DIASTOLE ECONOMIC AND MARKET COMMENT
September 27, 2021

I usually pay my bills on the first and the fifteenth, but I overspend, so each bill-paying is an exercise in borrowing (I issue and sell bonds) in order to pay my credit card bills. But I’ve set an arbitrary limit on how many bonds I can sell, so I’m just not going to pay my bills this week. Or maybe ever. Who will care? And by “I”, I mean the U.S. federal government. And as to who will care - EVERYBODY!

Needless to say, no progress has been made on the current debt ceiling issue. Federal money is expected to run out in mid-to-late October, which may cause the first-ever U.S. default. If the government defaults, which means not only does it shut down, but it also misses interest and principle payments on Treasury bonds, our credit rating may be reduced, the dollar’s status as the world’s safe currency will be damaged, and most experts agree that we would quickly fall into recession.

Picture an America in which Social Security checks and tax refunds are halted, most federal employees are furloughed without pay, government agencies close (no passport for you!), and law enforcement agents and military members are forced to work without pay. It’s ugly. But you know who keeps getting paid in a government shut-down? Congress.

Past Republican Treasury Secretaries Hank Paulson and Steven Mnuchin have joined current Treasury Secretary Janet Yellen in exhorting Congress to pass a higher ceiling, or suspend it altogether, as was last done in 2019. Since 1960, the debt ceiling has been raised 78 times. Senate Minority Leader Mitch McConnell has said that the debt ceiling must be raised, but that Republicans in the Senate won’t vote for it. Huh?

Mark Zandt, chief economist at Moody’s Analytics pointed to the possibility that the government would find itself in the position of being unable to find buyers for its bonds - especially short term bills that would conceivably mature before the debt crisis was resolved.

The Federal Reserve Open Market Committee met last week and left interest rates unchanged. But it’s not as if they actually did nothing. There was a great deal of talk about inflation, and whether it will be transitory and mild (the Fed thinks yes) or longer-lived and more serious (Wharton School’s Jeremy Siegel thinks yes). It is now expected that the Fed will announce next month that it is beginning the tapering of its monthly purchases of Federal bonds and mortgages (now $120 billion per month) - to continue until it stops all purchases sometime mid-2022. By purchasing bonds, the Fed has pushed bond prices higher, leading to lower yields. As the purchases taper off, yields may rise naturally, and a Fed rate hike is now seen possible as soon as a year from now.

If we return to an era of above-zero interest rates, banks will benefit, and high tech companies (which tend to have a lot of debt) will suffer. Value stocks - long-suffering old-fashioned manufacturing companies without a lot of debt - should do better.

In the meantime, just through market forces of demand and supply, government bond yields are rising. The 10-year Treasury Note is yielding about 1.5% today, back to a level last seen in June. This means that investors are selling the notes. Are they worried about the potential for a government default (in which case they would not receive their interest payments)? Or worried that inflation is coming (in which case it may not make sense to hold a fixed-rate instrument)? The markets are in a constant state of finding an equilibrium between bonds and stocks and cash.  Right now, stocks are winning.

Which was not true last week. On Monday, the markets dropped about 4% on worries that the Chinese company Evergrande was going to implode. By the end of the week, though, stocks had recovered to the positive side - about 2% below recent record highs. It remains to be seen what will happen with Evergrande, which builds apartment buildings and then sells financial instruments to the people in those apartments and now can’t make its interest payments. My guess is that whatever happens is exactly what the Chinese government wants to happen. It may be that it is time for China to stop basing balance sheets on empty, non-producing apartment buildings in ghost towns.

Samuel Adams’ limited edition Utopias beer contains 28% alcohol by volume, as compared to 5% in most standard beers. Fifteen states have already outlawed its sale, which seems like the result of a bad business decision by Sam Adams, until you realize that you really really want to try it now.

For the week ending September 24th, the Standard & Poor’s 500 finished at 4,455, the Dow Jones Industrial Average at 34,798, and the Nasdaq Composite Index at 15,047. The yield on the ten-year Treasury Note closed at 1.46%. U.S. crude oil cost $73.95 per barrel, N.Y. gold cost $1,750.60 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) Bloomberg, Yahoo Finance, Business Insider, The Economist, Barron’s, The Wall Street Journal, The Washington Post, USA Today, The New York Times, CNBC, CNN, 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.

