In Search of the Perfect Investment

Interest rates are ultra-low.

Now is a great time to borrow. Now is a great time to refinance your mortgage.

Now is a great time to buy good real estate and finance it with cheap borrowing.

I did not post in the last few days because I was mulling two things:

1. Bonds and

2. Recession?

Bonds: Yields are down, because prices are up. Bond prices are up because people overseas are buying our treasurys. Overseas — especially in Europe — government bond yields are negative. Which means you are guaranteed to lose money if you hold your government’s bonds to maturity. You’d have to be certifiable to do that.

Yield inversions don’t signal an upcoming recession. They signal that foreigners are buying our treasurys — some days short-term, some days long-term. We’re being yanked around by the idiocy of their negative interest rates.

Recession: Are we going to have one? And if so, will the markets collapse?

Everyone has a theory. The only things you can predict are:

+ Our stockmarkets react to tweets, and every other fake or real news.

+ Hence there’ll be constant and continuing volatility.

My friends are craving a thousand point decline in the Dow, so they can pounce on cheap stock. They’re bitterly disappointed in today’s three hundred point bounce. (Go figure.) My friends don’t think there will be a recession. Hence they want to buy cheap stocks.

Will there be a recession? The best piece is in the New Yorker. It’s by John Cassidy:

Trump’s Trade War Could Make the Trump Recession a Reality

Economic forecasting is a bit of a mug’s game. Mature capitalist economies tend to plod along, growing at modest rates, until they don’t. Despite extensive efforts, nobody has discovered a reliable way to predict when that moment will arrive and, subsequently, a recession will begin. Sometimes there are warning signs, such as asset-market bubbles developing, inflation picking up, the Fed raising interest rates, and trade deficits soaring. But, even if some of these signs are flashing amber, as they were in the late nineteen-nineties and the period between 2005 and 2007, it’s hard to know when they are going to turn red. The lesson of recent U.S. history is that expansions tend to last longer than many people expect.

It would be a mistake, therefore, to get too alarmed-or too excited, depending on your politics-about the big fall in the U.S. stock market on Wednesday. Sparked by negative news regarding the international economy and an unusual development in the bond market, the Dow Jones Industrial Average plunged eight hundred points. Despite the sell-off, most Wall Street economists still think it is unlikely that #TrumpRecession, the hashtag trending on Twitter during the Dow’s slide, will become a reality before the 2020 election. The truth is that no one can be certain of what is going to happen.

What we do know for sure is that, the longer Donald Trump persists in his trade war, the greater the chances are of an outright slump developing. That is what the financial markets are telling us: on Wednesday, the yield on ten-year Treasury bonds fell below the yield on two-year bonds, in what is known as an “inversion,” which has sometimes been the harbinger of a recession. It is also the implicit message from the Federal Reserve, which is mulling another cut in interest rates, to head off economic weakness. And it is something that at least some people around Trump have apparently acknowledged, finally. Hence the Administration’s decision, which it announced on Tuesday, to suspend its plan to expand tariffs on Chinese imports to a wide range of consumer goods, such as smartphones, toys, and video games.

It has been barely two weeks since Trump announced his intention to expand the tariffs, which were set to go into effect on September 1st. The aim was to pressure China to give up ground in trade talks that had, yet again, stalled. But, in this instance, according to numerous reports, many of the President’s senior advisers, including Robert Lighthizer, the U.S. Trade Representative, and Steven Mnuchin, the Treasury Secretary, privately thought that escalation was a bad idea. Trump went ahead anyway, which was consistent with the approach he has taken all along. He has repeatedly argued that tariffs are great because they protect U.S. jobs and raise money for the U.S. Treasury. Contradicting the findings of detailed academic studies, he has also claimed that Chinese exporters bear the cost of the import duties, rather than U.S. consumers. If you take this view of tariffs, why wouldn’t you up the ante?

