury Note hit 3% and then receded slightly.  Yields on the two-year Treasury are remaining about .5% off of the ten-year, which is only about .2% behind the thirty-year.  This is a very flat yield curve, indicating that investors don’t want to tie up their money for longer periods because they expect rates to rise.  As rates move higher, those who own long debt at fixed rates will see the principle of their bonds diminish temporarily.  Yields and prices move in opposite directions.  (But fixed-rate bonds are still worth their face value at maturity.)

The third time might be a charm for T-Mobile and Sprint, who have once again agreed in principle to merge, which would make them the third largest of the mobile phone service providers (Verizon and AT&T are numbers one and two).  The combined company, if it receives regulator approval, will use the T-Mobile name and be worth about $146 billion.  And haven’t we gotten casual with our use of the b-word?  Even the t-word (trillion) rolls off the tongue a little more convincingly than it used to.

WeWork is a millennial-focused sharing-work-space company, which rents space, turns it into the office of your dream (ping pong!  juice bar!), and then re-leases to you the exact amount of space that you need.  WeWork has just issued $700 million in seven-year notes at a yield of 7.875%.  The financial statement that it issued to help entice bond buyers was, to say the least, hardly a model of proper accounting.  Which is no doubt why they are paying way above market rate on their bonds.  The real question about WeWork is whether ping pong is enough of an extra to command above market rents.  If not, their business model won’t last much longer than your smoothie.

Amazon announced that its first quarter net income doubled to $1.6 billion, while revenue hit $51 billion (with a b).  Nonetheless, instead of sharing its enormous success with the people who made it possible (me! me! me!) Amazon is raising the cost of an annual Prime membership by 20% to $119.  Amazon, which leads in the smart speaker market (“hello, Alexa”) is planning to bring its Echo speakers to your car and to your domestic robots.  The point of the robots is to follow you around your home into areas where you do not have an Echo speaker, and listen to every word you say.  The point of the car speakers is to overhear you plotting bad behavior in your car, to where you have adjourned because every word you say in your house is recorded.

Amazon is also planning to add car delivery in 37 cities for people who own Volvo or GM autos with On Call or OnStar subscriptions.  No doubt Echo car speakers will also be required.  Remember the in-home delivery service that Amazon tried?  What could go wrong?

And speaking of robots, it recently took an artificial-intelligence-enhanced robot 20 minutes to assemble an IKEA chair.  Eleven of those minutes were spent in training the robot arms, and nine minutes were spent finding the dropped mini dowels that had rolled under the sofa.  While we are used to computers that beat us at chess and calculus, they are very clumsy when it comes to physical activity.  Humans tend to think that moving is easy and thinking is hard, as seen in Moravec’s paradox.  But for computers, the opposite is true: thinking is easy and moving is hard.  Why?  As evolutionists have noted, humans (or their ancestors) have been moving for billions of years, while chess has only been around for 2,000 years.

And speaking about robots a little more, Elon Musk, Tesla’s founder and boss, is now blaming them for his production problems.  He believes that he has over-automated his factory and “underrated” the use of people.

We have previously discussed phone-based therapy apps.  Now one of them, Talkspace, is planning to expand into prescriptions for problems like anxiety and depression.  Talkspace is a texting-therapy platform which has more than one million users.  It is aimed at the 20% of Americans who have a mental illness, nearly 2/3 of whom have gone more than a year without treatment.

The S&P retail sector has outperformed the S&P 500 Index so far this year.  But the retail sector apparently includes Netflix and Amazon.  Really?  It’s hard to believe that they aren’t classified as tech, what with their cloud services and all.  The rest of retail isn’t performing as well, with a few exceptions, one of which is Gap’s low-cost Old Navy brand.  60 new Old Navy stories will be opened in the U.S., because Old Navy is the most successful of the Gap company stores.  Gap’s other brand names include Banana Republic and Athleta.

For the week ending April 27th, the S&P 500 closed at 2,669, the Dow Jones Industrials at 24,311, and the Nasdaq at 7,119.  The yield on the ten-year Treasury Note finished at 2.96%.  Oil cost $68.10 per barrel, gold cost $1,320.30 per ounce, and one Euro was worth $1.2130.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The Wall Street Journal, Barron’s, The New York Times, The Economist, Bloomberg, businessinsider.com, CNBC, and Reuters.  If you have questions, please call us at 203.458.5220 or reply to this email.  Thank you for your attention to these pearls of wisdom!
DIASTOLE ECONOMIC AND MARKET COMMENT
May 7, 2018

Unemployment ticked down to 3.9% in April, its lowest level since 2000, and there were modest wage gains reported.  This marks the 91st month in a row that we have seen positive job growth, beginning in October 2010.  The stock markets responded favorably to this news, and also to the announcement that Warren Buffett’s Berkshire Hathaway bought an additional 75 million shares of Apple during the first quarter, bringing its Apple holdings to 240 million shares.

