Remember back on New Year’s Eve?
You were with your family or friends making resolutions of all the great things that were going to happen in the new year.
Now imagine for a minute that you knew back then that the United Kingdom would vote to leave the European Union.
Imagine that you knew there would be an uprising from the Turkish army, you knew Brazil’s president would fall, and you knew that terrorism would run rampant in Nice and Brussels.
What would you think our economy would like today?
Do you say that you would have had the ability to be able to predict that the S&P 500 Index would be holding yield premiums for the global corporate bond that are very close the narrowest they’ve been seen in a year’s time?
Would you have predicted the market currencies would today be 8 percent above the lows they had back in January?
This is what forecasters are facing at the moment.
Their predictions surrounding the fact that the year 2016 was going to be filled with political danger as mostly proven right.
However, the issue arises when they have been correct on their prediction of the world and mostly incorrect when trying to call the markets accurately.
One example of how impossible predicting the markets accurately in today’s world where central bank stimuli dominate are:
- The slow economic growth
- The subzero bond yields
Bill Stone stated over the phone that others probably would have done a worse job predicting the markets if they knew what was going to happen this year.
He further said that recent events reflect the pointlessness of making decisions about investment simply by looking at geopolitical outcomes.
Monetary stimulus has been the fuel for risky assets since the financial crisis began.
At the same time, it has managed to keep economies afloat but drifting.
The monetary stimulus ranges from cuts in interest rates all the way to the bond purchases have quickly filled up the balance sheets of major central banks since 2009 by approximately $7.2 trillion.
Policymakers, however, have remained generous following all the drama surrounding politics this year.
This has resulted in markets becoming increasingly vague when the traditionally used models of investment are used to view these markets.
For example, look at the United States stock market.
Valuations rose over twenty times earnings.
It has not done this in twenty years.
Profits are either declining or remaining the same.
Takeovers and share buybacks have begun to calm down. Amidst:
- The United Kingdom leaving the European Union
- The attack in Nice
- Turkey’s army uprising
The S&P 500 over the past three weeks straight has rallied.
It closed at a record, something it has not done in 13 months.
Last Wednesday, at 9:33 a.m. it slipped to 2,171.05 in New York, a .1 percent fall.
The United States’ economy’s refusal to experience another recession is one of the primary factors for this rebound.
Conditioning is another factor.
Thinking about protracted declines has not come with a payoff since the current financial situation started.
This is in part due to the central banks willingness to curtail losses.
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Ben Mandel said that part of the resilience is coming from the fact that policymakers are on top of it.
He says that they have been aggressive when it comes to responding to political shocks.
He also says that ultimately, a limit exists.
The best on where that limit may be have not panned out quite yet.
Morgan Stanley and Andrew Sheets proposed in may another options in opposition to the adage “sell in May.”
They encouraged clients to look at positions that would benefit from rising volatility and invest there.
At the same time, Savita Subramanian proposed that June would carry a number of pessimistic headlines that could potentially push stocks even lower.
Savita Subramanian is the chief equity strategist at the Bank of America Corp.
She was only half right.
In the two days after the United Kingdom’s decision to leave the European Union, there was a 5.3% decline in the S&P 500.
The Volatility Index of the CBOE rose around 49 percent.
This was the highest it had been since it hit its peak back in February.
However, it took less than a week for the rise to be erased.
Last Wednesday, the gauge for fear closed at 11.77; this is the lowest that it has been lowest it has been in nearly two years.
Markets Right Now
The markets are almost too quiet at the current time.
The Chicago Board Options Exchange’s Volatility Index measures the amount of volatility that is implied within the market.
The S&P 500 stock index has not moved more than one percent in any direction for more than a month.
The following shows an example of the bank bailouts in 2008, an example of volatility in the economic and stock worlds.
Earlier in the year, people were worried about some different things.
They were worried about the rise of corporate defaults, the Chinese experiencing a hard landing, and the central banks running out of ammo.
Most of these concerns have been put away for a later time.
However, some strategists are saying that this is merely the calm before the storm.
Subramanian, on top of her prediction for the negative headlines in June, made a few other comments as well.
She stated we were getting a little closer to the most polarized election that has been seen during their careers that every day.
She said that one thing they had noticed six months ahead of the voting month was that the market peaks and then start to move downward.
She further added that the Fed, during a recession for corporate profits, is tightening.
She said that this is not typical.
Andrew sheets also foresaw trouble coming our way for the summer.
He wrote a note to one of his client’s offering an alternative to the “Sell in May go away” adage.
He said that pulling out of stocks during the months of May through November has worked for people in the past.