Because it is based on wishful thinking, of course-something even Trump has now been forced to acknowledge. In confirming the postponement of the new tariffs until December 15th, he said, “We’re doing this for the Christmas season, just in case some of the tariffs would have an impact on the U.S. consumers.” So tariffs aren’t costless to consumers, after all. And they certainly aren’t costless to the stock market and the broader economy. In the days following Trump’s original announcement about expanding the tariffs, on August 1st, the Dow fell by almost a thousand points. If the warnings from Lighthizer and Mnuchin weren’t sufficient to persuade Trump to rethink his approach, the downward lurch in the market apparently was.

“Trump has now revealed his pain point,” Yahoo Finance’s Rick Newman noted on Wednesday. “He’s unwilling to tax American consumers beyond a nominal level, or stomach the stock-market turmoil steep tariffs cause. This is the fundamental problem with tariffs as a tool to gain leverage in trade negotiations: To inflict pain on a trade partner, you have to hurt your own economy first, through higher taxes.”

Not just your own economy. On Wednesday, we learned that Germany’s economy shrank slightly in the three months from April to June, and that, in July, China’s industrial output expanded at its lowest rate since 2002. The new data suggested that trade-related weakness in the Chinese economy, which is the world’s second largest, is now impacting other countries, including Germany, which exports a lot of vehicles, machinery, and other goods to China. This raised fears of a global downward spiral of the sort that some trade experts warned about back when Trump embarked on his campaign to upend the global trading system. “It’s a dangerous game,” Dan Ivascyn, the chief investment officer at the big fund manager Pimco, told the Financial Times on Wednesday. “We think some economic damage is dealt every day that this uncertainty lingers.”

In an appearance on Fox Business, Janet Yellen, the former head of the Fed, amplified the point. Noting that uncertainty about trade “is having a marked impact on business confidence,” among other negative effects, Yellen said she thought the U.S. economy was still strong enough to avoid a recession. Then she added, “But the odds have clearly risen, and they are higher than I’m frankly comfortable with.”

While you’re on your weekend reading, here’s the latest Economist:

The world economy

Markets are braced for a global downturn

The signals from bonds, currencies and commodities are increasingly alarming

Looking for meaning in financial markets is like looking for patterns in a violent sea. The information that emerges is the product of buying and selling by people, with all their contradictions. Prices reflect a mix of emotion, biases and cold-eyed calculation. Yet taken together markets express something about both the mood of investors and the temper of the times. The most commonly ascribed signal is complacency. Dangers are often ignored until too late. However, the dominant mood in markets today, as it has been for much of the past decade, is not complacency but anxiety. And it is deepening by the day.

It is most evident in the astounding appetite for the safest of assets: government bonds. In Germany, where figures this week showed that the economy is shrinking, interest rates are negative all the way from overnight deposits to 30-year bonds. Investors who buy and hold bonds to maturity will make a guaranteed cash loss. In Switzerland negative yields extend all the way to 50-year bonds. Even in indebted and crisis-prone Italy, a ten-year bond gets you only 1.5%. In America, meanwhile, the curve is inverted-interest rates on ten-year bonds are lower than on three-month bills-a peculiar situation that is a harbinger of recession. Angst is evident elsewhere, too. The safe-haven dollar is up against many other currencies. Gold is at a six-year high. Copper prices, a proxy for industrial health, are down sharply. Despite Iran’s seizure of oil tankers in the Gulf, oil prices have sunk to $60 a barrel.

Plenty of people fear that these strange signals portend a global recession. The storm clouds are certainly gathering. This week China said that industrial production is growing at its most sluggish pace since 2002. America’s decade-long expansion is the oldest on record so, whatever economists say, a downturn feels overdue. With interest rates already so low, the capacity to fight one is depleted. Investors fear that the world is turning into Japan, with a torpid economy that struggles to vanquish deflation, and is hence prone to going backwards.

