Tag Archives: Business

Rising Rates May Signal Significant Market Shifts Ahead

Some investors may be tempted to buy amid the moderate dips in stock prices, but we lay out the rationale for a more nuanced approach.
By Lisa Shalett – The second half of February brought not just a market selloff, but also indications of a more serious potential shift in market outlook. Just two weeks after hitting a high of 3948 on Feb 16, the S&P 500, the benchmark index of the broader U.S. market, has fallen 3.5%, while the tech-and-growth-stock-heavy Nasdaq index is down about 6.4%. For some, that may seem like the kind of moderate dip that could be a buying opportunity, but we don’t believe that’s the case right now.

A close look at interest-rate dynamics suggests that fundamental market conditions may be changing. In the past two weeks, we’ve seen the benchmark 10-year Treasury yield surge as high as 1.6% from 1.3%—compared with its historic low of 0.5% last August. The recent surge may indicate a reassessment of the speed of the U.S. economic recovery and the likely Federal Reserve policy response.

Investor faith that interest rates would remain stable at very low levels has helped support sky-high price-to-earnings multiples this year. Growth stocks are often valued against the yield on a low-risk Treasury bond—the wider the spread, the larger premium that an investor is expected to pay for the added risk of growth. As rates move higher, stock prices often adjust to reflect that narrowing gap. That may be a big reason why tech stocks, in particular, got hit so hard last week.

Also, survey-based indicators from primary dealers and investors suggest that market participants believe that a tapering of the Fed’s bond-buying program will begin in the first quarter of 2022. For that timeline, the Fed would have to start signaling a shift later this year to avoid major market upset, similar to what we saw with the 2018 “taper tantrum.”

This shift in policy expectations has material implications for portfolio construction, suggesting not only shifts in sector and regional positioning, but fresh approaches to diversification, as rising rates produce potential headwinds for both stocks and bonds simultaneously.

Investors should consider adding economically cyclical sectors that can take advantage of global reflation. We also suggest maintaining positions in defensive sectors that would likely do well if the faster-growth, rising-rate scenario takes longer to materialize than indicators now suggest. more>

Stock Market Outlook 2021: Bull Market, But Buckle Up

In what may become the second year of a bull market, where can investors look for returns, amid the appearance of historically high valuations?
By Andrew Slimmon – Stock market returns in 2020 eerily resembled the trend in 2009—that is, the strength of the first year emerging from a deep stock market recession. While past performance does not necessarily predict future results, being an active equity investor does require understanding historical moves.

Last year, as the market recovered from its drop in March, many investors were way too bearish in retrospect, keeping too much cash on the sidelines. Once the rally began, volatility dropped, and the bull market climbed significantly before the bears eventually capitulated late in the year.

Now in 2021, amid hope and excitement that the pandemic might soon be behind us as vaccines are distributed, investors may actually find it tougher to generate the kind of stock market returns we saw last year in the midst of COVID-19. Strange I know, but as we saw last year, equity returns need not align with what is the current state of the economy. Instead, stocks this year may resemble their performance in 2010, i.e., year two of the bull market that started in 2009. After the S&P 500 Index’s stunning 68% return from the March 2020 low to the end of the year, stocks likely need to take a breather, much as they did in the second quarter of 2010. Importantly, however, overall returns of a second year of a bull market are historically positive, like in 2010.

We should therefore brace ourselves for a lot more stock market volatility in 2021. This will likely shake out the reluctant bulls, those who only recently put their cash to work in equities, at the exact wrong time. Based on history, investors should hold tight and keep eyes on the longer term. The second year of a new bull market historically performs quite well overall, though it tends to be more gut-wrenching along the way. more>

2021 Bond Market Outlook: Finding Yield in a Recovery

As global economic growth strengthens this year, bonds investors may find opportunities in high quality bonds, higher-yielding debt and assets that hedge against a declining U.S. dollar.
By Jim Caron – As fixed income investors, we expect 2021 to be a year of recovery. Many economic forecasts show U.S. GDP increasing by as much as 5%, or even 6%, and it begs the question: Won’t bond market yields rise in this environment? Rising yields of course mean falling bond prices—at least on paper for investors who own the debt. But yields will be rising for good reasons, based on economic growth and cash flow returning to markets.