He did give credit that there were some dramatic declines that typically took place during this time.
However, this was in opposition to a generalized weakness for this period of the year.
He stated that it was butter to buy volatility in the month of May.
Sheets and Subramanian both see reasons that investors should remain cautious during 2016.
He says that a more cautious way to get involved would be to put spreads on the high-yield debt in the United States, focus on emerging markets, and call options on the S&P 5000.
Corporate bonds have a similar story to tell.
Investors are demanding an extra yield to make up for the risk to their credit has contracted to nearly the lowest it has been this year.
From Brazil to Russia, one MSCI index showing emerging-market currencies shows that these have rebounded in January from a little that lasted six years.
Below is an example of major developing economies from 1990-2012:
Dangers are beginning to dwindle.
One index that is tracking the amount of exposure seventy-seven different countries have to the risk of politic drama is reflecting the largest readings in the past ten years.
The Eurasia Group made this statement, a research firm based in New York.
These scores are estimated through surveys that are conducted monthly.
These studies address such topics as the amount of exposure seventy-seven different countries have to political risk is showing some of the biggest readings in the past ten years, according to the Russia Group.
The Eurasia Group is a research firm that is based in New York.
These scores are calculated through surveys that are conducted monthly.
These reviews address such topics as:
- Investment Policy
- Social Stability
- Government Stability
- Economic Policies
Investors used to demand solid returns to compensate them for the increased amount of uncertainty surrounding politics.
This request has weakened because of central-bank money.
The European Central Bank and Bank of Japan’s purchased assets are not only pushing yields around $10 trillion of the global debt below zero.
They have also managed to pushed investors into dodgier terrain and away from government bonds.
These investors are moving toward emerging markets, stocks, and corporate bonds.
On its Head
Bhanu Baweja is the head of emerging market and cross-asset strategy at the London-based UBS.
Baweja states that the world in one in which fixed income is becoming the norm to gain an appreciation of capital.
She further says that we are turning to equities to revive our yield, referring to it as a world upside-down.
The S&P 500 is around 2.1 percent.
This gives it dividend yield that is higher than where the 10-year Treasury stands at .05 percent.
Earlier in the month, the gap reached to one of the broadest levels that has ever been seen.
Simultaneously, the exchange-traded fund for the 20+ year iShares Treasury Bond posted a return that was approximately 16 percent this year.
Compare this with the 7.6% rise in the S&P 500.
As policymakers rely heavily on unusual measures to fight off pending recessions, the likelihood for falsification increases.
For years rates have managed to stay at lows that were recorded.
However, the global growth and economies all over the world continue to struggle and tiptoe around a dangerous downward spiral.
This month, an official from the Bank of England said that material easing was most likely, and the sledgehammer could be used.
It is speculated by economists that Japan is considering helicopter money.
Helicopter money is here fiscal stimulus is funded by the money printing conducted by the central banks.
There are a few positives to using helicopter money.
This type of program does not increase tax burdens for the future.
Helicopter money can also lift the inflation expectations that seem to stay too low.
They can boost the speed in which money circulates throughout the economy and provide more of a kick.
Bonds from banks puts money into the overall financial systems.
This limits the impact this cash will have on the economy because consumers are cautious, and companies would rather spend it.
The following shows the world GDP per capita up to 2008:
Even the Fed’s policymakers stressed the fact that there was no rush to raise the costs of borrowing once again.
The Fed is the one central bank that is attempting to deter investors away from attaining easy money.
Emerging-market investors are one constituency that is already used to risks from the political world.
The past couple of years has seen them juggling with falling oil prices, numerous corruption scandals taking place in the disputes between Brazil and Russia and Turkey and the Ukraine.
The stocks they hold show this fact: There has been a 10 percent gain for the emerging market index for the MSCI.
The price of Brent crude oil from 1998-2015 can be found below.
For the emerging-market investors, this year has just been another year of conducting business.
Some investors believe, in fact, that bonds and the developing market stocks are going to be the ones that show the most resilience to the fallout from the United Kingdom’s vote to exit the European Union and the volatility around the elections in the United States.
They are saying that nations who are industrialized are going to be able to keep their rates low.
Over $18 billion found its way to the emerging markets following the United Kingdom’s vote took place.
Andrew MacFarlane is an emerging markets credits strategist.
He is employed by BNP Paribas SA located in London.
He said that the market remains extremely focused on the overall yield.
He further states that the market has turned its focus off of numerous factors that are essential.
He says that when you are eager to see a return for the money you have invested, you are usually willing to look past things you would have paid more attention to in other circumstances.
