Morning Market Preview for September 9th, 2024

Overview

This gem by Greg Ip is by far our favorite book about economics. Ip has an awesome sense of humor that really speaks to a lot of people because it keeps you engaged. His style is fun, easy to read, and easy to understand. He uses a lot of great examples to make his point, which drastically improves retention. I can walk around and talk about economics, or hear it discussed in the news and know what is meant after reading this book. You really don’t need another economics book, although more good ones are indeed out there. If you read just one economics book, this is it.

Note: Students, read this book first, then read your assigned books – give yourself a head start, an advantage.

Let’s dive in

First and foremost, we noticed that Greg Ip puts a healthy check on the government. He definitely supports the government's role in economics though. “This is not a book for PhD Economists, but for the citizens – the investors on Main Street,” he opens. And he sticks to that. It describes how China was economically at the top of the world pre-Industrial Revolution, but squashed private enterprise. In turn, its people were poorer in 1952 than in 1820. He wisely points out that one overcomes the law of diminishing returns with ideas, and he calls for “better recipes, not more cooking.” In this way, China let itself down. 

He points out that GDP comes down to population and productivity. The business cycle suffers from viruses that make it sick, but we can inoculate ourselves and keep GDP growing. But the trouble is that viruses mutate, so responses need to keep adapting. He feels that post-war economic expansions, however, were all “murdered” by the Federal Reserve (the Fed), not natural causes. He specifically calls out Reg Q here. He also calls out how the Fed raised rates before inflation broke out and slashed them before growth crumbled. In this way the Fed tried to create “soft landings.” Something it still does today. Something I am personally in favor of. 

Ip describes recessions too, and how defining them is an art for some and a science for others. The NBER (National Bureau of Economic Research) for instance declares recessions after the fact, so “it’s about as useful as an autopsy report is for an EMT.” Funny guy. He notes that data-wise, business cycles (here) average 5 years. Short ones are about 2 years, long ones are about 11 years (1990-2001). And they typically end when an industry boom busts and brings the rest of the economy down with it.

The 4 Engines of GDP

He describes well 4 engines of GDP: consumer spending, business investment, government spending, and exports. He notes that two-thirds of GDP is consumer spending, which acts as a ballast and steadies the economy – except for housing which is volatile and 5% of GDP. It’s no surprise that after 9/11 President Bush reassured people to keep living and spending. 

For business investment, inventories are the biggest quarterly variable, but buying, leasing, or building buildings and equipment also drives GDP. He points out that for investors the biggest driver within business is the sales outlook from analysts. If sales are down or projected to be down, then business investment’s contribution to GDP slows. 

Government spending accounts for 20% of GDP per Ip. (A quick search shows it currently at 30%, but spending is up recently so his data passes a simple sanity check.) He cites things such as “tanks and teachers” as being major players in government spending’s upward push of GDP. Funny guy. 

Lastly, exports. Export data comes mainly from the BEA (Bureau of Economic Analysis), the US Census, the Bureau of Labor Statistics, and some Fed data. He points out that since 1982 the number of Americans that want to work grew 42%! To me that’s amazing, but also fits the “latch-key kids” narrative we grew up with (when kids would let themselves inside their house after school because no parent was home since both parents began working). He also notes that jobs since 1982 have grown 47%, and that the two statistics move together. 

He points out that “the income ladder has grown much taller but the distance between rungs has grown bigger too.” Data-wise the high earners correspond with education and skill levels, but the top 1% is not education-based. And that the top 1% represents 24% of all income, which is the highest rate since 1928. This is both good and bad in our opinion. It is the result of new age robber barons, who create jobs… and shows that we have been down this road before. But there are economic problems with stretching out incomes, economic problems with re-compressing it too quickly or forcefully, and economic problems with ignoring it. All in all, timely and appropriate action is key to creating soft landings, instead of hard landings.

Inflation and money supply

Ip goes into detail about inflation and money supply too. He points out that printing doesn’t equate to inflation, which most people think. To make the point he says that $1-trillion dollars printed and put under your mattress doesn’t create inflation. As unlikely as it is for 100% of printed money to be held and not circulated, he makes a good economic point. 

