The Federal Reserve on cut interest rates today, the third time since July. Chairman Jerome Powell says that they are likely done, for now. The federal funds rate is now at 1.50-1.75%, still a lot higher than the 0% of the European Central Bank, though.
Germany’s 10-year Bund yield is now at -0.35% (up from a record low of -0.61%), showing that investors there are still desperate for safe assets. They are really not confident about the economic prospects of the Eurozone. Besides, Germans tend to hoard money in savings, instead of investing it.
The New York Times has launched a project called the 1619 Project. ‘The 1619 Project is a major initiative from The New York Times observing the 400th anniversary of the beginning of American slavery. It aims to reframe the country’s history, understanding 1619 as our true founding, and placing the consequences of slavery and the contributions of black Americans at the very center of the story we tell ourselves about who we are’.
Here is an excerpt from an essay written by Matthew Desmond, professor of sociology at Princeton University for the Times’s 1619 Project.
‘Those searching for reasons the American economy is uniquely severe and unbridled have found answers in many places (religion, politics, culture). But recently, historians have pointed persuasively to the gnatty fields of Georgia and Alabama, to the cotton houses and slave auction blocks, as the birthplace of America’s low-road approach to capitalism.
Slavery was undeniably a font of phenomenal wealth. By the eve of the Civil War, the Mississippi Valley was home to more millionaires per capita than anywhere else in the United States. Cotton grown and picked by enslaved workers was the nation’s most valuable export. The combined value of enslaved people exceeded that of all the railroads and factories in the nation. New Orleans boasted a denser concentration of banking capital than New York City. What made the cotton economy boom in the United States, and not in all the other far-flung parts of the world with climates and soil suitable to the crop, was our nation’s unflinching willingness to use violence on non-white people and to exert its will on seemingly endless supplies of land and labor. Given the choice between modernity and barbarism, prosperity and poverty, lawfulness and cruelty, democracy and totalitarianism, America chose all of the above’.
Federal Reserve Chairman Jay Powell fielded a lot of questions today after the announcement that the Federal funds rate will be cut by 25 basis points to a target rate of 2.00 – 2.25%. He characterized the cut as a mid-cycle ‘adjustment of policy’ — and that it is a way to brace against downside risks. (Um, another way to ‘brace against downside risks’ would be for the Trump Administration to stop the never-ending tariff wars with China and others).
That means savers will earn even less money on their savings. Borrowers for say home loans, may get a little relief from lower borrowing rates .. but 0.25% will barely make a difference on an 18% annual rate on a credit card!
Facebook revealed the details of its cryptocurrency, called Libra (symbol ≋), today. Its planned launch is in early 2020. The digital wallet will reside in Messenger, in WhatsApp or in a stand-alone app.
Libra currency will let people buy things or send money anywhere in the world, with nearly zero fees.
Facebook will not have full control – they are recruiting founding members for the Libra Foundation and have signed up the likes of MasterCard, Visa, EBay, Uber and Vodafone.
Facebook’s subsidiary company called Calibra will handle its crypto transactions, and they promise to not combine payment data with Facebook social media data (so that transactions cannot be used for ad targeting). Hahaha. Tell you what, Facebook. Twenty bucks at a time is all I will ever use of your Libra. MAYBE. To buy beer and burgers with on Wednesday nights.
From this article on techcrunch.com:
A Libra is a unit of the Libra cryptocurrency that’s represented by a three wavy horizontal line unicode character ≋ like the dollar is represented by $. The value of a Libra is meant to stay largely stable, so it’s a good medium of exchange, as merchants can be confident they won’t be paid a Libra today that’s then worth less tomorrow.
The Libra’s value is tied to a basket of bank deposits and short-term government securities for a slew of historically stable international currencies, including the dollar, pound, euro, Swiss franc and yen. The Libra Association maintains this basket of assets and can change the balance of its composition if necessary to offset major price fluctuations in any one foreign currency so that the value of a Libra stays consistent.
The stock market here in the States does not seem too freaked out yet by the Trump Administration’s tariff wars and threats of starting a real war in Iran, but we will have to see where we end up at the end of 2019.
Today an online pet food purveyor called Chewy, had its IPO, and ended the day 60% higher.
Just for fun, I wondered if chewy.com would have food for say, a pet chinchilla that I might have. Well, it turns out 1. that they do, and 2. that chinchillas love Timothy hay. I did not know that! Washington State is known worldwide for the quality of its Timothy hay.
The bank I referred to yesterday is Wells Fargo. I’m in the process of closing out all my accounts there. It’s really just to simplify my finances, but I could have justified it with the never-ending stream of scandals coming out of this bank.