US Housing Sales Boom Will Last Until 2021
Redfin CEO Glenn Kelman told CNBC on Thursday that he sees the US housing sales boom will last until 2021. Total US Home sales increased 9.4% in September, surpassing estimates. Meanwhile, median prices went up 15% year over year. This is according to data provided by the National Association of Realtors.
Shares of Redfin, a real estate brokerage firm, were higher by 1% Thursday to $45.60. The stock more than doubled during this year. It now has a market cap of $4.5 billion.
Why do people buy houses during a recession?
During this time when the economy is reeling and jobs are tight, people buy homes. Why? There are a couple of reasons.
The bigger acceptance for remote work freed many people from living in the city. The opportunity to leave cramped apartments and expensive city living. The pandemic gave enough reason for workers to pack up and head for greener pastures. Next, interest rates are going down hard. From 3.7%, 30-year mortgage rates are now 2.9%, the lowest rates ever. Despite higher prices, people know this is the best time to buy on the cheap.
The intent is there. The pandemic allowed you to work anywhere. And interest rates allow you to pay the lowest interest rates. People are taking the plunge and buying. So what’s the problem? We’re running out of houses to buy.
Demand coming from the rich
Rich professionals who can work from home are the reason for the uptick in housing demand. Kelman said that many remote workers moved from major cities to distant suburbs. Kelman said these workers began “taking a permanent vacation where they’re working from those homes.”
People are taking advantage of low-interest rates to snap up homes. Kelman noted that “part of what is fueling this boom is that the economy has just split into two and rich people are able to access capital almost for free.” The opportunity to buy homes for cheap may be too much to resist. “Of course, they’re going to use that money to buy homes,” he added.
Meanwhile, there’s another group of people who would like to buy but can’t. Kleman said: “There’s just another group of Americans who are still struggling, who can’t access the credit because we’ve raised credit standards, and you have high unemployment. I just think those two trends, at some point, have to collide.”
Kelman foresees demand to continue until 2021 at least. Many undecided buyers will buckle down next year and take the plunge. He said: “There’s no way it can last forever. This level of demand is absolutely insane. I would expect it to last into 2021, at least.” Why 2021? “There are so many people now who have decided they’re not going to be able to buy a home by year-end,” he said. Kelman expects them to buy next year, “as their kids shift school districts. I do think we’re going to see this for some time.”
Shrinking inventory of houses for sale
With homes fast disappearing from the market, higher purchase prices are coming back. Based on data from the National Association of Realtors data, only 2.7 months’ supply of houses is available last month. This represents the lowest level since 1982 when the NAR began tracking data.
Kleman expects supply to increase after the elections. Uncertainty will decrease after voters elect a new president. Listing and selling a home can take months to process. That’s why sellers have a lower risk tolerance than buyers. “Buyers, when they see a house they love, they pounce,” he said. “I think the sellers are just looking long term in the economy and still feeling some anxiety. Many of them are going to put their homes on the market in January and February.”
Demand won’t last forever
The Wall Street Journal’s Justin Lahart thinks not everybody can live outside the big cities. A remote job in a vacation spot may pose difficulties for some. Winter conditions may also make some remote workers rethink their strategy. He also believes that the housing boom now made people buy houses sooner than later. He thinks many of the workers who moved to the suburbs would’ve done so in a few years. When the pandemic subsides, a smaller group might follow the exodus out of big cities.
The number of people who can afford houses will shrink as well. Many workers’ careers derailed during the year. Many millennials got burned during the financial crisis in the early 2000s. Now, a new career-threatening crisis is in full swing. The post-coronavirus landscape may depend on how well the economy rebounds. We’ll have next year to find out.
Watch this as CNBC reports on the US housing sales boom. Redfin CEO Says “people are buying vacation homes, then taking a permanent vacation:
Are you house hunting right now, or have you already bought a house this year? Why are you doing so? Let us know why buying a home is a good idea right now. Share your thoughts in the comments section below.
Biden Plan Could Mean 60% Tax Rates, But Here’s Who Will Get Stuck With Higher Taxes
New York and California may start losing high-income residents by the droves next year if Democratic nominee Joe Biden wins the election in a few weeks.
That’s because the two left-leaning states would have a combined federal and state rate over 60% under Biden tax plan.
Even New York resident and rapper 50 Cent tweeted earlier this week that despite his apparent dislike for President Trump, he said “Vote Trump” and “62% are you out of ya (expletive) mind,” when he learned about Biden’s tax plan.