Bond market movements will act as key indicators of the health of the recovery, as well as corporate performance and consumer confidence in 2021 and beyond. Compared to 2020, when global monetary and fiscal policies were focused on supporting solvency and bond investors benefited from flocking to safe-haven assets, such as U.S. Treasuries, this year may entail a more idiosyncratic environment for credit, which will make active portfolio management paramount.

As economic growth strengthens (most likely in inverse proportion to the severity of the pandemic this year) and variation in the fixed-income market broadens, so will the opportunities for bond allocators. For investors searching for higher yields and portfolio diversification to hedge against equities and U.S. dollar weakness, we see fixed income opportunities in five key areas.

We see value in taking a tactical barbell investing approach, which involves owning high quality and interest-rate sensitive fixed income to balance more risky credit. During the first half of 2021, investors can consider adding U.S. Treasuries and Australian and New Zealand government bonds amid an expected increase in yields. When it comes to investment grade corporate credit, we have some aversion to highly-rated bonds, including A-rated corporates with high cash balances because there’s risk that M&A activity in this cohort could weigh on valuations. We prefer a combination of triple-B corporate bonds with solid company fundamentals and U.S. Treasuries as a preferred risk allocation, as an example. more>

2021 Global Economic Outlook: The Next Phase of the V

Morgan Stanley projects strong global GDP growth of 6.4% for 2021—led first by emerging markets, followed by reopening economies in the U.S. and Europe—in a macro outlook that diverges from the consensus.
Morgan Stanley – Rising COVID-19 case numbers in the U.S. and Europe make it difficult right now to envision a return to normal. Yet, even as the pandemic drags on, the global economy has proven remarkably resilient.

Following a steep decline in early 2020, the world economy rode a rebound that began in May and remains on track to surpass prepandemic GDP levels by the end of this year—setting the stage for strong post-recovery growth in 2021.

In their 2021 outlook, the economics team at Morgan Stanley Research says the V-shaped recovery that the team forecast in their 2020 midyear outlook is now entering a new self-sustaining phase and is on track to deliver 6.4% GDP growth in the coming year.

“This projection stands in stark contrast to the consensus, which forecasts 5.4% global growth and worries that the pandemic will have a bigger impact on private-sector risk appetite and, hence, global growth,” says Chetan Ahya, Morgan Stanley’s Chief Economist. “We maintain that consumers have driven the recovery, and investment growth—a reflection of the private corporate sector’s risk tolerance and a key feature of any self-sustaining recovery—is bouncing back as well.”

Three key factors will characterize the next stage of the V-shaped recovery, says Ahya: synchronized global growth, an emerging-market rebound and the return of inflation. Against this macro outlook, Morgan Stanley strategists urge investors to trust the recovery and overweight equities and credit vs. government bonds and cash (see the 2021 Strategy Outlook for more). more>

China after November

By Basil A. Coronakis – The war between the US and China that started shortly after the election of Donald Trump in 2016 and has since continue at relatively low intensity w

There is no doubt, of course, that it will continue at even stronger pace after the election, regardless of who the winner is, whether it is the remains of the Democratic party or of the Republicans. Indeed, Trump has brought the US’ relations with China to a point of no return. And regardless whether he will or not win a second term, the Sino-American war will not stop.

American society has been intelligently brain-washed by the Trump Administration into holding China responsible for the Wuhan Virus pandemic, and the more lives it costs in the United States, the more Americans will hold China responsible. As this is, for ordinary Americans, a matter of life or death, their anger and hatred for China will continue to grow in parallel with the pandemic effects.

It would be far fetched to speculate that Trump has handled the pandemic in the way to have exactly this effect, but there is no doubt that he maximized it as an excellent detergent for brain-washing the people of Main Street.