Says Huffington Post: ‘To any reasonable person, Wells Fargo is a rolling disaster – a ripoff, wrapped in a swindle, inside a bank’. And: ‘Wells Fargo’s very existence, not to mention its continued profitability, is an indictment of two decades of embarrassing regulatory oversight from four separate administrations‘.
Among the scandals: millions of new accounts in customers’ names without their consent, wrongly repossessing 27,000 cars, and foreclosing the homes of 400 families for no reason.
It’s been a rough week in the US stock market this week, with the Dow Jones Industrial Index down 3% and the Nasdaq down 4% just on Wednesday, both down some more on Thursday, and then recovering a little bit on Friday.
Morgan Stanley published a bland note on Wednesday for their investors saying – uh, the market is down – and ‘a host of concerns have appeared to weigh on the market in recent sessions’. (Higher US Treasury yields, rising interest rates, trade uncertainty between the US & China, political uncertainty & rhetoric, economic growth could be peaking). Yes, yes, we know all of that. And it’s October, notorious for weighing on the stock market.
For once, Trump is not crowing about the stock market; now relentlessly attacking the Federal Reserve Bank (for raising interest rates). Always looking for someone else to blame.
The filing for Chapter 11 bankruptcy protection by financial services firm Lehman Brothers – ten years ago this week (Sept. 15, 2008) – remains the largest bankruptcy filing in U.S. history. Lehman held over US$600 billion in assets. The fall-out from the 2008 crisis reverberates to this day through global politics. It gave us Donald Trump, Brexit, extreme nationalism, the blaming of immigrants for economic misfortunes.
Here is Philip Stephens in a column in the Financial Times newspaper (headquartered in London): ‘Historians will look back on the crisis of 2008 as the moment the world’s most powerful nations surrendered international leadership, and globalisation went into reverse. The rest of the world has understandably concluded it has little to learn from the West. Many thought at the time that the collapse of communism would presage the hegemony of open, liberal democracies. Instead, what really will puzzle the historians is why the ancien régime was so lazily complacent – complicit, rather – in its own demise’.
Apple Inc. has a market cap of $1 trillion .. wow. Once, there was Exxon, General Electric, IBM and Microsoft, at the top of the heap, but Apple made it to $1 trillion first. (PetroChina briefly hit $1 trillion in 2007 on the Shanghai Stock Exchange, only to plummet to less than $260 billion by the end of 2008. According to Bloomberg, this represents the largest destruction of shareholder wealth in world history).
So we will see what happens. China is a huge market for iPhones, but a risky one. And will Americans be willing to shell out ever more for a new iPhone? Another thought: Maybe – 30 years from now – a company that builds fusion reactors (that produce 100% clean & cheap energy), will be the world’s most valuable.
Is there a recession on the way (say, some time next year)? It seems a silly question, with low unemployment, and projected growth of 4.7% here in the second quarter in the United States .. but a reliable indicator called the yield curve has been steadily trending down to zero. Typically, breaching zero means recessions inevitably follow.
Karl Marx was born on May 5, 1818, in the southern German town of Trier (at the time Trier was in the Kingdom of Prussia). To celebrate the bicentennial of his birthday, the town issued a souvenir zero euro bill, that proved to be very popular. (I am tempted to buy one on E-bay).
I also need to brush up on my understanding of Marxism. The Wikipedia entry is probably a good start: Marxism holds that human societies develop through class struggle. In capitalism, this manifests itself in the conflict between the ruling classes (known as the bourgeoisie) that control the means of production and the working classes (known as the proletariat) that enable these means by selling their labor power in return for wages. .. Marx predicted that, like previous socio-economic systems, capitalism produced internal tensions which would lead to its self-destruction and replacement by a new system: socialism.
Here in the United States socialism is a toxic word, but man! since the 1980s, the forces of capitalism have resulted in a very unequal sharing of prosperity (no real wage increases for middle class worker, and spectacular riches for the one-percenters at the top). Something will have to give.
‘Investors are grumpy, and have nothing to look forward to’ says the New York Times. The Dow Jones Industrial Average has lost steam since its high point in late January.
Today Caterpillar (construction machinery and equipment company) spooked everyone on a conference call, saying the first quarter ‘may have been the high-water mark for business for the year’. Apple analysts worry openly about sagging iPhone X sales. Bigger picture, interest rates are going up, and the cloud of trade tariffs still hangs over all of the market as well.
Brett Stephens writes in the NYT that we do not know if Trump’s Chief Economic Advisor Gary Cohn quit ‘out of horror of the president’s protectionist turn, or merely out of the pique of losing a policy argument’ (over the trade tariffs). What is certain, is that the Trump Administration is looking increasingly unstable and unable to retain key personnel.