According to calculations from Jared Walczak of the Tax Foundation, California residents earning more than $400,000 per year could face a combined tax rate as high as 62.6% under the Biden plan. New Jersey residents could see taxes reach 58.2% and New York would top out at just over 62%.
But somehow, it could get even worse.
Tax Rates Can Still Go Higher Under Biden
Walczak points out that if you include the contributions to the tax hikes by employers, which are often passed along to employees, the combined rates would jump to over 65% in California, 62.9% in New Jersey and 64.7% in New York City. They could still go even higher if California and New York raise taxes on high earners. This is something some legislators have proposed to try and close multibillion-dollar budget gaps.
“These rates would be the highest in about three and a half decades,” said Walzcak, “and imposed on a broader tax base than was in place previously.”
The Middle Class Will Suffer?
But Home Depot co-founder Ken Langone believes the wealthy won’t pay higher taxes at all – the middle class will.
“The middle class will not be exempt. Tragically, it will punish them. It isn’t going to punish us,” said Langone.
Appearing on Fox Business yesterday, Langone said due to Biden’s tax hikes, “the middle class will be in peril.”
He said that despite Biden saying the wealthy should pay more in taxes, the middle class will feel the effects of Biden’s tax plan. Langone said he is in favor of a tax code that is more progressive and equitable. This includes eliminating loopholes that favor the rich and large corporations.
“I don’t know if there’s any of us that have done well that will have a problem with paying more taxes, but it’s a ruse to think that hitting us and us alone is going to get the job done,” Langone said, adding ““It won’t and the middle class will be in peril and when you take money out of the hands of the middle class, you do a dramatic impact negatively on the economy.”
He said that increasing taxes on the middle class will lead to a recession.
“The problem is, when you go after the middle class, you begin to attack the backbone of the economy and we will have a bad recession. We will have a very bad recession,” Langone said.
“These are very precarious times and not the time to be screwing around,” he added.
Market Volatility Rises As Election Polls Show Tightening Race
The relatively calm markets earlier this month are giving way to more volatility as we approach the election. This is according to a team of strategists at JPMorgan.
“While it is perhaps true that during the first two weeks of October risk markets were supported by a widening of US presidential odds, which by itself implied a lower probability of a close or contested US election result, over the past week or so these odds have started narrowing again,” said a team of strategists at JPMorgan Chase, led by Nikolaos Panigirtzoglou.
According to recent polls by RealClearPolitics, in key battleground states, Democratic nominee Joe Biden leads President Trump by 3.9 percentage points, 49.1 vs. 45.2. That lead has shrunk from a 5 percentage point advantage for Biden about a week ago.
A general election nationwide poll by RCP shows a wider 8.6 percentage-point lead for Biden. However, there are many who feel those polls are not correcting for sampling bias.
MarketWatch recently interviewed Phil Orlando, the chief equities strategist at Federated Hermes. There, he said he doesn’t believe the polls accurately reflect how close the race is. In relation to this, he pointed to the surprise win by Trump against Democrat Hillary Clinton in 2016.
“Our base case is that the polls are wrong, there’s an oversampling biased error that a lot of polls aren’t correcting for,” Orlando said.
With a tightening race for the White House, volatility has returned to the market. It will also likely increase in the final two weeks leading up to the election.
A report put out yesterday by SentimenTrader showed that the CBOE Volatility Index or VIX, jumped to levels last seen during the Great Financial Crisis, and tends to rise as stocks fall as it is typically used as a hedge against market downturns.
Market analysts use the ratio to measure how speculative traders are getting. A rise in the put/call ratio means that investors are expecting plenty of volatility between now and November 3.
The VIX, which measures investor bullish or bearishness on the S&P 500 for the next 30 days, is currently near 29, well above its historical average between 19 and 20. This week alone the VIX jumped 6.3%.
Source of Volatility
Jeffrey Mills, the chief investment officer at Bryn Mawr Trust, said some of the volatility likely comes from investors trying to position their portfolios based on who they perceive will win the election. “There could be some front-loaded selling but I do feel like that’s a near-term phenomenon,” he said. But he says no matter who wins, there’s really only one place to invest, and that’s the stock market.
“There is going to be this continued pull toward equity markets — where else are you going to go when you need to earn a certain percentage to fund retirement, fund education?”
If investors are moving money today based on who they think will win the election, Daniel Clifton, head of policy research at Strategas Securities said each candidate will likely benefit different sectors.
A Biden victory will be good for stocks in the infrastructure, renewable energy and technology sectors, said Clifton.
If President Donald Trump is reelected, Clifton said there’s “huge upside” in some sectors. These include defense, financials and even the for-profits like prisons, education and student loan lenders.
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