Americans are convinced that China is responsible for the pandemic, which is true, but to communicate this sort of truth efficiently, and to engage the entire population of the United States, was a victorious tactical maneuver in the New Cold War against China.

Now all Americans are psychologically engaged against China and this is the bond that the next president will be forced to continue the war against China. If he does not, he will certainly be accused for high treason, an accusation which regardless of what the impact is on his presidency, will carry on in the historical record.

For China, this war is a win-win situation because if Beijing loses, it will be completely isolated from the rest of the world and will have no external influences, which means no dangers, thus leaving the Communist regime with eternal power. For China’s Communists, isolation is the best-case scenario as they will maintain power and extend their totalitarian rule to all aspects of life by eliminating any potential threat to their grip on power, all of which will be done pretty easily as the Chinese people have never sensed freedom or democracy, and they are trained to work for a handful of rice under the shadow of the Great Helmsman. more>

How to Disguise Racism and Oligarchy: Use Economics

By Lynn Parramore – James McGill Buchanan is a name you will rarely hear unless you’ve taken several classes in economics. And if the Tennessee-born Nobel laureate were alive today, it would suit him just fine that most well-informed journalists, liberal politicians, and even many economics students have little understanding of his work.

The reason? Duke historian Nancy MacLean contends that his philosophy is so stark that even young libertarian acolytes are only introduced to it after they have accepted the relatively sunny perspective of Ayn Rand. (Yes, you read that correctly). If Americans really knew what Buchanan thought and promoted, and how destructively his vision is manifesting under their noses, it would dawn on them how close the country is to a transformation most would not even want to imagine, much less accept.

That is a dangerous blind spot, MacLean argues in a meticulously researched book, Democracy in Chains, a finalist for the National Book Award in Nonfiction. While Americans grapple with Donald Trump’s chaotic presidency, we may be missing the key to changes that are taking place far beyond the level of mere politics. Once these changes are locked into place, there may be no going back.

MacLean’s book reads like an intellectual detective story. In 2010, she moved to North Carolina, where a Tea Party-dominated Republican Party got control of both houses of the state legislature and began pushing through a radical program to suppress voter rights, decimate public services, and slash taxes on the wealthy that shocked a state long a beacon of southern moderation. Up to this point, the figure of James Buchanan flickered in her peripheral vision, but as she began to study his work closely, the events in North Carolina and also Wisconsin, where Governor Scott Walker was leading assaults on collective bargaining rights, shifted her focus.

Could it be that this relatively obscure economist’s distinctive thought was being put forcefully into action in real time?

MacLean could not gain access to Buchanan’s papers to test her hypothesis until after his death in January 2013. That year, just as the government was being shut down by Ted Cruz & Co., she traveled to George Mason University in Virginia, where the economist’s papers lay willy-nilly across the offices of a building now abandoned by the Koch-funded faculty to a new, fancier center in Arlington.

MacLean was stunned. The archive of the man who had sought to stay under the radar had been left totally unsorted and unguarded. The historian plunged in, and she read through boxes and drawers full of papers that included personal correspondence between Buchanan and billionaire industrialist Charles Koch. That’s when she had an amazing realization: here was the intellectual linchpin of a stealth revolution currently in progress.

Buchanan, a 1940 graduate of Middle Tennessee State University who later attended the University of Chicago for graduate study, started out as a conventional public finance economist. But he grew frustrated by the way in which economic theorists ignored the political process.

Buchanan began working on a description of power that started out as a critique of how institutions functioned in the relatively liberal 1950s and ‘60s, a time when economist John Maynard Keynes’s ideas about the need for government intervention in markets to protect people from flaws so clearly demonstrated in the Great Depression held sway. Buchanan, MacLean notes, was incensed at what he saw as a move toward socialism and deeply suspicious of any form of state action that channels resources to the public. Why should the increasingly powerful federal government be able to force the wealthy to pay for goods and programs that served ordinary citizens and the poor?

