Monthly Recap

It was another busy month with continued talks of trade wars.  To recap, below are bullet points of the important and noteworthy events that occurred in June.

• The trade war with China picked up with the US and China going back and forth on tariffs.  This uncertainty was a contributing factor for the market selloff that happened during the last 2 weeks of the month.  Read more here
• Central bank officials voted unanimously to raise their benchmark federal-funds rate by a quarter-percentage point to a range between 1.75% and 2%. It is their second rate rise this year, and they penciled in a total of four increases for 2018, up from a projection of three at their March meeting.
• Canada joined in on the fun and announced they’re prepping tariff’s against China on steel.
• The SEC says that ether is not a security, which should diminish the risk of extensive regulatory burdens for some cryptocurrencies.
• General Electric will drop out of the Dow Jones Industrial Average next week, a milestone in the decline of a firm that once ranked among the mightiest of U.S. blue-chips.
• The separation of families at the border prompted nationwide and worldwide condemnation
• The ECB announced that it will conclude its quantitative easing program by the end of the year (with tapering starting in September). However, Mario Draghi also said that there would be no rate hikes in the first half of 2019.
• The FDA approved the first cannabis based drug for the first time ever.
• AT&T’s $85 billion purchase of Time Warner is on track to go down as one of the largest acquisitions in history, but the deal will be dwarfed by an even larger figure: the combined company’s approximately $181 billion debt load.
• The fall in the value of Argentina’s Peso, Brazilian Real, Turkey and other emerging market currencies continue to weaken as the USD strengthens.

My 2 Cents

Not a lot has changed in my thinking over the past few months and instead of reiterating the same thing, please read from the past 2 months updates.

Charts & Commentary

(In no particular order)

• Bridgewater: “We Are Bearish On Almost All Financial Assets”
  • (…) In one of Bridgewater’s latest Daily Observations authored by co-CIO Greg Jensen, the firm writes that “2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed’s tightening will be peaking” a point echoed yesterday by the head of the Indian central bank, Urjit Patel, who warned that unless the Fed ends its balance sheet reduction which comes as a time when the Treasury is soaking up dollar liquidity by issuing substantial amounts of Treasuries to fund the Trump budget, the tightening in financial conditions could lead to a global conflagration started by emerging markets.
• Bitcoin Bloodbath Nears Dot-Com Levels
  • Bitcoin is down 70 percent from its December high and hundreds of other virtual coins have all but gone to zero.

The spread between long and short term bonds continues to compress as the yield curve flattens.  This spread is very widely followed now that the difference is so narrow.  Everyone is watching for an inverted yield curve which signals a recession is near.

Why buy a 10 year US treasury bond and earn 2.85% when you could own a 10 year Greek bond at 4.05%!  I’m sure you won’t have any problems getting repaid…

There are already fed funds projections for the projected recession in 2020 and 2021.

This chart combines margin debt, leveraged ETFs, and futures positioning as a percentage of the S&P 500 market cap.  While it’s single factor, this particular chart should give you some concern.

If you wanted to know what an inverted bond yield curve looks like, check out Argentina.  Their currency is plunging and the IMF just agreed to a record $50B loan.  Argentina doesn’t have a great track record of repaying loans though which also makes you wonder who was buying their 100 year bonds.

Hardly any of the tariff’s announced by China and the US are actually in force.  The planned and potential haven’t hit just yet.

Nearly half of investment grade debt in the US is rated BBB.  This is important since that’s only one rating away from being in junk bond territory and shows our corporations are potentially over leveraged.  In a recession, we could see a lot of companies debt downgraded to junk.

According to John Burns Real Estate Consulting (a widely followed research group), homes are 17% over priced if mortgage rates hit 6%.  They also forecast increasing risk (which they measure as demand, supply and affordability) through 2021.

I hope you enjoyed this months financial markets update.  If you have any questions please contact us directly.  If you’re interested in a topic that you’d like us to address, please email us so we can include them in future updates.

If you’re interested in starting a dialogue and learning how we can help, please click the link below to book a call or meeting with us.

Best Regards,

Jared Toren
CEO & Founder

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