I hope everyone is enjoying their holiday weekend but its back to business next week and the coming weeks will be interesting. We have the Fed meeting September 19-20 where the market expects more details on how the Fed will withdraw stimulus either through interest rates or reduced quantitative easing. I doubt that there will be any great clarity on these items as in the last week we have had good GDP, mediocre job growth and one dictator who likes playing with his missiles. I just don’t see the Fed changing anything substantially with a potential military conflict or war with North Korea looming on the horizon.
For those that missed it, the market hit a key reversal point on Tuesday morning after North Korea shot a missile over Japan. Looking back, the market tried to break down in late August but that effort failed after several sessions of rangebound activity. As we closed out the month, all that was needed was an excuse to buy the market. That came on Tuesday when stocks opened substantially lower on the North Korea news which brought in buyers and flipped momentum to the upside.
In my mind, everything is short-term right now. There is no clarity on policy changes out of Washington (taxes, healthcare, trade) and military tensions are escalating around North Korea. There are other trigger points to discuss but I think these two items along with the Fed meeting will be in focus for September. The market hit a nice bottom on Tuesday so let’s see how far this takes us. I’ll be back to you next week!
Economic & Central Banking Snippets
- US consumer confidence ticked higher in August, thanks in part to a rosier outlook on current conditions despite a small decrease in the number of people surveyed who think business conditions will get better in the next few months. The Conference Board’s consumer confidence index rose to 122.9 in August, up from a revised reading of 120 from July.
- The U.S. economy grew faster than initially thought in Q2, notching its quickest pace in more than two years, and there are signs that the momentum was sustained at the start of Q3. Gross domestic product increased at a 3.0% annualized rate according to the Commerce Department in its second estimate released on Wednesday. The upward revision from the 2.6% pace reported last month reflected robust consumer spending as well as strong business investment. Growth last quarter was the strongest since the first quarter of 2015 and followed a 1.2% pace in the January-March period.
- Below is a chart of GDP vs Federal Debt for some perspective.
- Brazil’s gross domestic product expanded for the second consecutive quarter (at 0.2%) in the three months ended June, officially ending the worst recession in Latin America’s largest economy.
- US job growth cooled in August with the previous month’s gains revised lower as well. Employers added a lower-than-expected 156,000 jobs in August and June’s non-farm payrolls growth was revised lower to 189,000 from 209,000, previously. The jobless rate ticked up to 4.4% from a 16-year low of 4.3% in July.
Politics! Politics! Politics!
- President Donald Trump said that North Korea displayed “contempt” for its neighbors and for the world by firing a ballistic missile over Japan, and said “all options are on the table” in dealing with the threat. “The world has
received North Korea’s latest message loud and clear: this regime has signaled its contempt for its neighbors, for all members of the United Nations, and for minimum standards of acceptable international behavior,” Mr. Trump said in a statement released by the White House. (FT) - President Donald Trump has revealed his threat to pull out of the North American Free Trade Agreement could be used to force Mexico and Canada to make further concessions. Ambiguity exists on whether withdrawal can happen without congressional approval.
- Mexico sees a serious risk the United States will withdraw from NAFTA and is preparing a plan for that eventuality, Economy Minister Ildefonso Guajardo said on Tuesday, calling talks to renegotiate the deal a “roller coaster.” (Reuters)
Fun Fact of the Week: Sales Tax by State
Flood Insurance (POLITICO)
Nearly two decades before the storm’s historic assault on homes and businesses along the Gulf Coast of Texas this week, the National Wildlife Federation released a groundbreaking report about the United States government’s dysfunctional flood insurance program, demonstrating how it was making catastrophes worse by encouraging Americans to build and rebuild in flood-prone areas. The report, titled “Higher Ground,” crunched federal data to show that just 2% of the program’s insured properties were receiving 40% of its damage claims. The most egregious example was a home that had flooded 16 times in 18 years, netting its owners more than $800,000 even though it was valued at less than $115,000. Hurricane Harvey is not the first costly flood to hit Houston since that 1998 report.
In 2001, Tropical Storm Allison dumped more than two feet of rain on the city, causing about $5 billion in damages. Two relatively modest storms that hit Houston in 2015 and 2016—so small they didn’t get names—did so much property damage they made the list of the 15 highest-priced floods in U.S. history. But Houston’s low-lying flatlands keep booming, as sprawling subdivisions and parking lots pave over the wetlands and pastures that used to soak up the area’s excess rainfall, which is how Houston managed to host three “500-year floods” in the past three years. All enabled by the flood insurance program by the federal government as nobody builds on a flood plain without insurance.
But the climate is not changing fast enough to explain the dramatic spikes in disaster costs; all seven of the billion-dollar floods in American history have made landfall in the 21st century, and Harvey will be the eighth. Experts believe the main culprit is the explosive growth of low-lying riverine and coastal development, which has had the double effect of increasing floods (by replacing prairies and other natural sponges that hold water with pavement
that deflects water) while moving more property into the path of those floods. An investigation last year by ProPublica and the Texas Tribune found that theHouston area’s impervious surfaces increased by 25% from 1996 to 2011, as thousands of new homes were built around its bayous.
A recent Pew Foundation study found that the Higher Ground problems have not been solved; about 1% of insured properties have sustained repetitive losses, accounting for more than 25% of the nation’s flood claims. One $69,000 home in Mississippi flooded 34 times in 32 years, producing $663,000 in payouts. The government routinely dishes out more in claims than it takes in through premiums, and the program has gradually drifted deeper and deeper into debt.
Chart Time!
Market Snippets
- Uber Technologies Inc said on Tuesday it was cooperating with a preliminary investigation led by the U.S. Department of Justice into possible violations of bribery laws.
- Apple Inc. plans to transform the way people use its next high-end iPhone by eliminating the concept of a home button and making other adjustments to a flagship device that’s becoming almost all screen, according to images of the new device viewed by Bloomberg News and people familiar with the gadget. (Bloomberg)
- The New York Stock Exchange has proposed a five-minute news embargo at the close of trading to prevent trading algorithms from dominating closing auctions that determine end-of-day stock prices. The exchange is looking to prevent the volatility and investor confusion that arise when a company releases important news after trading closes but before the exchange has published closing prices for stocks.
- Financial firms will be taking advantage of the long Labor Day weekend to update their systems for Tuesday’s start of the T+2 settlement cycle, which will require stock and bond transactions to be settled two days after a trade is executed, instead of three.
- Uses for medical cannabis in the US.
International Snippets
- Estonia is likely to issue a cryptocurrency of its own, according to an announcement written by Kaspar Korjus, Estonia’s E-Residency managing director. The name of the cryptocurrency will be Estcoins, and they will function as an asset that will funnel investor’s funds to the support and development of the nation.
- Six new banks have joined a UBS-led effort to create a digital cash system that would allow financial markets to make payments and settle transactions quickly via blockchain technology. The group aims to launch the system late next year and have joined another group that is developing the “utility settlement coin” (USC) – a digital cash equivalent of each of the major currencies backed by central banks. The group is in discussions with central banks and regulators and is aiming for a “limited ’go live’” in the latter part of 2018. The USC would be convertible at parity with a bank deposit in the corresponding currency, making it fully backed by cash assets at a central bank. Spending a USC would be the same as spending the real currency it is paired with. Blockchain works as a tamper-proof shared ledger that can automatically process and settle transactions using computer algorithms, with no need for third-party verification. Because it does not require manual processing, nor authentication through intermediaries, the technology can make payments faster, more reliable and easier to audit. (REUTERS)