We’d add that this is part of the concern with China holding massive amounts of US dollars; the US government operates with the money in circulation, but what if massive amounts were quickly released? Ip continues and explains how “voters hate inflation” more than unemployment. He gives examples of how the former gets people voted out of office but the latter less so. Also of note, he points out that a bit of inflation is stabilizing, but too much is destabilizing.

Deflation is covered too, and Ip describes it as destructive. In the US, inflation wasn’t a problem during The Great Depression, but unemployment and deflation were.

Ip writes really well about imports and exports. He discusses comparative advantage and its role in international trade. He points out that since 1950 global trade has outpaced world GDP by 50%, or 6% versus 4%, and even US exports moved from 5% to 11% of GDP in that time. We are exporting more and it’s a larger percent of our GDP than it was in 1950. But we import more too now. 

It’s the relationship between importing and exporting nowadays that concerns people. When giving an example of comparative advantage, Ip points out how households import a nanny’s services from abroad (aka outside the household) so that they can go to work. So the import of the child-watching service enables more production because it is cheaper than doing it yourself (cheaper than not working).

Ip describes imports and exports as one of the few economic topics that is straightforward. Yet it remains controversial, nonetheless. He estimates that 25% of our jobs could be done offshores, and that this idea terrifies people. Astutely, he then points out the importance of our infrastructure and legal system. They are critical because they make it worth keeping jobs inside the US. You may be able to do a job overseas at a lower cost, but how risky and complicated is it at that point? Companies tend to overdo or underdo their overseas endeavors. 

For whatever reason it is tough for them to keep properly balanced, likely because the more abroad you go the more dynamic things get, which creates vulnerabilities in supply chains, management, diplomacy, and so on.

He points out how trade can reward the top and erode the middle class. For instance, Apple is rich, but the jobs needed to make their products are lost to the US middle class. So it ends up as a net plus, but if the middle class evaporates then that effect is worse than the gain because it alters our fiber and complicates our economics. Interestingly, no one company really feels at fault for the erosion of the middle class, similar to how no one contributor of the GFC (Great Financial Crisis) felt guilty and few were held accountable. 

Everyone was just playing their part in a very big thing. We see how an industry bubble can form, pop, and pull the entire economy down. Ip finishes this section by saying that voters don’t like imports en masse because the negatives are obvious and the positives aren’t. So you have obvious negatives competing with obscured, nuanced, or second-order positives. 

There are actually a lot of examples of how a gross net positive does not work for individuals because it is not a positive for them personally. A government (economy) is not a household, as the saying goes.

Currencies

Greg Ip describes current accounting deficits (aka financing deficits) well too. He explains that current accounting deficits means one must borrow or sell assets, but that action enables investment opportunities that exceed the value or usefulness of saving.

He describes how driving down one’s own currency value boosts exports, and that China used to have excess savings (from a governmental, macroeconomic point of view) but eventually boosted its exports by buying US Treasuries, which strengthened the US dollar by “retiring it” and therefore weaken Chinese currency relative to the US dollar. That buying also spent the “excess” Chinese savings, drove down the value of the Chinese currency (Yuan) and therefore improved exports (as the value of your currency means either imports or exports are more attractive). You have to decide which game you want to be in. China chooses exports and therefore devalues its currency, while the US chooses imports (remember comparative advantage) and therefore boosts its currency’s value. 

Why doesn’t everyone use comparative advantage? 

Because not every household, or government, is rich enough to spend on X (nanny) in order to earn more Y (income). What if there were very few high-income jobs? Would you have one? If not, you aren’t playing this “import” game. Interestingly, in countries with few high income jobs it is actually a social expectation that you hire nannies and “import” similar jobs because you are a job creator, and therefore a socio-economic enabler. 

Back to currencies though. 

Ip states that the USD (US dollar) is like a boring mutual fund for an ordinary household, and is therefore the world currency. And since countries like to take USD, we finance things easily. This is just one way in which money makes money and having the reserve currency of the world is critical to the US economy. And the US staying stable is, in turn, critical to the world economy. You want the world currency to be under the tutelage of a stable nation, not a flash in the pan or a gamble.

