Five years ago, on Black Friday 2008, quantitative easing (QE) was born. In its quest to battle the deflationary effects of the financial panic, the Fed launched the “extraordinary” policy of buying long-term assets from banks. In exchange, the Fed credited banks’ reserve accounts, believing the banks would lend off these reserves many times over—a big money supply increase to boost growth.
To date, through multiple rounds of (now infinite) QE, the monetary base (M0) has swelled by nearly $3 trillion. Yet this economic expansion has been the slowest in post-war history.
Exhibit 1: Cumulative GDP Growth
Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?
Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.
While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).
|By Fisher Investments Research Staff, 11/26/2013|
With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.
MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).
To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).
When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.
The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.
Exhibit 1: Emerging Markets Foreign Equity Inflows
Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.
|By Jeff Cox, CNBC, 09/01/2015|
MarketMinder's View: The idea here is that the Fed can’t begin raising rates this month because it would cause investors to panic further amid volatile equity markets, flattish corporate profits and a slowing economy. While a rate hike might rattle investors—especially when fear is already elevated—it seems a stretch to say the Fed will not do what they think is best for the economy (assuming they believe a September rate hike is the right course of action) just because it might further increase market volatility over the near term. Besides, the article’s expectation of trouble in September largely hinges on seasonality—that September is the most frequently negative month of the year! (Falling about half the time.) And that a bad August presages a bad September. Folks, that’s all trivia—markets do not operate according to calendars or schedules. As for corporate profits, the Fed has known for a while Energy firms’ losses have flattened headline earnings so far this year, so why would this only now affect their rate hike decision? And while the Atlanta Fed’s GDPNow model currently predicts 1.2% GDP growth for Q3, it didn’t foretell the 3.7% Q2, either, instead showing 2.2% growth after Q2 ended. Are we to now believe it will be so much more accurate a month before quarter end? Second, GDP has been bouncy from quarter to quarter throughout every expansion ever. Wobbling down a bit in Q3 (should this happen) would be right in line with this trend and doesn’t mean the Fed “missed its window” to hike rates, whatever that even means. And anyway the Fed meets before that comes out. As ever, they’ll do what they do when they do it.
|By Staff, Reuters, 09/01/2015|
MarketMinder's View: China’s official manufacturing Purchasing Managers’ Index fell to 49.7 in August, adding to fears China is headed for a hard landing. But in our view, this isn’t the big warning sign some suggest. Chinese officials cited several one-off factors that contributed to the weak reading: Several factories shut down to improve air quality in advance of military parades planned for Thursday, a huge chemical plant explosion in the port city of Tianjin crimped activity, and a strong el-Niño pattern brought inclement weather. But even with all that, the manufacturing slowdown is consistent with China’s longstanding trend of deceleration as it transitions from heavy industry to consumption. Also, Western countries’ measures of business activity with China largely confirm that while growth is slowing, it is still quite healthy on an absolute basis. For more on this, see our 8/26/2015 commentary, “Corporate America’s View of China.”
|By Greg Quinn, Bloomberg, 09/01/2015|
MarketMinder's View: It should come as no surprise that Canada’s economy is sputtering, given its large weighting in energy and other natural resources whose prices have plunged over the last year. And, given the fact April and May monthly GDP were already known, we’ve long expected a second consecutive quarter of declining output. But at about 2% of global output, it is very unlikely Canada drags down the non-commodity heavy parts of the world any more than similarly sized Russia and Brazil haven’t. And what’s more, it isn’t like Canada is all of a sudden a clone of (also cold) Russia. It has healthy consumers, a solid Financials sector, open borders and close proximity to the US, which is growing nicely. Those factors likely mean the stronger regions and Canada’s consumers make this a mild, mostly industry specific, downturn. There were already signs of this in Q2. Consider: “Canada’s economy got a boost in the second quarter from international trade and continued support from consumer spending. Household consumption growth quickened to 2.3 percent from 0.5 percent in the first quarter, led by automobiles. Exports rose for the first time in three quarters with a 0.4 percent gain, while imports fell by 1.5 percent.”
|By Victor Mallet and James Crabtree, Financial Times, 09/01/2015|
MarketMinder's View: Here is the biggest news from the Emerging Markets of the day, if not week: India is backing off its demands foreign institutional investors and companies to pay back taxes, called the Minimum Alternate Tax. This seems like the correct call, particularly since the government’s attempt to enact it spooked foreign investors and triggered outflows. Reversing the decision should give more clarity.
Market Wrap-Up, Tuesday September 1, 2015
Below is a market summary as of market close Tuesday, 9/1/2015:
Global Equities: MSCI World (-2.7%)
US Equities: S&P 500 (-3.0%)
UK Equities: MSCI UK (-3.4%)
Best Country: New Zealand (-0.3%)
Worst Country: United Kingdom (-3.4%)
Best Sector: Consumer Staples (-2.1%)
Worst Sector: Energy (-3.3%)
Bond Yields: 10-year US Treasury yields fell -0.06 percentage point to 2.16%.
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.