In thinking about how people make political decisions and choices, Buchanan concluded that you could only understand them as individuals seeking personal advantage. In an interview cited by MacLean, the economist observed that in the 1950s Americans commonly assumed that elected officials wanted to act in the public interest. Buchanan vehemently disagreed — that was a belief he wanted, as he put it, to “tear down.” His ideas developed into a theory that came to be known as “public choice.”

Buchanan’s view of human nature was distinctly dismal. more>

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We are Hong Kong

By Chris Patten – In my final speech as Hong Kong’s governor on June 30, 1997, a few hours before I left the city on Britain’s royal yacht, I remarked that “Now, Hong Kong people are to run Hong Kong. That is the promise. And that is the unshakable destiny.”

That promise was contained in the 1984 Joint Declaration, a treaty signed by China and the United Kingdom and lodged at the United Nations. The deal was clear, and the guarantee to Hong Kong’s citizens was absolute: the return of the city from British to Chinese sovereignty would be governed by the principle of “one country, two systems.” Hong Kong would have a high degree of autonomy for 50 years, until 2047, and would continue to enjoy all the freedoms associated with an open society under the rule of law.

But with his recent decision to impose a draconian new security law on Hong Kong, Chinese President Xi Jinping has ridden roughshod over the Joint Declaration and directly threatened the city’s freedom. Defenders of liberal democracy must not stand idly by.

For over a decade after the 1997 handover, China largely kept its promise regarding “one country, two systems.” True, not everything was perfect. China retreated from its promise that Hong Kong could determine its own democratic government in the Legislative Council, and the Chinese government periodically interfered in the life of the city. In 2003, for example, it abandoned an attempt to introduce legislation on issues such as sedition – an odd priority in a peaceful and moderate community – in the face of mass public protests.

Overall, however, even skeptics conceded that things had gone pretty well. But China-Hong Kong relations started to deteriorate after Xi became president in 2013 and dusted off the playbook of aggressive and brutal Leninism. Xi reversed many of his immediate predecessors’ policy changes, and the Communist Party of China reasserted control over every aspect of Chinese society, including economic management.

Xi toughened the party’s grip on civil society and universities, and cracked down on any sign of dissident activity. He demonstrated that his regime’s word could not be trusted internationally, for example by reneging on promises he had made to US President Barack Obama that China would not militarize the atolls and islands it was seizing illegally in the South China Sea. more>

Updates from Chicago Booth

Think you’re not racist?
Research uncovers our secret prejudices, and ways to overcome them
By Alice G. Walton – It has been 50 years since the Civil Rights Act outlawed discrimination based on race, color, religion, sex, or national origin. The landmark legislation marked the end of the era of legalized racism. Now some affirmative action programs, created to encourage and promote diversity and the presence of underrepresented minorities, are being rolled back.

However, while overt racism may be on the wane in the US, research suggests it remains just below the surface. Very few people would admit to being biased, yet there’s strong evidence that biases continue, often under the level of our expression and of our awareness.

Ten years ago Marianne Betrand, Chris P. Dialynas Distinguished Service Professor of Economics at Chicago Booth, and Sendhil Mullainathan, then at MIT, published a famous study entitled, “Are Emily and Greg More Employable Than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination,” in which 5,000 fictitious resumes were sent in response to 1,300 job postings in Chicago and Boston. The resumes were either “high quality” or “low quality,” varying in the typical things that set resumes apart—job and internship experiences, academic institutions, and languages spoken. Then, the team randomly assigned either a “white-sounding” name, such as Emily Walsh, or an “African American–sounding” name, such as Lakisha Washington, to each resume.

The results were unambiguous. White-sounding applicants got 50% more callbacks than African American–sounding candidates. This didn’t seem to be a matter of how common the names were or the apparent social status of the applicant, but simply a function of what the names suggested about the race of the fictional applicants.

Even more disturbingly, white applicants with higher-quality resumes had a strong advantage over their African American peers. The authors suggest that this makes it less enticing for African Americans to develop high-quality resumes, which makes hiring discrimination part of a destructive cycle. more> [VIDEO]

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Do civilisations collapse?