The Fed

Ip describes several mistakes the Fed has made, which we will not go into here. He describes them well, and it is important for us to understand (and the Fed too) so we can avoid them. By and large, the Fed does learn well. But there are always new mistakes to be made. By studying the past mistakes, Ip shows us how it is possible to distill fundamental economic truths. At that point, there’s no excuse for violating one of those truths. If the Fed is to make mistakes moving forward, it should only be in new, unexplored circumstances – not fundamental errors like during The Great Depression. The Fed has power; FOMC meetings move the market for a reason ("Investors, don't fight the Fed" as the saying goes.

Hawk and dove bankers are described pretty well by Ip. He shares that in the banking world “Only hawk bankers go to central banker heaven.” Funny guy. That’s the feeling in that circle at least. Hawkish bankers are tight with their actions, more likely to dissent, and care far more about inflation than unemployment. Doves are the opposite. It’s not just war that has hawks and doves, but economics too.

Overall, the Fed tries to target 1.7-2% inflation by measuring growth, unemployment, and inflation. Ip points out how Ben Bernanke did well overall in that regard, and describes Bernanke as a Great Depression buff, like there are Civil War buffs. Ip says Bernanke disliked the Fed’s excessive orthodoxy during The Great Depression, felt more action (and more liberal action) was needed sooner, but disliked FDR’s New Deal. Simply put, Bernanke felt the Fed missed and then the president missed in response, which exacerbated and prolonged The Great Depression.

Ip describes the Federal Funds Rate, the Fed as a lender of last resort, and discretionary spending versus entitlement spending. Each of these is covered well, easy to read, and easy to understand. Merely his poignant description of how US government borrowing is like an elephant pushing up long-term interest rates and crowding-out private investing is worth the price of the book. 

There are pros and cons to government borrowing, but they have major impacts that are important to understand as an investor. Basically, the US government borrowing abroad is far better for everyone in the US because they aren’t crowded-out, and Uncle Sam gets his borrowing complete. 

Another very poignant point Ip makes is that if the US borrowing is mainly abroad then inflation is mainly the rest of the world’s problem. A full two-thirds of inflation is at the expense of the rest of the world (when two-thirds of government borrowing is outside the US). Obviously this is both good and bad depending on how you look at it. But it's important to know as an investor. It gives you insight into the health of the US and world economic health.

Oh the leverage!

Lastly, we'll mention Ip’s coverage of leverage. He describes leverage this way: “Leverage is like speed in a crash, and as a crisis hits the more leverage involved the more damage.” See, he paints pictures. He's easy to read, and easy to remember. There are amazing advantages of leverage (labor, money, technology, media are all leveraged to great benefit) but when a household, business, industry, sector, or an entire economy begins to wobble… measure their leverage and decide how far away you need to get as an investor from an upcoming crash!

“The Little Book of Economics: How the Economy Works in the Real World” was fantastic, and we hope you can tell how much we loved it.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

Arena Investor is modern planning and investing built for the busy, hardworking professionals who know their money needs more attention but don't have the time, or simply want better work-life balance

Good morning, Heroes!

Here’s your Morning Market Preview for September 16th, 2024
Read, or listen relaxingly for a few minutes – whichever you prefer!

Key Economic Reports

• No reports to mention for Monday.

Key Events & Earnings Reports Today

• A handful of lesser-known companies report on Monday: Hide Tide Inc, RF Industries, Vince Holding Corp, and Ocean Power Technologies. Likely, none of these reports will move the market.

The Fed

• All eyes are on the Fed. On the 17th and 18th the key members meet to decide on a rate cut. The consensus had been that the Fed would cut rate by a quarter percent, but a lot of energy has formed around a half percent cut with the charge led by former New York Fed President William Dudley, saying “I think there’s a strong case for 50.”

Stocks

Year-to-Date Performance:

• Up Most: Tech has taken over the top spot with a strong week last week, now up 26.21%. Second is Utilities, now up 23.18%.
  
