DIASTOLE ECONOMIC AND MARKET COMMENT
January 15, 2018
It is fitting, on this anniversary of Dr. Martin Luther King’s birthday, that a discussion of race dominates our conversations. We hope to arrive at a day when race is irrelevant. And it may also be not unexpected, in this era of casual mega-weapons, that a false report terrorized more than a million people in Hawaii. We hope the day will come when ballistic missiles carrying nuclear warheads is a concern of the past only. May you spend today in peace.
Kind of hard to segue after that, but let me try. The markets at record highs is only our third most important story of the week. And we must remember that “the markets” are not the entire economy, and that the economy itself does not treat everyone equally. Nonetheless, some news….
North and South Korea, sitting down for talks for the first time in two years, have agreed that the North should send a team of athletes (and cheerleaders) to the forthcoming Winter Olympic Games in Seoul. There is even talk of a joint North/South women’s ice hockey team. Athletes from all over the world should be relieved that the presence of North Koreans seems to obviate the possibility of any North Korean shenanigans (threats) during the Games. In addition, a cross-border military hotline was reestablished between the two countries, and military talks are planned. North and South have been technically at war since 1950.
The South Korean government is making noises about shutting down cryptocurrency exchanges. Most Bitcoin transactions are completed in Asia, but South Korea is unique in that it doesn’t allow foreigners to trade there. As a result, Bitcoin buyers in South Korea are paying up to a 30% premium when they buy the currency. South Korean speculators in all digital currencies are worried now about what value their holdings will retain if the exchanges close.
At the same time, Merrill Lynch has just banned its financial advisers and clients from trading in Bitcoin. The ban applies firmwide and covers self-directed accounts and fee-based accounts. The trading ban is for the currency and for derivative products like funds and ETFs.
JPMorgan’s Jamie Dimon is taking back his comment that Bitcoin is a fraud. He recently said, “I regret [making the statement]…. The blockchain is real.”
And among its other uses (follow a peach from tree to mouth!) blockchain technology is now being used by Kodak to create a rights-management service designed to help photographers get paid for the use of their images. If you’ve ever accessed Google Images, you know that paying for photographs is currently an honor system (or an I-hate-that-watermark-and-will-look-elsewhere system.) The blockchain may allow artists to track their work to the end user and demand payment. This will no doubt show up soon on music sites, since music is being widely pirated and only the most successful artists are getting paid.
Facebook is making changes to its algorithms to emphasize family and friend posts on individual newsfeeds, and de-emphasize news and product placements (Mahabi slippers, anyone?). This move is problematic in that Facebook is supported by those ads, and by those of us who click on them. (Are Mahabi slippers really still $100?) Facebook has two billion users worldwide, and has been a fertile source of business for digital publishers, who may now need to enhance their own sites and advertising. The move comes among reports that Facebook socially alienates users. Facebook CEO Mark Zuckerberg said the firm felt a responsibility for people’s “well-being”. Facebook stock fell over 4% on Friday, but remains up 48% over the past year.
T. Boone Pickens, famous oilman and alternative energy supporter, is closing the energy-based hedge fund he has run for more than 20 years. The 89-year-old has suffered a series of strokes in the past year, as well as a bad fall. He says that, at his age, “trading oil is not as intriguing to me as it once was.”
Nonetheless, oil prices continue to creep upward, with U.S. crude worth $64.30 per barrel as of Friday. Moving these markets are recent pipeline leaks/accidents, which OPEC is in no hurry to fix, as well as unrest in Iran and the threat of new U.S. sanctions on that country.
An American spy satellite, worth billions of dollars, was written off after it failed to separate from the SpaceX rocket carrying it and reach orbit. Details from SpaceX and spies were scanty. In additional Elon Musk news, the Tesla Model 3 failed to reach its production goals for 2017. By a wide, large, gaping margin. Tesla was supposed to produce 20,000 Model 3s in December, but instead delivered just 1,550 of the cars during the whole fourth quarter. Production goals for 2018 have been revised downward to 2,500 per week by the end of March, and 5,000 per week by June.
While our current bull market in stocks is more than eight years old, bonds have been enjoying a bull market for more than 30 years. (Does anyone else remember mortgage rates above 14% in the 1980s?) As bond yields have fallen, bond prices have risen. That bullish scenario may be ending. For one thing, how much lower could yields go? And for another thing, the Federal Reserve Board has been raising rates, hoping to incite just a little inflation, and it seems to be catching on. Bill Gross, once the legendary manager of the world’s biggest bond fund (Pimco), and now portfolio manager at Janus Funds, said on Tuesday that the bull market in bonds is already over. He noted that 25-year trend lines for both five- and ten-year Treasuries had been crossed.
Bloomberg News reported that Chinese authorities were considering slowing or stopping their investments in U.S. Treasury debt, but China denied the news. Beijing has over $3 trillion in foreign currency reserves, much of it in U.S. Treasury bonds, which are considered safe and liquid. If China were to actually stop buying our debt, interest rates would have to rise dramatically to entice them back or find substitute buyers. That would increase the cost to the government (all of us) to service the nation’s debt.
General Motors plans to mass produce self-driving cars that lack steering wheels and pedals by 2019. The car will be a variation of the all-electric Chevrolet Bolt and is expected to make up a ride-hailing fleet in several large cities. Soon we will have to choose which is safer: computer drivers or people like us!
For the week ending January 12th, the Standard & Poor’s 500 closed at 2,786, the Dow Jones Industrials at 25,803, and the Nasdaq Composite Index at 7,261. The yield on the ten-year Treasury was up at 2.55%. Crude oil cost $64.30 per barrel, gold cost $1,333.40 per ounce, and one Euro was worth $1.2181.
Elizabeth E. Cook
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, businessinsider.com, and Reuters. If you have any questions, please call us at 203.458.5220 or reply to this email. Thank you so much for your attention. Please be well.