James Bond drives an Astin Martin DB5 with adorable machine guns mounted in its fenders. Well, now that level of cute is available for your kids or grandkids in a miniature, battery-powered DB5 Junior. The car drives up to 50 mph, also has machine guns, as well as an exhaust pipe that funnels dark smoke out the back so you can hide from bad guys. Put it on their holiday gift list! Oh wait, did I mention that the DB5 Junior sells for $123,000. Maybe they’d rather have a Tesla X AND a year of college.
DIASTOLE ECONOMIC AND MARKET COMMENT
October 4, 2021

Last week we saw all kinds of tumult in the markets during the first four days, followed by rising stock prices on Friday. Several factors were rattling investors. The Chinese Evergrande debacle continues, the debt ceiling has not been raised (leaving us open to a federal default on debt), inflation is still a concern, as are supply chain disruptions and semiconductor chip shortages. 

On Friday, Merck announced that it had developed a new antiviral drug, (molnupiravir) to treat active Covid. Merck says it is 50% effective at preventing death, but it has not been approved yet.  Still, stocks moved higher - mostly the ones that will benefit from economic recovery, i.e. value stocks. (Value stocks are old-fashioned manufacturing and other dividend-paying stocks.) Growth stocks, which include tech stocks, are suffering because interest rates are/will be/should be rising, and tech companies hold more debt on their balance sheets. Covid-vaccine makers’ shares also fell on the possibility that the vaccine-hesitant will never choose vaccination, and will instead rely on Covid treatments.

So, for last week, we saw the Standard & Poor’s 500 lose 2.19%, the Dow Jones Industrial Average down 1.36%, and the Nasdaq Composite Index lower by 3.19%. The fact that the Dow held up the best is due to its concentration in value stocks. But year to date, the three indices are up 17%, 13% and 13%. Most analysts expect October to be volatile (it would help if Congress would deal with the debt ceiling before the U.S. defaults on its obligations around October 18th.), but anticipate a positive fourth quarter overall.

And speaking of the debt ceiling, there’s a wild idea going around that a platinum coin will solve our current cash-flow problems. As you’ll remember, the debt ceiling limits how much debt the federal government can issue in order to pay its bills. And you’ll also remember that deficit spending is how the sausage is made in Washington. So not only do we have to pay for all of the social safety-net programs, and huge defense spending, we also have to pay for several rounds of pandemic assistance and the large 2017 tax break. I’m not here (this time) to judge the spending, only to reiterate that when we spend more, or reduce revenue, we have to cover it somehow.

Oh wait - back to the platinum coin. Through a legal loophole, the Treasury Department is allowed to print (mint?) a one-time platinum coin, declare what it’s worth (one trillion dollars is a popular amount), sell it to the Federal Reserve Board which will use it to offset more debt, and poof! problem kicked down the road by one trillion dollars. No one actually wants to engage with this transparently ridiculous tomfoolery, but no one wants Congress to default us either. The idea of the platinum coin is circulated every time we need to raise the debt ceiling, and this time we might be closer than ever to using it. Congressional Democrats are ready to raise or suspend the debt ceiling, but Republicans don’t want to help, and it can’t be done without them unless another carve-out to the filibuster rule is created.

In a relatively unrelated story, Facebook is continuing to tank today, due mostly to a whistleblower from Facebook appearing last night on 60 Minutes, telling the world that Facebook knew it was disseminating lies before the election and fomenting insurrection before January 6th, but did nothing, because it didn’t want to hurt revenue. Likewise, Instagram (owned by Facebook) knew that it was harming teenaged girls’ self-images and causing suicidal thoughts, but also didn’t want to hurt its revenue stream. Note to self: quit Facebook, for real this time.

The MacArthur Foundation announced this year’s Fellowships. 25 artists, writers, scientists, and don’t-fit-into-any category recipients will each receive $625,000 to help them continue their “high-risk, high-reward” work. Past and present recipients do not include me.

On October 1st, 1928, ten stocks were added to the Dow Jones Industrial Average, bringing it to the 30-stock format that continues today. Among the stocks included at that time were Nash Motors, American Smelting, and Victor Talking Machine. All giants of the Dow today! Kidding, of course. The Dow was originally founded in 1896 with 12 stocks, none of which survive in the Index. General Electric was the last of the original 12, and it was removed in 2018. The Dow is unusual in that stocks with higher prices have more influence on the index, rather than stocks with bigger market caps.

For the week ending October 1st, the S&P finished at 4,357, the Dow at 34,326, and the Nasdaq at 14,566. The yield on the ten-year Treasury Note closed at 1.47%. U.S. crude oil cost $75.74 per barrel, N.Y. gold cost $1,761.30 per ounce, and one Euro was worth $1.16.

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

America has now passed 700,000 Covid deaths, the latest 200,000 of which happened after vaccines became widely available. Scientists from Yale now posit that unvaccinated people who have had Covid may only be protected by their antibodies for up to three months and thereafter could face reinfection. You’re important to us. Please get your shots!
DIASTOLE ECONOMIC AND MARKET COMMENT
October 12, 2021

Here’s what’s been going on:

Oil prices have risen dramatically, and so have other commodity prices, leading one to think that inflation talk is more than just talk. With supply chain problems still bedeviling us, and demand for energy increasing as Covid shutdowns end, this is no surprise.