  
• Down Most: Energy is down the most, but is still barely up on the year overall at 1.83%. Down second-most is Materials, up 7.95% on the year.

5 Day Moving Average: This is the percent of Large Cap stocks above their 5 day average

• Up Most: Utilities and Consumer Discretionary are now up a whopping to 97% and 96% of their Large Cap above their 5 day average, respectively. Tech and Materials are tied for second best over the last 5 days with 93% of their Large Caps above their 5 day averages.
  
  

• Down Most: Energy is down most with 59% of its Large Cap stocks above its 5 day average. And Consumer Staples was second to last, although it had 68% of its Large Cap stocks above their 5 day averages.
  
  
• Overall, it was a great week for these sectors, as we get a new week started.

Crypto

• Bitcoin: Up to about $59,826, up a massive 42.24% this year.
  
  
• Ethereum: Opening at about $2,409, and staying positive at 2.47% this year.
  
  
• Top Gainers Recently: Litecoin left the rest of the field in the dust recently, up 5.74% as of this report.

Bonds

• 2-Year Treasury Yield:  At 3.603%, it has continued its yield decline this year.
  
  
• 10-Year Treasury Yield: At 3.649%, it also continues its yield decline this year.

Gold

• Price: Gold has had an amazing year, up 24.92%, now at about $2,576.

Real Estate

• 30-Year Fixed Mortgage Rate: Down just a bit, now to 6.14%. The mortgage rate has dropped about 7.95% this year.

Geopolitical Aspects

• Geopolitical tensions, particularly in the Middle East and between major powers like the U.S. and China, influence markets significantly. Escalations or de-escalations in these regions can lead to immediate market volatility, affecting oil prices, stock markets, and investor sentiment. The potential for broader conflict or trade disruptions adds uncertainty, with markets often reacting swiftly to geopolitical news.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

P.S. 

Some Simple Explanations of Key Concepts to Level Up Your Financial Education

Stock Market Sectors: Stocks are divided into sectors like technology, health care, or energy. Each sector performs differently based on economic conditions, policy changes, or technological advancements. For instance, tech stocks might thrive in a high-growth environment, while energy stocks could respond to oil price fluctuations.

Bonds and Treasury Yields: When you buy a bond, you're lending money to the issuer (like the government) in exchange for interest over time. The yield is this interest rate. Higher yields can mean higher risk or inflation expectations, affecting all asset classes, including stocks and real estate.

Cryptocurrencies: These are digital or virtual currencies not backed by any government or physical asset. Their value can soar or plummet rapidly due to speculation, regulatory news, or technological developments.

Gold: Often seen as insurance against economic downturns or inflation. When economies are uncertain, gold tends to rise in value as investors seek safe investments.

Real Estate: Mortgage rates directly impact housing affordability. Lower rates can lead to a housing boom, but if rates rise, demand can fall, affecting home prices.

Understanding these aspects of the investing arena can help investors in making informed investment decisions.

You’re the Hero.
    We’re the Guide.

‍

Arena Investor is modern planning and investing built for the busy, hardworking professionals who know their money needs more attention but don't have the time, or simply want better work-life balance

Good morning, Heroes!

Here’s your Morning Market Preview for September 23th, 2024
Read, or listen relaxingly for a few minutes – whichever you prefer!

Key Economic Reports

• At 9:45 am US Services PMI and US Manufacturing PMI report, monthly reports that give insight into service and manufacturing activity.

Key  Earnings Reports & Events Today

• AAR Corp, Red Cat Holdings, and Phoenix Motors have their earnings calls today.
  
  
• Boeing’s strike continues, and the company has furloughed thousands of workers. Mechanics are saying they are ready for a long strike. The strike began on September 13th.

The Fed

• The Atlanta, Chicago, and Minneapolis Fed Presidents speak today, giving insight into the last Fed rate cut and possible insight moving forward for Mr Market.

Stocks

Year-to-Date Performance:

• Up Most: Tech is now up 27.44% this year. Utilities is second-best on the year, up 25.61%.
  