Yet a recession is so far a fear, not a reality. The world economy is still growing, albeit at a less healthy pace than in 2018. Its resilience rests on consumers, not least in America. Jobs are plentiful; wages are picking up; credit is still easy; and cheaper oil means there is more money to spend. What is more, there has been little sign of the heady exuberance that normally precedes a slump. The boards of public companies and the shareholders they ostensibly serve have played it safe. Businesses in aggregate are net savers. Investors have favoured firms that generate cash without needing to splurge on fixed assets. You see this in the vastly contrasting fortunes of America’s high-flying stockmarket, dominated by capital-light internet and services firms that throw off profits, and Europe’s, groaning under banks and under carmakers with factories that eat up capital. And within Europe’s stockmarkets a defensive stock, such as Nestlé, is trading at a towering premium to an industrial one such as Daimler.

If there has been no boom and the world economy has not yet turned to bust, why then are markets so anxious? The best answer is that firms and markets are struggling to get to grips with uncertainty. This, not tariffs, is the greatest harm from the trade war between America and China. The boundaries of the dispute have stretched from imports of some industrial metals to broader categories of finished goods (see article). New fronts, including technology supply-chains and, this month, currencies, have opened up. As Japan and South Korea let their historical differences spill over into trade, it is unclear who or what might be drawn in next. Because big investments are hard to reverse, firms are disinclined to press ahead with them. A proxy measure from JPMorgan Chase suggests that global capital spending is now falling. Evidence that investment is being curtailed is reflected in surveys of plunging business sentiment, in stalling manufacturing output worldwide and in the stuttering performance of industry-led economies, not least Germany.

Central banks are anxious, too, and easing policy as a result. In July the Federal Reserve lowered interest rates for the first time in a decade as insurance against a downturn. It is likely to follow that with more cuts. Central banks in Brazil, India, New Zealand, Peru, the Philippines and Thailand have all reduced their benchmark interest rates since the Fed acted. The European Central Bank is likely to resume its bond-buying programme.

Despite these efforts, anxiety could turn to alarm, and sluggish growth descend into recession. Three warning signals are worth watching. First, the dollar, which is a barometer of risk appetite. The more investors reach for the safety of the greenback, the more they see danger ahead. Second come the trade negotiations between America and China. This week President Donald Trump unexpectedly delayed the tariffs announced on August 1st on some imports, raising hopes of a deal. That ought to be in his interests, as a strong economy is critical to his prospects of re-election next year. But he may nevertheless be misjudging the odds of a downturn. Mr Trump may also find that China decides to drag its feet, in the hope of scuppering his chances of a second term and of getting a better deal (or one likelier to stick) with his Democratic successor.

The third thing to watch is corporate-bond yields in America. Financing costs remain remarkably low. But the spread-or extra yield-that investors require to hold risker corporate debt has begun to widen. If growing anxiety were to cause spreads to blow out, highly geared firms would find it costlier to roll over their debt. That could lead them to cut back on payrolls as well as investment in order to make their interest payments. The odds of a recession would then shorten.

When people look back, they will find plenty of inconsistencies in the configuration of today’s asset prices. The extreme anxiety in bond markets may come to look like a form of recklessness: how could markets square the rise in populism with a fear of deflation, for instance? It is a strange thought that a sudden easing of today’s anxiety might lead to violent price changes-a surge in bond yields; a sideways crash in which high-priced defensive stocks slump and beaten-up cyclicals rally. Eventually there might even be too much exuberance. But just now, who worries about that?■

Really dumb stuff

+ Your bank is paying you zippo on your checking account. Time to open some one-year CDs. They’re paying 2.40% to 2.55%. Good banks include Ally, Capital One and Marcus. Fidelity has SPAXXX, a brokerage sweep account. It pays much less. But it’s better than a slap in the belly with a cold fish. You can find other banks on BankRate.com. But recognize that banks that get top billing pay money — though they may not have the top rates.