But the markets are also uneasy.  There are several factors causing this, including increasing U.S. government debt which is complicated by rising interest rates and an incipient trade war with China.  There is also concern about whether or not we are pulling out of the Iran nuclear deal, which could cause oil prices to rise.  (Pssst, oil prices are rising on the news that oil prices might rise.)

Chinese and U.S. officials met for two days last week, to discuss trade, but made no progress.  Instead, according to reports, both sides dug further into their trenches.  The U.S. needs China to keep buying our Treasuries, which fund our budget deficits (now reaching $1 trillion annually), and also to trade with our manufacturers.  Does China cheat around the edges?  Yes, and perhaps down the middle as well, but they are the primary funder of our insatiable need for cash.  Think of your own situation.  How far would you go to anger the holder of your home mortgage?

And speaking of biting the hand that feeds, Elon Musk had an interesting conference call with Tesla analysts on Wednesday after the release of Tesla’s financials for the first quarter.  (What were they?  Who knows?  Who cares?  Nobody buys Tesla because of its financials.)  When analysts asked Musk about his cash flow and production problems, he replied, “Boring, bonehead questions are not cool.  Next.”  Musk apparently is not enjoying recent comparisons with Jeffrey Skilling, former Enron CEO, now incarcerated, who also got testy with the media.  Tesla is currently taking deposits for two vehicles that aren’t even in production.  (By the way, Tesla stock has risen 700% in the past five years.)

Jeff Bezos, head of Amazon, and worth approximately 6.8 Elon Musks, made more than $107 million PER DAY last year, increasing his net worth to about $130 billion.  Business Insider has made a handy chart comparing “Bezos dollars” to regular dollars.  For instance, a Tesla Model X with Ludicrous Mode (zero to 60 in under three seconds) costs real people $140,000.  But that’s only $103.32 in relative Bezos dollars.  Must be nice!

And in the Amazon-Weirdness Department, the company is inviting New Yorkers to participate in a 3-D body-scanning survey.  Selectees will be fully scanned every two weeks for 30 minutes.  Amazon says it is “interested in understanding how bodies change shape over time.”  As are we all!  Speculation is rife that the body scans are the beginning of a experiment in gaming or fashion.  Amazon is expected to become the leading U.S. apparel retailer this year, beating Walmart.  3-D body scanning would help the company win over those who don’t buy online because they can’t try on ahead of time.

When Kim Jung Un met with South Korean President Moon, he was presented with a USB drive which contained a presentation and e-book explaining how North Korea could rejoin the economic world by linking to Russia, China, and Europe through trade and trains.  Now we wait to see if the economic incentives dangled by Moon are enough to cause Kim to behave.

As you know by now, China borders North Korea and is very concerned about what happens there.  But Kim’s recent trip to Beijing by train, as well as Kim’s meeting with Moon at the de-militarized zone (DMZ), is already having an effect on Chinese real estate.  Housing prices in the Chinese border city of Dandong are soaring.  Some prices have even doubled in the brief time since Kim’s visit.  Before sanctions (and probably after), three-quarters of the Chinese-North Korean trade flowed through Dandong, and real estate prices are reflecting optimism that North Korea will cooperate in reducing sanctions.  Although more difficult, Chinese interest in acquiring North Korean real estate is also growing.

Research completed by the World Bank has shown that each extra year of schooling results in a pay increase of 8.8%, as compared to the return in the U.S. stock market of 5.6% per year over the past 50 years.  The premium is even higher for girls and those in poor countries.  A good reminder of the old adage, “If you think education is expensive, try ignorance.”

There will be no Nobel Prize in Literature this year.  The Swedish Academy which awards the prize is so enmeshed in a sexual-harassment scandal that half of its members have resigned.  Next year the Academy will award two Literature prizes.  It probably doesn’t matter to most of us, but the prize is worth more than one million dollars (given in Swedish Kronor), which I’m sure matters to the writer who receives it.

The Federal Reserve Board’s Open Market Committee met last week and made no change to interest rates.  Currently its key rate is 1.5% - 1.75%.  It is expected that a rate hike will come at the June meeting.

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For the week ending May 4th, the Standard & Poor’s 500 closed at 2,663, the Dow Jones at 24,262, and the Nasdaq Composite at 7,209.  The yield on the ten-year Treasury finished the week at 2.95%.  Crude oil cost $69.72 per barrel, gold cost $1,312.70 per ounce, and one Euro was worth $1.1955.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Reuters, The Wall Street Journal, The New York Times, Barron’s, businessinsider, Bloomberg, The Economist, and CNBC.  If you have questions, please call us at 203.458.5220 or reply to this email.  Thank you for your time!
DIASTOLE ECONOMIC AND MARKET COMMENT
May 14, 2018

The equity markets were up substantially last week (although still shy of January highs by about 5%), led by the health-care and pharmaceutical sectors.  These stocks had been lower in anticipation of the President’s announcement on drug prices, but rose in the aftermath when it became clear that the government will not begin negotiating prices directly with drug companies.

