FactSet StreetAccount Summary – US Weekly Recap: Dow (0.22%), S&P +0.16%, Nasdaq +0.81%, Russell 2000 +0.67%
Did you miss SUMMIT FEVER?
Don’t miss this:
Don Coxe: Bull Market in Bonds Now Ending
(…) So manias build their own momentum and to talk of manias in bonds is sort of a contradiction in terms but…what finally convinced me that things were getting out of control was a couple of weeks ago when the yield on the German 10-year bond, which is the second most important 10-year bond next to Treasuries, climbed by 18 times in one week! We went from 4 basis points to 72 basis points before coming back. So what that showed you is that this thing is out of control because if you’d ever make a prediction that there would be a time when the yield on the second highest grade bond in the world could climb by 18 times in one week, you’d say, ‘Okay, this game is over. We are in an area of wild speculation.’ […]
[Most importantly] 20 companies manage 70% of the supply of bonds in the world. This is a concentration far beyond the kind of risks we had on Wall Street with the big banks having so much of that garbage that had been created in the housing boom. So what we’ve got here is a situation where there’s a squeeze and people are rushing out of other assets into these bonds where they have no chance of making money and they have a chance of losing fabulous amounts of money…
So, we’re in the final phase of this…and it was really startling when last week it was revealed that of the corporate bonds issued in the last 12 months, 60% of junk bonds have what’s called cov-lite or light covenants. Now, it used to be that less than 10% of them had that. That means that these are bonds that can be issued where if something goes wrong you can’t get the company to buy them because they don’t have a covenant to do anything in the meantime to protect you. So that’s also a sign that the kind of mechanisms within the bond market to reduce risk have been thrown to the four winds.
Putting it all together the bond market is the center of risk now. Of course, what you don’t have is a 10-year Treasury that’s going to collapse as opposed to a Nasdaq stock at 120 times earnings but because for so many pension funds and individual investors having bonds was a point of stability…it’s no longer a source of stability, it’s a source of instability.”
(…) when it switches and people start to realize it’s a risky asset class, what you’re going to see is huge spreads developing and so the advice we’ve given is not that you panic on this but to understand that the main challenge to the stock market will come not from the stock market itself, but from the bond market, which will give a boomerang effect into the risky areas of the stock market…(…)
I have not in my lifetime (and, by the way, I’m a historian as you know) seen nothing of this character ever. We’ve gone to the lowest levels for the British Gilts—those are 50-year bonds issued by the UK government—they were the standard bond of the world until WWI. We went to a new low in yields there. Imagine that! Because, remember, in the last 50 years of the 19th century you had four separate depressions occur but the interest rates didn’t go back to where they are now. There’s not much room on the downside on yields but what you cannot see is what the restraint is on the upside. And since nobody who’s managing bonds now has had experiencing with managing bonds during a depression, it’s going to be a tough period…”
FOLLOW UP
In last week’s BEARNOBULL’S WEEKENDER, I posted on the apparent froth in the art market and on investor sentiment.
I was not been able to find some history on art valuation in order to correlate it with the equity market. Zerohedge obliged the following Monday. Unfortunately, the numbers on the chart are rather confusing. I suspect that the “May 1999” bars have been misplaced:
As Bloomberg reports, Goepfert’s recent note, analyzing the relationship between record art sales and the stock market, strongly suggests,“previous bouts of expensive art sales have indicated over-confident conditions in the stock market as well.”
There is broad overlap between the markets, now more than ever. Wealth concentration is near an all-time high, and with stocks doing so well, it has helped to fuel massive confidence in other “greater fool” markets like art.
…The market is relatively isolated and a plateau in art prices wouldn’t have much affect on broader assets, though it would likely be coincident with a plateau in stock and bond markets.
With the art market hitting a new milestone last week, perhaps it is time to consider reducing exposure to the exuberance.
In the same piece, I showed this chart from the Short Side of Long which might infer that Joe Public was back in the stock market:
In reality, the more recent stats reflect the growing share of income that the 20 percenters now represent. This group likely account for a larger share of investable assets than in previous cycles. To wit:
More Americans Are Out of the Market Than In It Nearly seven years after the Panic of 2008, and six years after a massive rally started, more Americans are out of the stock market than in it, according to a new survey from Bankrate finds, and for younger investors the numbers are even more lopsided.
About 52% of Americans are not investing in the stock market, the survey found, and it’s not necessarily that they still don’t trust the market. Of the ones that are out of the market, only 9% said they weren’t investing because they didn’t trust stockbrokers; another 7% said they weren’t invested because stocks are too risky. A bigger chunk, 21%, said they weren’t investing because they didn’t understand the market.
(…) Fully 53% of people who aren’t in the market now said they weren’t investing in the market because they didn’t have the funds to do so. A study from the National Institute on Retirement Security found that 45% of working-age households had no retirement savings at all; among the 55-64 age group, the average was only $12,000.
The younger the surveyed got, the lower the results got.