The Republicans are finally getting worried that Trump’s economic and trade policies might make trouble. (They were not too worried about the tax cuts massively increasing the deficit). The House sent a letter today, signed by 107 representatives, asking Trump to refrain from implementing broad-based tariff measures that could trigger trade wars with Europe, China, and even Canada.
Will we be OK? It’s been 10 years since 2008’s global financial crisis. During a Reddit ‘Ask Me Anything’ last week, Bill Gates was asked if, in the near future, the U.S. will have another crisis similar to 2008. ‘Yes’, he said, admitting that the question would be better directed at Warren Buffet. ‘It is hard to say when, but this is a certainty’.
Well – it was a bit of a bloodbath today in the stock market with the Dow Jones down another 4.6%. Note to media: Why sensationalize it further by reporting the 1,175 points loss as the ‘biggest ever’ – technically true, but misleading? Percentage-wise it’s only the biggest drop since 2011 for the Dow.
Bloomberg reports that the robo-advisor websites from Betterment and Wealthfront crashed today. (Too much traffic). Ironically, robo-trading algorithms are suspected as the culprits for accelerating the 900 point loss to 1,600 points (6.2%*) in the afternoon, before the market recovered somewhat to the 1,175 points loss at the close.
*At 7% down for the S&P 500, the trading curb circuit-breakers would have halted trading for 15 minutes.
Well, the week ended with the US stock market sharply down, spooked (so the experts say) by fears of interest rate hikes by the Fed. The January jobs report had revealed that hourly wages jumped 2.9% year-over-year. There might be more pain ahead : the technicians say it’s about 5% further down, to get back to the S&P 500’s long-term trendline.
It’s not even mid-January, and the stock market is already up 4% for the year.
Veteran investor Bill Miller said on CNBC this week of the US stock market, that there might be a ‘melt-up’ this year. Bond investors could soon decide that they are missing out, and start pouring lots of money into equity funds. This scenario could add another 30% of valuation – this to a stock market that has now gone up for nine years, with no 10% (or more) correction since 2011. Whoah. That would be a time for even the most optimistic investor to start to panic.
The Frankfurt Allgemeine newspaper that I brought back from my trip, has a 6-page supplement with 40 questions about money (in Germany, and for 2018).
Below are short answers to the questions, that I roughly translated to English.
1. Can saving be fun?Yes. Start early in life and save consistently. It is fun to see one’s money grow.
2. Should I spend my money before inflation comes and everything becomes more expensive?Yes. On the whole, and for durable items, it’s a good time to be a consumer.
3. When will there again be interest paid on savings accounts?The bitter answer is: it will still be a number of years.
4. Is it wise to buy Bitcoin?Probably not. It is very risky.
5. What kind of insurance does everyone need?Germans are fearful. Still, insure for ruinous events only, such as one’s home and the life for the bread- winner. (My note: Germans have universal healthcare).
6. Is it a good idea to buy (German) government bonds?No, not worth it in these times.
I unpacked my bags today, and started going through my mountain of junk mail.
It’s bitterly cold on the East Coast (Boston at -6 °F/ -21°C), and frozen iguanas are falling out of the trees in Florida. Zoologists say they will ‘thaw’ again and come back to life. Here is Seattle it was a balmy 49°F/ 9°C today, with rain.
Thursday marked the anniversary of the US Stock Market crash of 1987, called Black Monday. The Dow Jones Index fell by 22.6% in one day, a record decline that stands to this day. The impact was felt worldwide. ‘It is a sobering experience’ said my dad at the time. In South Africa, the Johannesburg Stock Exchange Index would slump by 38% in the month that followed.
Under current rules, if the broader S&P 500 index falls more than 7.0% before 3:25 p.m. New York time, trading is paused for 15 minutes. If the decline continues once trading resumes, and it is still before 3:25 p.m., the market is again paused at 13% down. If the decline happens after 3:25 p.m, trading continues. But if the decline reaches 20%, trading is suspended for the session, regardless of the time of day. Still, said the traders on the floor of the New York Stock Exchange today: the forces in the market driven by fear are very powerful, and even the circuit breakers may not prevent the market from going down significantly in a very short time.
It has to be a matter of ‘when’, and not of ‘if’, when it comes to a 10% or 20% correction in the US equities market. Yale University economics professor Robert Shiller has an index called the CAPE: Cyclically Adjusted Price Earnings ratio (it takes inflation into account). The index has only been higher before the 1929 crash, and before the 2000 dot-com bubble. It is now over 30, and – if history repeats itself- it has to go back to the trend value of 16-something. Sooner, or later. We just do not know when.
Update Tue: the Dow Jones Industrial Average briefly crossed 23,000 for the first time on Tuesday. There is already speculation that 25,000 is possible by June 2018. (Agreed. But let’s add: 20,000 is also perfectly possible).