The jobs numbers released on Friday were excellent, and using all of the related data, it shows the economy continues to be strong, and is likely to continue strong all year. The slight bounce up in the unemployment figure is simply caused by large number of people coming off the sidelines and seeking work. A very good sign that the last stragglers now believe they can get a job instead of welfare. More important is the labor participation rate moved higher by .2% to 63.4%, That continues the uptrend since 2016. The highest was 67.3% in Feb 2000, but times and demographics were very different. Productivity also rose. Wages continued up for the 18th month in a row, and nicely exceed inflation 3.1% to 1.6%. With mortgage rates ultra-low refi has skyrocketed, gas prices remain very low, and so disposable income for low income households has risen materially. Savings rates continue higher than 7% which is excellent. Debt to income rations continue to decline ate the same time savings is rising and 401K and IRA values hit new record highs. Bottom line, consumers may be in the best shape ever. That translates into more good consumer spend and ability for consumers to ride out any slowdown. There is every reason to believe the year will only get better when Boeing returns to production, and CDC continues to do an excellent job of protecting the country from the virus. If world growth were to pick up, factory orders would rise and GDP would rise more, and unemployment would go below 3.5%. It does not get much better than this. It is clear the Philips curve is dead. The Fed is a long time from raising rates. Probably not at least until Q1 next year, and maybe longer. The expansion is solid and can potentially continue up for years to come, provided the Dems lose big in November and the R’s regain the House with Trump as president. If the Dems win, even with Bloomberg, all bets are off. The stock market now could hit 3500 on the S&P this year. 30,000 on the Dow is very possible.
The possibly more real number of virus cases in China slipped out on Tencent, and it may be true that far more have died, and as many as 150,000- 200,000, or more, possibly are already infected, or are suspected of being infected since there is evidence that infected people are being turned away from hospitals because there are no more test kits or other medical supplies to cope. China only reports what they claim are “confirmed “ cases, not possible cases. And nobody believes what they say. However, a smuggled video taken inside a Chinese hospital shows extreme chaos with dead bodies in the hall with crowds of patients. A friend, who is a general in the US army medical corps, has been inside Chinese hospitals surreptitiously before the virus. He said they are not capable of coping, which is some verification of that smuggled video. He also has a Chinese sister-in-law still in China who claims things are really bad. Nobody knows what is really going on. Food is becoming in short supply in quarantined areas. This whole situation is horrendous for China no matter the real numbers. It not only creates vast disruption to their economy now, plus inflation, but the more this continues, the more and faster companies will move out permanently, the fewer tourists will come for a long time. The public is getting very upset by what is happening and the lack of transparency. It is a nightmare scenario for China. At the same time, the CDC and HHS are doing a great job of protecting us, so the US will come out of this with nil impact. This just adds to the US strength over China for future negotiations. We likely will never know the truth, but it is very bad. The condo markets in the US, Vancouver and London will get hit hard with no Chinese able to travel.
Fannie and Freddie will stop all use of Libor on Dec 31, 2020, and revert to SOFOR. That will essentially mean an end to Libor for home loans and then it will be a short matter to move all loans form all lenders to SOFOR over the following year. If you have a Libor loan it is best to check with your lender now to find out what is the plan to change the index and how will your loan be priced. Each lender may choose to handle it differently depending on the term of the loan and their plan to switch to SOFOR. It is unclear what happens to loans in CMBS pools but I assume they might remain as Libor until maturity, but you need to ask now. All new loan docs need to say what index and what happens when the index changes.
We are constantly hearing how investors are seeking yield. That is a stupid goal. The whole point of investing is to preserve your capital and to make a reasonable return relative to the risk you take. It is not to take high risk just to make another 100 basis points, and then end up losing principal when the bond matures and does not pay. The junk bond market is now high risk, and getting riskier. Yields do not reflect the level of risk in many cases. Energy bonds are very high risk now. There are numerous over levered companies of all sorts who have issued junk bonds that are at real risk of default. Chasing yield or growth in emerging markets, given the virus impact, is really a good away to lose money. If you just stick with good US based companies whose main business is in the US, and possibly the EU, you will do far better in the long run. If you have been in good US stocks since Dec 2018, you would have made gains equal to several years of junk bond yield, but with much lower risk.