“Millennials are investing in the stock market at half the rate boomers are,” MarketWatch’s Jillian Berman said this morning on the MoneyBeat show; Bankrate’s survey found that only 26% of millennials were investing in the market. Between unemployment, underemployment, and student loans, these youngsters simply don’t have the money to invest. Even when investors do have the money, they’re cool to stocks. (…)
This is Bankrate’s first year doing the survey, but Gallup has been doing similar surveys for years, which illustrates that the percentages have come down. In April 2014, Gallup found that 54% of Americans were invested in the market, either directly or through a fund. In 2009, it 57%; in 2005, it was 62%; in 2001, it was 64%. (…)
From the Brookings Institute:
More than 78% of the growth in GDP between 1979 and 2013 has gone to the top one percent. (…)
Middle class incomes were growing slowly before the recession and have actually declined over the past decade. In addition, according to the New York Times, the proportion of the population with incomes between $35,000 and $100,000 in inflation-adjusted terms fell from 53% in 1967 to 43% in 2013. During the first four decades this was primarily because more people were moving into higher income groups, but more recently it was because they have moved down the ladder, not up. One can define the middle class in many different ways or torture the data in various ways, but there is plenty of evidence that we have a problem.
Wait, wait! Martin Feldstein, from 30,000 feet where most economists reside, argues that incomes are not as weak as the official stats suggest:
The U.S. Underestimates Growth The official statistics are missing changes that are lifting American incomes.
(…) Official statistics also portray a 10% decline in the real median household income since 2000, fueling economic pessimism. But these low growth estimates fail to reflect the remarkable innovations in everything from health care to Internet services to video entertainment that have made life better during these years, as well as the more modest year-to-year improvements in the quality of products and services. (…)
Then, why this?
And that?
From ground zero (letters to the WSJ editor):
- Regarding Martin Feldstein’s “The U.S. Underestimates Growth” (op-ed, May 19): Most middle-class Americans are not thinking how much more quality or satisfaction their $1,000 expenditure produced. No, they are struggling to pay ever-higher real-estate taxes, cover auto repairs because car prices are exploding, and don’t forget the ridiculous cost escalation that accompanies higher education. They are drowning in increased health-care costs instead of celebrating new lifesaving drugs. The decline in real income combined with these and myriad other rising costs contribute to the insecurity of the middle class. I truly hope Prof. Feldstein is right that the U.S. is booming. I wish the working middle-class, small-business owners were feeling like he is.
- My observation is that the middle class drives high-mileage cars, eats out less, doesn’t decorate as much, replaces furniture more slowly, isn’t ashamed to have its children forgo four-year schools for community college and avoid new debt.
The Brookings paper sees a solution to the middle class problem:
The most promising approach is what I call “the second earner solution.” For many decades now, the labor force participation rate of prime age men has been falling while that of women has been rising. The entry of so many women into the labor force was the major force propelling whatever growth in middle class incomes occurred up until about 2000. That growth in women’s work has now levelled off. Getting it back on an upward track would do more than any policy I can think of to help the middle class.
But the rich already know that: Poor Little Rich Women (NYT)
(…) The women I met, mainly at playgrounds, play groups and the nursery schools where I took my sons, were mostly 30-somethings with advanced degrees from prestigious universities and business schools. They were married to rich, powerful men, many of whom ran hedge or private equity funds; they often had three or four children under the age of 10; they lived west of Lexington Avenue, north of 63rd Street and south of 94th Street; and they did not work outside the home.
Instead they toiled in what the sociologist Sharon Hays calls “intensive mothering,” exhaustively enriching their children’s lives by virtually every measure, then advocating for them anxiously and sometimes ruthlessly in the linked high-stakes games of social jockeying and school admissions.
Their self-care was no less zealous or competitive. No ponytails or mom jeans here: they exercised themselves to a razor’s edge, wore expensive and exquisite outfits to school drop-off and looked a decade younger than they were. Many ran their homes (plural) like C.E.O.s. (…)
And then there were the wife bonuses.
I was thunderstruck when I heard mention of a “bonus” over coffee. Later I overheard someone who didn’t work say she would buy a table at an event once her bonus was set. A woman with a business degree but no job mentioned waiting for her “year-end” to shop for clothing. Further probing revealed that the annual wife bonus was not an uncommon practice in this tribe.
A wife bonus, I was told, might be hammered out in a pre-nup or post-nup, and distributed on the basis of not only how well her husband’s fund had done but her own performance — how well she managed the home budget, whether the kids got into a “good” school — the same way their husbands were rewarded at investment banks. In turn these bonuses were a ticket to a modicum of financial independence and participation in a social sphere where you don’t just go to lunch, you buy a $10,000 table at the benefit luncheon a friend is hosting.
Women who didn’t get them joked about possible sexual performance metrics. Women who received them usually retreated, demurring when pressed to discuss it further, proof to an anthropologist that a topic is taboo, culturally loaded and dense with meaning. (…)