By Guy D Middleton – We also need to think about what we apply the term ‘collapse’ to – what exactly was it that collapsed? Very often, it’s suggested that civilizations collapse, but this isn’t quite right. It is more accurate to say that states collapse. States are tangible, identifiable ‘units’ whereas civilization is a more slippery term referring broadly to sets of traditions. Many historians, including Arnold Toynbee, author of the 12-volume A Study of History (1934-61), have defined and tried to identify ‘civilizations’, but they often come up with different ideas and different numbers. But we have seen that while Mycenaean states collapsed, several strands of Mycenaean material and non-material culture survived – so it would seem wrong to say that their ‘civilization’ collapsed. Likewise, if we think of Egyptian or Greek or Roman ‘civilization’, none of these collapsed – they transformed as circumstances and values changed. We might think of each civilization in a particular way, defined by a particular type of architecture or art or literature – pyramids, temples, amphitheatres, for example – but this reflects our own values and interests.

It is the same with the Maya and with the Easter Islanders. In both cases, civilization and state have been confused and conflated. The Maya world was spread across a huge area with many different environments, from the dry northern Yucatán Peninsula to the river-fed lowlands in the south, and beyond into the mountains. It was an old and interconnected world of cities and kings, divided up among super-states of wide influence and more modest kingdoms that could fall under their spell. There were probably 60 to 70 ‘independent’ states; the fortunes of all waxed and waned. It was a bigger and more complex world than Late Bronze Age Greece.

he idea of a collapse of Maya civilization seems just wrong – and it carries with it the wrong kind of implications – that the Maya all disappeared or that their post-collapse culture is less important or less worthy of our attention. Via many individual collapses, Classic Maya society transformed through the Terminal Classic and into the Postclassic – a development that is hardly surprising when compared with the changing map of Europe across any five-century period. Maya society continued to change with the arrival of the Spanish, and through the colonial and modern eras. If we value the Maya’s so-called Classic period more than their culture at other times, this is our choice – but it is one that should be recognized and questioned. more>

It’s a virus, and this isn’t a war

The coronavirus crisis is a social challenge, Karin Pettersson writes, which the formerly secure are now being reminded is hitting the poor hardest.
By Karin Pettersson – In an essay in Wired magazine, the British author Laurie Penny describes how most of our disaster scenarios describe situations where those who survive are saved by raw strength and weapons. The hero is a man, alone against the danger: terrorists, zombies, aliens.

When the crisis came—our actual crisis—it turned out to look nothing like we had imagined. The hero who risks his life to save us is not a survivalist ‘prepper’ wrapped in a cartridge belt with a gun over his shoulder.

The heroine is an underpaid temp working in a home for the elderly, forced to expose herself to the virus without sanitizer or proper protection. The ‘frontline combatants’ in this apocalypse are not soldiers, but nurses and doctors, cleaners and cashiers. Surgical masks and ventilators, not weapons, are unloaded from Finnish emergency warehouses.

What stands between us and collapse is not raw strength but protective equipment, medication and hospital beds. It is the very welfare capacity which has been underfunded and even privatized in recent decades. It’s the prosaic infrastructure of civilization: eldercare, health care, social security.

This is also where our shortcomings become visible. The stories are by now commonplace—how people working in nursing homes kept on going to work when the virus exploded, even though they had a sore throat. They simply could not afford to stay at home. In the end they, and many others, lacked two layers of protection—against poverty as well as the virus.

Some politicians have called the challenge of dealing with the virus a ‘war’ nonetheless. But a real war, heaven forfend, calls for action. What is needed now, from most of us, is the opposite: patience, caring for others, quiet solidarity, small acts of kindness.

Of course, if it really were a war, as the author Arundhati Roy rhetorically asks, who would be better prepared than the United States? ‘If it were not masks and gloves that its frontline soldiers needed, but guns, smart bombs, bunker busters, submarines, fighter jets and nuclear bombs, would there be a shortage?’ Certainly not. more>