+ Many of your voice mails don’t appear on your iPhone. Hence, you get a “voice mail full message” — when your phone is empty. To get to your old messages, you need to dial *86 and listen through Verizon’s irksome messages. Then hit 7 and delete each message, one by one. This is a major  bug in Verizon’s Apple iPhones.

+ Your dumb credit card company will reject a charge — but not tell you why. If you want the charge to go through, pay off your entire bill and resubmit the charge. This worked for me. Yesterday Citigroup rejected a $47,000 charge. After I’d paid off my balance of about $3,000, today they accepted the $47,000 charge — despite the fact that my credit line limit is $27,500. I actually asked them on the phone last to increase my credit limit. They rejected me. But they accepted the $47,000 charge. My FICA score is 722, according to Citi.

+ The new Apple credit card is pretty, but pretty useless. Other cards offer far better rewards. Which one is “the best” depends heavily on how much you travel. Pay more for your credit card — like the best American Express — and you get more miles.

+ It’s amazing — at least to me — that banks can actually make a living, given the dumb things they do. My favorite bank to-hate remains Wells Fargo. It wins the contest for most creative, most crooked schemes.Read today’s New York Times for a piece on Wells charging fees on closed accounts! Click here.

Wait till you read about a famous bank’s offering on structured notes. That’s for Monday. Meantime, don’t go for structured notes. Wall Street is great at making up enticing names for horrible investments.

The best wire-free earbuds

They’re not the Apple EarPods. The best are here, courtesy Wired Magazine.

Donald Trump wants the U.S. to buy Greenland

Greenland is the world’s largest island and an autonomous Danish dependent territory with limited self-government and its own parliament. Denmark contributes two thirds of Greenland’s budget revenue, the rest coming mainly from fishing.

Today Andy Borowitz of the New Yorker wrote:

Our Newton family birds are wonderful. 

Watching them is more far satisfying than watching the news or reading President Trump’s latest tweet.

Here’s the mother.

Three times this summer she has laid three little blue eggs:

And three times baby birds have hatched. Here’s the latest batch, as shot this morning with my trusty iPhone. It’s me making the sound.  From the day she lays the eggs, the birds are hatched and gone in 27 days. Then she lays another three. She can hatch as many as 22 a season.  I wish my investments grew as fast as these birds.

SNL and Max the dog. Priceless.

Harry Newton. I’ve been playing tennis every day (except for several days in Europe). I feel great.

If you still have a stomach for more reading, read this piece from the Financial Times

“Automated selling has exacerbated US market swings.”

It begins:

Computer-driven investment strategies that automatically sell when market turbulence erupts have exacerbated this week’s swings, offloading up to tens of billions of dollars’ worth of US shares, according to analysts.

So-called “volatility-targeting” funds that manage about $400bn in assets have bought up stocks this year as markets have calmed since markets’ dramatic end to 2018. But the renewed turmoil means they were pegged to sell $50bn by the end of Wednesday, according to Wells Fargo estimates.

“When volatility jumps, systematic funds rebalance portfolios away from risky assets like equities,” said Pravit Chintawongvanich, an equity derivatives strategist for Wells Fargo.

Automated, volatility-sensitive trading strategies have become a popular bogeyman in recent years, with many analysts and fund managers blaming them for exacerbating market swings.

The renewed spurt of automated selling comes during a crucial period for the US stock market as it responds to slowing growth, fresh tariffs on Chinese goods and a tepid market response to last week’s interest rate cuts.

There are several different types of funds and trading strategies that target a certain level of volatility, and therefore ratchet their equity exposure up and down according to the strength of market fluctuations. They mostly use liquid financial products such as futures and exchange traded funds.

For the entire piece, click here.

By the way, exports are responsible for nearly half of Germany’s economic output and almost a fifth of China’s. China is a huge export market for Germany. Germany’s latest quarterly GDP declined. One more decline and that’s how economists define a recession.

Have a great weekend. I will.