Jeremy Siegel, the stock market professor at Wharton, now says having 40% in bonds does not make sense, given that rates will likely remain quite low for maybe years. One of his points is that with the aging of population, there are huge increases in the number of investors in bonds, which then drives down yields. The more money pouring into bond funds needs to be invested, so bond prices rise and yields decline. An article in the Saturday WSJ makes an analogous point that there are massive amounts of money pouring into bond funds. Siegel makes the same point I have made for a long time. Over time, stocks will be less volatile than bonds, and will provide a materially higher return. Back to my duration point recently. Short term bonds are less volatile, but yield a lot lower returns as a result of lower risk over time. I reiterate, that unless you need the money in the very short run, holding mostly equities is a far better risk reward structure that 60-40 bonds. A lot depends on your term horizon. If you note, even after the crash in 2008, the equity markets have gone on to record new highs over 11 years. You just need to know when to get out at the start of a massive crash scenario like 2000 or 2008. The key is to not react to short term events, and to take a long term view of rates, inflation and the US economy. You have to look past the pundits who are paid to react to the latest whatever, and who try to be heroes, and instead just make your own assessment of the world. The US is on a roll, and it might be able to last for many more years depending on the 2020 election. If Trump wins, then the good times will roll on. If one of the insane Dems like Bernie wins, go all cash or gold. Europe may be in or on the verge of recession, and the EU may be on track to blow apart over the next 5-10 years as I believe it will, China may be a challenge, but now the US has regained its mojo and power, after Obama depleted it. After the virus finally is beaten, China and Xi will be weakened considerably. Iran will be stopped now that they lost their real leader in Soleimani, and the sanctions are collapsing their economy. If Trump is reelected, Iran knows it is at real risk. The chance for a peace deal with the Israelis and Palestinians will increase immeasurably if Trump wins. The election is a key moment. As of now I see Trump in a major win, and Republicans recapturing the House after the impeachment fiasco and Iowa. The Dems will not be able to get the raging factions together. If this does play the way I predict, the stock market will rally into next year.
The private sector is not waiting for the do nothing Congress to do an infrastructure deal. Between the big funds, there is now $212 Billion in free cash available to spend, and that is before any leverage or partnering with other investors or operators who would add to that. That is a lot of funding for data transmission and storage, pipelines, toll roads, and other needed projects. While some of that will go offshore, there is well over $100 billion going into US projects. Just imagine what could be done if the Congress could ever pass a program that partnered government money with this private capital as Trump envisioned. Thus far, infrastructure funds have returned around 15% with not much risk. This is far better than fixed income, but these funds are mainly for institutional investors. Eventually there will be many more public infrastructure funds. Once again, it is private sector investors stepping in where Congress has failed. If something has a good profit, and risk return ratio, private capital will flow to it. If you need any further proof that the private sector is far better at rejuvenating poor neighborhoods then the government, just look at the opportunity zone activity vs decades of failed urban renewal programs by the government that wasted hundreds of billions and accomplished nothing good.
When I look at the investment banking world of today compared to when I was part of it, there is not a lot of similarity. When I was young, and we were swinging guys, it was great fun and very lucrative. Now it is a much smaller world with many more regulations and strictures, and more limited ways to make the big bucks. Goldman is a shadow of what it was. Credit Suisse is in turmoil, Lehman is gone as is Bear, and Merrill is now part of B of A. JPM is now a major player, but they are restricted by being a commercial bank with heavy regulation. Morgan Stanley is not the old premier firm it once was, now that it has a major retail operation. I am happy I was part of the old days where wild things happened, and we were free to be real entrepreneurs.
Biden is touting that he would not have had Soleimani killed because he did not pose and immediate threat. Supposedly he was against killing Bin Laden. He is just what we need as president so we can go back to the Obama world of ISIS and Iran running rampant with no consequences. At least Biden knows how to point out that Buttaboy accomplished nothing and is unqualified, and also good at positioning his son and brother to take bribes. Biden is done. Many months ago the Rant said Klobachar had a chance. Now it appears she may have a real chance as the compromise. We will see where things stand after S Carolina. That is when it matters. The number of Dems who showed up for the Iowa caucus was far less than usual. Only 176,000 down from well over 200,000 in past elections. It suggests the Dems do not have the energy nor interest by their people to show up at the election. Trump just held a rally in New Hampshire and drew thousands, with some standing in the cold for hours vs small crowds for the Dems.
The U of CA, as I have mentioned previously, now requires that professors applying for jobs must first pass a submission as to how they are promoting diversity and inclusion. Some schools in the system have adopted the Advancing Diversity Pilot Program Result is few whites are getting jobs despite sterling records as researchers and professors. They will get hired by many other universities. So once again the students at UC lose. The university loses. It is akin to the old Jewish quota from decades ago when there was a limit at some universities as to how many Jews they would accept as professors. But now when you discriminate against whites and ignore their proven skills, it is considered a good thing to discriminate, but CA has a law supposedly preventing any racial discrimination when admitting students. Under the Pilot program 679 perfectly qualified professors were eliminated just on an “inadequate diversity profile” before their qualifications were reviewed. At UC Davis for one search 100% of the hires were minorities for 8 different jobs. Welcome to university education in California.
From: Tom Czech
Date: February 11, 2020 at 9:41:33 PM EST
Subject: Fwd: Ross Rant Feb 10