Also, job growth for September came in woefully low, with up to 500,000 new jobs expected and only 194,000 realized. The unemployment rate fell to 4.8% largely because people have pulled themselves out of the labor market. There remain 7.7 million unemployed, and 11 million job openings. On average, women left jobs in order to deal with child-care issues, while men went back to work.

Stocks weakened last week and into Monday, reacting to the pitiful job growth, and government bond yields rose on inflation fears. 

And just like last week, we are seeing bond prices fall (causing yields to rise) while stock prices also fall. If money is coming out of both sectors, where is it going? To the sidelines, of course, because why not a football metaphor to start the day? The money will not stay there indefinitely.

Twenty-one years ago today, the bull market of the 1990s began. On that day, the Dow Jones Industrial Average rose about ten points to close at 2,407.92. Stocks rose fourfold during the following ten years. We have since had corrections in 2002-2003, 2008-2009, and (very briefly) in 2020, but the Dow today stands around 34,000. This is why you shouldn’t sell just because markets drop.

It seems like months ago, but was just last Thursday, that the Senate approved a short-term fix for the self-imposed debt-ceiling debacle. It was raised just enough to get the country through until December 3rd, which (not coincidentally) is also the day that Congress has to act in order to keep the government from shutting down. I believe that Americans in general like belt plus suspenders, while our government prefers working without a net.

And remember that trillion-dollar, platinum coin that we now don’t need until December? It turns out that the Treasury is legally limited on how much paper money, gold, silver, and copper coins it can circulate at one time. But no one thought to limit platinum coins. That oversight could save us one day.

The U.S. dollar is rising in value versus other currencies. This usually happens when either the American economy is doing well compared to others, or when the global economy is underperforming. In each case, investors seek out dollar-denominated investments. But it is not always good news. When the dollar is strong, foreign shoppers find our goods to be more expensive, while we find their goods to be more affordable. It is therefore no surprise that the U.S. trade deficit grew to a record $73.3 billion in August, due naturally to imports increasing   more than exports.

It feels like we are all waiting for another shoe to drop. Oh yes! The Federal Reserve! What are they going to do, and when are they going to do it? The Open Market Committee’s next meeting is scheduled for early November. Watch this space.

Merck and Ridgeback Pharmaceuticals, are requesting FDA approval for their antiviral pill, Molnupiravir. Early studies show it is 50% effective at preventing hospitalizations and deaths from Covid-19 and its variants. The drug works by insinuating itself into the genetic material of the virus and then causing mutations which kill the virus. But the pill is not without risks. If the treatment chooses to infiltrate healthy cells, it could theoretically cause cancer. Much better to take the vaccine and wear your mask.

Forbes magazine just released its 2021 Forbes 400 list of the richest people in the country. Fifteen of them are under 40. All of them are billionaires, and there are so many billionaires now that some of them don’t even make the list. But 156 of the Forbes 400 members donate less than 1% to charity. Elon Musk and Jeff Bezos are among them.

For the week ending on October 8th, the Standard & Poor’s 500 finished at 4,391, the Dow at 34,746, and the Nasdaq Composite Index at 14,579. The yield on the ten-year Treasury Note closed at 1.61%. U.S. crude cost $79.59 per barrel, N.Y. gold cost $1,757.20 per ounce, and one Euro was worth $1.16.

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) Business Insider, Yahoo Finance, Barron’s, The Wall Street Journal, The New York Times, USA Today, The Washington Post, The Economist, the U.S. Department of Labor, CNN, CNBC, 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.

Coming in December: Wendy’s Frosty Chocolatey Cereal from Kellogg’s. If you like a good Frosty and wish you could have one for breakfast, your wait is almost over. The cereal will be “cocoa-coated bites with chocolate flavored marshmallow pieces” evoking classic Frosty deliciousness. If you can’t wait for two months, try the Wendy’s Frosty-ccino from its breakfast menu. Wendy’s has you covered!
DIASTOLE ECONOMIC AND MARKET COMMENT
October 18, 2021

If we are expecting inflation, where is the best place to invest? Cash is still paying little, bonds are subject to erosion as yields rise, and high-tech stocks will be pinged by rising interest payments on their balance-sheet debt. Low tech (aka value) stocks look surprisingly attractive, especially with their higher-than-average dividend payouts. Floating-rate bonds or bond-funds are a possibility, too.