  
• Down Most: Important to know, no sectors are negative on the year. The smallest gain has been in Energy, up 5.69% this year. Second-to-last is Materials, up 9.59%.

5 Day Moving Average: 

• Up Most: 86% of Energy Large Cap stocks are now above their 5 day average. Tech is second now with 76% of its Large Caps above their 5 day average.
  
  

• Down Most: Real Estate is down, and only 26% of Large Caps are above their 5 day average. Next closest is Health Care with 32% of Large Caps above their 5 day average. 

Crypto

• Bitcoin: Up big recently, now over $63,000, which puts it at a staggering 52% gain on the year.
  
  
• Ethereum: It’s been a good couple of days for Ethereum again, and is nearly $2,600 now, which means a 12.5% gain on the year.
  
  
• Top Gainers Recently: Bitcoin and Litecoin have performed well recently, up about 2.2 to 3.3% in the last day.
  
  
• Important to note: Crypto markets are always open and prices change constantly.

Bonds

• 2-Year Treasury:  Yields continue to come down, now at 3.597%.
  
  
• 10-Year Treasury: Up a tick to 3.741%, but overall it’s had a decline this year too.
  
  
• The yield curve is no longer inverted, having un-inverted in late August, 2024.

Gold

• Price: Gold has had a great year, now over $2,600 per ounce, and up 27% on the year.

Real Estate

• 30-Year Fixed Mortgage Rate: Up just a bit, now to 6.15%. The mortgage rate has dropped about 7.8% this year.

Geopolitical Aspects

• Europe: Continued recovery with a focus on green energy, impacting commodity markets.
  
  
• Asia: Economic rebound in China post-COVID, influencing global manufacturing and tech sectors.
  
  
• Global Tensions: Ongoing trade negotiations and regional conflicts could sway investor sentiment, particularly affecting oil prices and defense stocks.

‍

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

P.S.

Continue reading, if you would enjoy some simple explanations of key concepts to level up your financial education

Each of these elements interacts, creating the dynamic we call 'the market'.

Understanding these aspects of the investing arena can help investors in making informed investment decisions.

You’re the Hero.
    We’re the Guide.

• PMI (Purchasing Managers' Index): This is like a health check for businesses. A number above 50 means more growth, below 50 indicates contraction. It's crucial because it shows if companies are buying more stuff, which suggests they're confident about future sales.
• Economic Reports: Data like jobless claims help predict economic health. For instance, rising claims might suggest economic slowdown.
• Jobless Claims: These are weekly reports that show the number of people filing for unemployment benefits. Higher numbers can indicate a weakening labor market.
• Housing Starts: This measures the number of new residential construction projects and is a key indicator of real estate market health.
• The University of Michigan's Consumer Sentiment Index measures consumer confidence through surveys, reflecting optimism or pessimism about personal finances and business conditions.
• Federal Reserve Rate Decisions: The Fed adjusts interest rates to either stimulate the economy (by lowering rates) or control inflation (by raising rates). Rate cuts can make borrowing cheaper, while rate hikes aim to curb inflation.
• Treasury Yields: The return on U.S. government bonds, often used as a measure of investor sentiment about future inflation and economic growth.
• Stock Sectors: Different sectors thrive in different economic conditions. Tech might boom during innovation, while energy could struggle with green shifts.
• Bonds and Yields: Bonds are safer than stocks but yield reflects risk or inflation expectations. Higher yields could mean investors demand more return.
• Cryptocurrency: Digital currencies like Bitcoin and Ethereum have been volatile but offer significant returns in 2024.
• Gold: A traditional safe-haven investment that often rises during times of uncertainty or when inflation is high.
• Real Estate: Influenced by rates, economic health, and demographic trends. Lower rates can inflate home prices due to increased buying power.
• Mortgage Rates: Higher rates make borrowing more expensive, which can cool down housing demand and affect real estate prices.‍
• 1 Basis Point (BPS) equals 0.01%. It’s easier to say “5 bips” than it is to say “zero point zero five percent.”