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
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!