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The Best of What They Said and I Read Week Ending 9/9/18

Short excerpts from articles I found interesting. I may not agree with the author and the following material is not intended as investment advice.

U.S Global Investors – September 7, 2018 – by Frank Holmes

“…The major market indices finished down this week. The Dow Jones Industrial Average lost 0.19 percent. The S&P 500 Stock Index fell 1.03 percent, while the Nasdaq Composite fell 2.55 percent. The Russell 2000 small capitalization index lost 1.58 percent this week…The 10-year Treasury bond yield rose 7.9 basis points to 2.94 percent.”

“…The yield on two-year Treasuries rose to 2.69 percent on Friday, the highest level since July 2008, after the U.S. jobs report for August showed an unexpected uptick in average hourly earnings growth. The better-than-anticipated data are helping to cement expectations for a Federal Reserve rate hike later this month, while the odds of an additional increase by year end have also received a boost.”

The Wall Street Journal  – September 8, 2018 – The Financial Crisis Made Us Afraid of Risk – For a While – by Greg Ip

“…Ten years ago this month, the failure of Lehman Brothers exposed how cavalier the world had been towards risk. Households had bought homes they thought could never go down in price, banks had made loans they thought would never default and repackaged them into securities to make them seem riskless and governments, convinced depressions were a thing of the past, had stood by.”

 “…Households and investors are much warier of risk: Look no further than Treasury bonds which, adjusted for inflation, have yielded on average just 0.7% since Lehman failed, compared to more than 3% in the prior three decades. This is due both to central banks buying bonds and holding short-term rates near zero and to investors preferring safe securities to risky ones. Nearly 30% of American households held stocks or mutual funds in 2007; in 2016, only 24% did.”

This pessimism is why the bull market has lasted so long: There are fewer bulls forced to sell into downturns. The late economist Hyman Minsky anticipated the crisis with his thesis that “stability is destabilizing.” Long periods of calm induce behavior and innovation that make the next downturn more violent. The converse explains the aftermath: Instability is stabilizing. “The events of 2008-09 create appreciation for the possibility of events like 2008-09, which prompts risk-reducing behavioral changes that make the system more stable,” Mr. Thomas writes in a report. Among them: businesses hold more cash, banks are less leveraged, and policymakers intervene more to stabilize markets.”

Barron’s  – September  7, 2018 – How to Spot the Next Financial Crisis – by Randall W. Forsyth

“…Different” certainly describes U.S. politics, but the drama in D.C. that dominates the news these days isn’t what concerns the markets. Neither do the escalating tensions over trade and tariffs, at least not yet. The widespread presumption is that the U.S. and its major trading partners, especially China, won’t allow the disputes to escalate to a full-scale trade war, as in the Great Depression.  What the markets fret about most is the withdrawal of the unprecedented medicine provided by central banks in the form of trillions of dollars’ worth of liquidity, which has inflated asset values and spurred the long but slow recovery of major economies.”

“…That’s now changing. Since last October, the Fed has proceeded as promised in shrinking its balance sheet. the net purchases of the Fed, ECB, and BOJ will go from the equivalent of $100 billion a month in the fourth quarter of 2017 to zero starting in this year’s fourth quarter.”

“…In the last five years, U.S. corporations have taken advantage of low yields to sell $9.2 trillion of bonds, which have helped fund $3.5 trillion in repurchases, and are on pace for a record $850 billion in stock buybacks in 2018.  Leverage has permeated the economy…“share buybacks with borrowed money is leverage, private equity is leveraged equity portfolios, tax cuts financed with Treasurys is leverage.”


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