Oil prices were also up last week in the wake of the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA - aka the Iran Nuclear Deal).  If the U.S. reimposes sanctions on Iran, it will be unable to sell as much oil, and there are additional concerns that tensions in the Middle East will rise, threatening other sources of oil.  The fear of shortages is driving recent price movements.  The remaining signatories to the deal have promised to honor their commitments under the JCPOA.

Do you know how your dog can hear a leaf fall from down the street?  Well, hackers are using commands undetectable by human ears to compromise your smart speakers.  While you hear nothing but music, your speaker may be hearing orders to unlock doors, make online purchases, or activate smart phones.  Keep an eye on your dog!  If he starts to growl at Alexa, you may have a problem.

Toys ‘R’ Us is closing its final stores after 60 years in business, and 30,000 employees are being laid off with no severance pay.  The company was attempting to renegotiate $200 million in debt when vultures flew in, and is now bankrupt AND paying $348 million to bankers, lawyers, and consultants.

The H-2B visa program allows employers to bring in low-skilled seasonal workers, to help them through a busy season.  So many employers want to use the program that the visas are now awarded with a lottery system.  66,000 of these visas are available for the winter and summer seasons together, but 81,000 were requested for this summer alone.  That means lots of businesses will be without the help they need, all over the country.  Especially hard hit this year was the crab-picking industry.  Sorry Maryland!

Facebook is thinking of creating its own cryptocurrency - at least according to unnamed sources who report that Facebook is exploring blockchain technology.  A Facebook digital coin would be a seamless way to pay for Facebook ads and products, even for people who don’t have regular bank accounts.  And speaking of banking, the number of people in the world who can’t access a bank has dropped from 2.5 billion in 2011 to 1.7 billion in 2017.  This is due primarily to mobile banking availability in rural areas where banks and ATMs are too expensive to set up.

Apple is working with Goldman Sachs to launch a joint credit card.  Goldman is trying to push into retail banking and shed its investment-banking image, while Apple is hoping the new card will help popularize Apple Pay, which sadly is not used by the cool kids at Starbucks.  But will the credit card have computing powers?  Or play music?  Huh.  Sounds like a dud.

NOT a dud was the recent Peggy and David Rockefeller Art Auction, which set a record for the most valuable private collection ever.  The art was auctioned by Christie’s after 80,000 people toured exhibits of the collection in Hong Kong, London, Paris, Los Angeles, Beijing, Shanghai, and New York.  The collection was 100% sold and brought in over $832 million, all of which is being given to charity.  Highlights of the art include a rare Picasso from his Rose Period, which earned $115 million, a Monet at $84 million, and a Matisse at $80 million.  Among other collectibles was a unique Sevres porcelain china service originally commissioned by Napoleon I, which sold for $1.8 million.  But does it go in the dishwasher?

California became the first state to mandate solar panels on new homes, beginning in 2020.  The plan, which is expected to add $12,000 to the cost of new homes (haters) or just $40 to monthly mortgage costs (lovers), still has to be approved by the building-standards regulator of the state.

If you’re worried that interest rates are rising, as evidenced by the flirting of our ten-year Treasury Note with the 3% level, be grateful that you don’t live in Argentina.  The central bank there has just raised its benchmark interest rate to 40%.  Yes, 40%.  Not a typo.  The country is raising rates to try to curb meteoric inflation.  It has also reached out to the International Monetary Fund for help.  And in other crazy South American financial news: Venezuela continues to default on its debt.  But the $275 million dollars that it was due to pay to Brazil and Credit Suisse last week was guaranteed by Brazil, which benefitted from the construction projects funded by the money.  Now Brazil has to scramble to repay the loan before it, too, defaults.

And another place you can be glad you don’t live is Hawaii’s Big Island - at least the part near the Kilauea volcano.  It has been continuously erupting for years, but like any toddler who is being ignored, it has started yelling louder.  New fissures are opening, piling lava 40 feet high and spewing magma chunks up to 100 feet in the air.  Google it for amazing images of Mother Nature putting us in our place.

For the week ending May 4th, the Standard & Poor’s 500 finished at 2,727, the Dow Jones Industrials at 24,831, and the Nasdaq Composite Index at 7,402.  The yield on the ten-year Treasury Note closed at 2.97%.  Oil cost $70.70 per barrel, gold cost $1,319.00 per ounce. and one Euro was worth $1.1943.

Elizabeth E. Cook
Partner

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News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Barron’s, The Wall Street Journal, The New York Times, The Economist, Bloomberg News, businessinsider.com, Reuters, and CNBC.