Over the past few weeks, as stocks declined, money moved to cash, and currently, 22% of individual portfolios globally are still held in cash. But it won’t stay there long, and it might be a bullish force. Also, we are in the beginning of third-quarter earnings season, and stocks rose last week on good news from the banking sector, the first to report.  The Standard & Poor’s 500 (+1.8%), the Dow Jones Industrials (+1.6%), and the Nasdaq Composite Index (+2.2%) all rose for the week as Morgan Stanley announced profits higher by 36%. Citigroup profits rose 48%, and Bank of America profits were higher by 58%. Banks are profiting from rising rates and from the amazing usurious fees that they charge to mortgage applicants.

A sector I wouldn’t recommend is one of the new bitcoin-futures ETFs. If the SEC approves them, or fails to stop their coming to market, we may see one trade as early as tomorrow. Maybe it’s just me, but an ETF (exchange-traded fund) that holds not bitcoin, but futures on bitcoin seems like a hot-air derivative. A week ago, Jamie Dimon, CEO of JPMorgan Chase said, “I personally think that bitcoin is worthless.”  So what happens to the ETF if Bitcoin starts to decline in price? Who will buy the futures contracts that make up the portfolio once they are unattractive, and how will the ETF provide liquidity to investors who want out? We may see soon. Nonetheless, the price of bitcoin is rising above $60,000 on the hope of SEC approval.

Signs of inflation are easy to come by these days. Oil prices continue to rise as people travel more and supply chain bottlenecks hurt oil delivery. The spill off the coast of California, and remnants of damage from Hurricane Ida in the Gulf of Mexico are not helping matters. The members of OPEC+ are enjoying the higher prices and are in no great hurry to increase oil production. 

But remember the pandemic? Some signs of inflation appear worse than they are because of what we compare them to. For instance, prices for lodging at hotels are higher by 19.8% over last year <gasp>, but only 1.9% higher than two years ago. Oil prices are high only based on recent memory. Oil is trading about where it was in 2018, and is only half as costly as it was in 2008.

The Federal Reserve Board was watching over the past couple of years for inflation to reach 2%. That was the level at which it felt it would be necessary to stop supporting low rates by buying bonds and mortgages. But inflation jumped past 2% largely because of shortages of goods caused by supply-chain bottlenecks, and now the Fed is going to have to chase inflation, which is running much hotter. The Social Security Administration has just announced that recipients will receive a 5.9% cost-of-living increase next year. A Wall Street Journal survey of economists predicts that our supply chain problems (and the concurrent inflation) will persist well into 2022 and perhaps longer. After that, they expect inflation to subside to near that long-watched-for 2% level.

If you think inflation is bad now, or will be soon, remember 1981. Forty years ago, mortgage interest rates hit 18.5%. Some analysts believe that fifty percent of all home appreciation over the past forty years is due to falling mortgage rates. And even if homes are now selling near record highs because of the work-from-home dynamic, mortgage rates are rising and may  take some of the air out of the real-estate souffle.

And speaking of homes, China’s Evergrande is still in default of its interest payments, and four other large Chinese real estate developers are due to join it. Exacerbating the situation is the fact that home sales in China have fallen drastically.  This is largely due to the Chinese model of home purchasing, which is that individuals cough up the dough for a new apartment before the apartment has even been built. Buyers are no longer willing to trust the big real-estate developers to actually produce the apartments they have already bought.

Looking to shelter some income in a tax haven? You might want to look closer to home than the Cayman Islands. In fact, South Dakota is now the place to hide your profits. South Dakota law affords a great deal of protection against claims of assets by creditors and exes. That’s why $500 billion is now held in trusts in South Dakota, where the creator of a trust can legally name himself as the beneficiary, and where the creator, the trustee, and the beneficiary can all legally claim that the money isn’t theirs for tax purposes.

For the week ending October 15th, the S&P finished at 4,471, the Dow at 35,294, and the Nasdaq at 14,897. The yield on the ten-year Treasury Note closed at 1.57%. U.S. crude oil cost $81.72 per barrel, N.Y. gold cost $1,768.20 per ounce, and one Euro was worth $1.16.

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) Yahoo Finance, Bloomberg, Reuters, The Associated Press, YCharts, CNN, CNBC, The New York Times, The Washington Post, The Wall Street Journal, USA Today, and Barron’s.

Three years ago a Banksy painting (originally called Girl With Balloon, but now called Love Is In the Bin) went up for auction, and was half shredded by a hidden mechanism during the auction. Mysterious Banksy (no one knows Banksy’s identity) has since said that a malfunction ended the shredding before it was complete. Don’t necessarily believe him (her? they?) because he is a marketing genius. Anyway, the half-shredded painting was just sold again for twenty times what it was worth then. Despite a pre-auction estimate of $8.3 million, the painting was bought for $25.4 million. I am sorry to report that I, for one, am not Banksy.