REUTERS/ Diptendu Lahiri
Gold slides from near 7-year peak as U.S.-Iran fears subside
January 9, 2020
“Gold prices slid on Thursday, retreating further from a near 7-year peak scaled in the previous session as tensions between the U.S. and Iran eased following conflict over the U.S. killing of an Iranian general. Spot gold fell 0.2% to $1,552.74 per ounce by 1250 GMT, having earlier slipped to $1,539.78 an ounce. U.S. gold futures fell 0.4% to $1,553.70 per ounce. Gold had risen as much as 2.4% early on Wednesday to break above the key $1,600 level after Iran’s retaliatory attacks on military bases housing U.S. troops in Iraq.
President Donald Trump responded to the missile attacks with sanctions rather than military action, while Iranian officials said the missile attack concluded their response, easing fears of wider conflict in the Middle East and prompting a sell-off in safe haven assets like gold. ‘Since Iran and U.S. will not escalate the recent issue out of proportion, we are seeing a little retracement after gold broke a key technical level of $1,550,’ said Bernard Sin, group head of trading at MKS. Holdings of the world’s largest gold-backed exchange-traded fund SPDR Gold Trust dropped 1.05% to 886.81 tonnes.”
The Economy Is Expanding. Why Are Economists So Glum?
January 9, 2020
“The mood among economic forecasters gathered for their annual meeting last weekend was dark. They warned one another about President Trump’s trade war, about government budget deficits and, repeatedly, about the inability of central banks to fully combat another recession should one sweep the globe anytime soon. Among the thousands of economists gathered for the profession’s annual meeting, there was little celebration of Mr. Trump’s economic policies, even though unemployment is at a 50-year low, wages are rising and the economy is experiencing its longest expansion on record. Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully.
Those concerns were echoed on Wednesday by economists at the World Bank, who called the worldwide expansion ‘fragile’ in their latest ‘Global Economic Prospects’ report. The report forecasts a slight uptick in growth in 2020 after a sluggish year bogged down by trade tensions and weak investment. But it said ‘downside risks predominate,’ including the potential escalation of trade fights, sharp slowdowns in the United States and other wealthy countries and financial disruptions in emerging markets like China and India.”
JP Morgan tells wealthy clients a ‘progressive overhaul’ of economy is one of 2020′s biggest risks
January 7, 2020
“J.P. Morgan’s private bank, which manages $2.2 trillion for wealthy clients, said a presidential victory from a radical leftist candidate is among the biggest threats to their money in 2020. The firm also warned about a possible inflation scare in its annual outlook report to clients. With left-winged Democratic presidential candidates like Sen. Elizabeth Warren and Sen. Bernie Sanders as front-runners in the national primary polls, J.P. Morgan sees a ban on stock buybacks, increased corporate tax rates, collective bargaining and a break-up of big tech as distinct possibilities. ‘A progressive overhaul of the U.S. economy after the election’ would be among the biggest perils, wrote Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset Management.
President Donald Trump’s growth strategy fueled by tax cuts and deregulation has lead the stock market to an all-time high, with returns well above the average U.S. president three years into their terms. The S&P 500 had its best run in six years, gaining nearly 30% in 2019. However, Trump was impeached by the House of Representatives in December for abuse of power and obstruction on Congress regarding Trump’s dealings with Ukraine, which could hurt his reputation at the polls, J.P. Morgan noted. Cembalest told clients a Warren-like progressive overhaul will ultimately be up to U.S. voters, whether ‘unorthodoxies and misdeeds of the President offset a pretty strong US economy.’”
MARKET WATCH/Joy Wiltermuth
Why a bustling labor force could signal a recession looming in the near future
January 8, 2020
“Strong consumer demand and a bustling job market have been two key reasons why Wall Street thinks U.S. stocks will rise and the American economy can grow this year. But low unemployment also can be a ‘defining characteristic’ of a late-cycle economy where ‘recession looms in the near future,’ warned a team of Credit Suisse economists led by James Sweeney, in the bank’s 2020 outlook published Tuesday. The team credits the spending power of employed households with helping to prevent recent global manufacturing weakness from spiraling into ‘something more severe,’ but also stressed that higher wages over time come at a cost for companies.
This chart above shows how higher labor costs coming out of the 2007-’09 recession have cut into U.S. corporate profits. To put a finer point on its, U.S. companies saw incomes grow 7.1% a year on average in the first five years of expansion following the 2008 financial crisis, but slumped to only 2% annual growth in the past five years … in the past, low unemployment rates and falling corporate profits have been reliable harbingers of recession, the team wrote. ‘Because although they sustain the cycle, they are not sustainable.’”
Nearly all corporate CFOs say the economy is going to slow and the stock market is overvalued
January 9, 2020
“Chief financial officers at big U.S. companies entered 2020 on a cautious note, with almost all anticipating an economic slowdown against the backdrop of an overvalued stock market, according to a survey released Thursday. The Deloitte CFO Signals Survey showed that while the corporate leaders see the economy as ‘good,’ they anticipate that before the year is over, conditions will slow. They see consumer and business spending slowing, and 82% anticipate taking more defensive actions, like reducing discretionary spending and headcount, as a way to stave off the looming headwinds.
The slowdown is likely to be particularly acute in Europe and China. While 69% of respondents see conditions in North America as good, the number is just 7% in Europe and 18% in China, the latter a three-year low as the country’s shift to a more consumer-focused economy and its trade battle with the U.S. both conspiring to hold back growth. ‘North America is clearly the place where companies are continuing to increase their investment focus,’ said Sandy Cockrell, Deloitte Global CFO program leader. ‘There’s still a high level of caution’ … The concerns are consistent with a recent Conference Board CEO survey that found recession at the top of the list of things to fear, though Goldman Sachs recently said the U.S. economy is much less susceptible to recessions. Deloitte surveyed 147 CFOs from U.S., Canada and Mexico, most from companies with more than $3 billion in annual revenue.”
BLOOMBERG/David McLaughlin and Annie Massa
The Hidden Dangers of the Great Index Fund Takeover
January 9, 2020
“If you hold a stock market index fund, congratulations. The S&P 500’s total return was a thumping 31.5% in 2019, and a fund that passively tracks that benchmark delivered almost all those gains, minus a tiny fee—perhaps just 0.04% of assets. Now here’s something you probably weren’t thinking about when you clicked on the box to choose an index fund in your 401(k) or IRA: You were also part of one of the biggest shifts in corporate power in a generation … Before it caught on, investors routinely paid sky-high fees to active stockpickers who often delivered subpar returns. The near-universal popularity of index funds puts them up there with Social Security, Stevie Wonder, and streaming TV.”
Their success has had a weird and unintended consequence. As millions of investors have done the most sensible thing financially, they’ve also concentrated shareholder power in the Big Three (Black Rock, Vanguard and State Street). Some 22% of the shares of the typical S&P 500 company sits in their portfolios, up from 13.5% in 2008 … They’re potentially the most powerful force over a huge swath of America Inc. Alarm bells have begun to go off … ‘When you see a small handful of players with ever-growing share and ever-growing clout affecting the trajectory of the largest public companies in the world, that’s going to raise a lot of eyebrows,’ says Ben Johnson, a Morningstar Inc. analyst … Even Vanguard founder Jack Bogle—a tireless advocate for indexing—warned just before his death in January 2019 that there may be too many shares in too few hands.”