Risk/Reward Vol. 375
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Surprise! Yes, Virginia, there is an edition this week. Why? Well my dear wife/girlfriend took a few spills on the slopes. The last one resulted in a wrenched knee. After consulting one of the Team USA Snowboard doctors, we decided to head home early for an in person inspection. The diagnosis: a grade 2 LCL sprain and a skier's thumb. Nothing she can't handle, but some pain and a great deal of inconvenience nevertheless. Shame on me for pushing her back into something she does not love. Thankfully she will not be disabled from her number one sport: trekking to the beach with grandchildren and libations in hand.
Wow. Another record setting week. The fuel continues to be tax reform. As the specifics emerge, financial consultants are listing those corporations that will benefit the most. Not surprisingly, they are mostly big names (e.g. Apple, financial instituions and C corporatins in general). Thus the blue chips found in the Dow Jones Industrial Average are leading the charge; up nearly 25% year to date. As I have stated repeatedly, I see no end in sight.
No end in sight despite a paltry 52 basis point spread between the yield on the 10 Year and the 2Year US Treasury Bonds, the smallest spread since the fall of 2007 . Conventional wisdom is that the flattening of this spread or yield curve suggests a slowing economy as investors opt for the safety of longer term Treasuries over shorter term ones. This time is likely different at least according to such market mavens as Mohamed El Erian. He posits that the shorter term, 2 year Bond, is reacting to the rise in the Federal Funds interest rate which the Fed raised again just this week and which is scheduled to rise three more times in 2018. In contrast, the longer end (the 10Year) is experiencing downward rate pressure due to two factors: one, low inflation and two, an influx of foreign buyers. This latter point is extremely significant. It suggests that the most important pricing mechanism for each and every US financial asset (the rate on the 10Year) is now dominated by factors outside the US. And the facts bear this out. Remember, because the European Central Bank is still buying every sovereign bond available at whatever price, the rates on the 10Year bonds of every major European country (e.g. Germany, France) remain well below ours. Therefore, foreign investors seeking highly rated government securities have no choice but to bid on US bonds thereby raising their prices and depressing their yields. Take a look at the spike in foreign buyers of US debt year to date. Foreign entities currently hold $6.3 trillion of US Bonds out of a total tradable amount of $14.7 trillion or nearly half. (Although the total US debt is $20.24 trillion, approximately $6 trillion is held by the Social Security Trust and similar government agencies and is not deemed tradable.) This means that rate watchers such as myself must keep an eagle eye on what the ECB does. Once it ends its bond buying spree (quantitative easing) our bonds will become less attractive and we should see the 10 Year yield spike. This will have a ripple effect on the price of all financial assets.
Three seemingly unconnected news reports on Thursday caught my eye. One, Toyota and Panasonic signed a joint venture to develop the next generation of lithium ion batteries for use in automobile production. Two, the Renault/Nissan Alliance announced that in the near future it will have 40 models with various driver autonomy capabilities. And three, Morgan Stanley issued a report that once driverless cars are the norm it foresees a 6.5% increase in alcohol consumption given the additional drinking time available to commuters. Seemingly unconnected but in reality very much interrelated. To this end, I HIGHLY RECOMMEND watching a 1:03 hour video presentation dated June 9, 2017 by futurist Tony Seba. It is available on YouTube. His premise is that single technology developments do not move the needle but the convergence of several innovations does. He cites the fact that the iPhone (which is only 10 years old) arose due to a combination of technological developments (computer, telephony and touch screen) He sees the same thing occurring with the development of longer lived and significantly cheaper batteries, improved electric vehicle performance and driving autonomy. The implications are enormously disruptive. It is a real mind blowing thought piece. A shoutout to a subscriber for alerting me to it.
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